india vs china-104
TRANSCRIPT
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CURRENT SCENARIO
INDO-CHINESE RELATIONSHIP
ervice sector is India is booming. Experts say that
in the of shoring world, India could be the hub and
other asian nations, the spokes. But, china is now
catching up with the Indian of shoring industry at the same
time,its manufacturing sector in full fledge. China seems to
have realized that any sector, no matter how profitable will
slump into recession once it reaches the peak. However, in
India, the service sector is still being milked dry, while we
actually need to shift our focus toward the manufacturing
sectors.
S
The point however, to be considered, is that china need not
be a replacement market for Indian talent but a
complementary market for growing business in japan and
servicing the local Chinese businesses. But setting up a
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development centre in china is not that simple. Now, the exit
options at the moment are not clear. Even though the cost of
a Chinese programmer may be less than that of an Indian
programmer, there are other overhead costs which bring the
cost of development in china almost on par or above India.
0
5000
10000
15000
20000
INDIA CHINA SOUTH AFRICA
On comparision of all the above costs, India is the best
alternative. The Indian firms will have to look at these centres
as strategic resources to de-risk.
As far as the English speaking talent is concerned, India will
continue to be the base. At the moment, the Indian talent
supply looks sufficient. So much so, that there has been no
increase of salaries at the entry level for the last 2-3 years.
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This is probably an indicator of the soon-to-come recession
in the service sector.
An attempt has been made in this project to identify the
various needs as to why India has to concentrate on
industrial development and propel the manufacturing sector
that is not being exploited to its fullest potential.
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SERVICE SECTOR IN INDIA
he growth of the service sector in both the
developed and developing world has been
phenomenal. As economies become
progressively service driven, greater wealth and
employment is being generated in this sector. Before we
begin, what exactly are the different types of services?
T
Services can be classified into four categories on the basis
of the service customization and customer contact, and we
would look at the categories as follow.
First of all would be the Service Factory, with such
examples as airlines, hotels/resorts and trucking. This is
the type where there is low customer contact and low
degree of customization. The services offered need to be
warm and exciting, and attention must be paid to
ambience and physical surroundings.
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Secondly, the Service Shops, where there is high degree
of customization. The management must deal with skilled
labour and the key challenges would be keeping cost
down and quality up. Examples are hospital and auto
repair.
The third type of service would be the Mass Service,
where there is high level of customer contact and low level
of customization. Managing and controlling the workforce
would be the key and examples are retailing, wholesale
trade and school.
Lastly, the Professional Service Firms, with a high degree
of customer contact and customization. The key to this
type of services is the managing and controlling of people,
management's ability to deal with skilled workforce as well
as keeping cost down and quality up. Some examples are
doctors, lawyers, consulting firms and so on. Due to the
growing importance of the service sector, academics and
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consultants worldwide have make efforts towards
improving the management of service businesses.
Similarly, in India, the service sector has been growing
rapidly over the last decade or so and the trend is likely to
continue. If one describes an economy based on its major
economic sector, then India made the transition from an
agricultural economy to a service economy in 1979. In
1985, the service sector accounted for 47 per cent of
GDP, having expanded at an average annual growth rate
of 7 per cent between 1980 and 1985 The share of
services sector in the real GDP in India has surpassed that
of agriculture and industry at a relatively faster pace as
compared to other industrialized nations.
Service sector has become the main contributor to the
GDP not merely in developed economies like U.S.A.
(71%), Japan(60%) & U.K.(67%) but also in developing
economies like China(33%), Indonesia(41%),
Pakistan(50%) & Brazil(56%).
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SHARE OF SERVICE SECTOR IN
THE VARIOUS ECONOMIES
71%
60%67%
33%
41%
USA
JAPAN
U.K
CHINA
INDONESIA
In the Indian context, it can be safely said that the service
sector now accounts for more than half of India's GDP
This sector has gained at the expense of both the
agricultural and industrial sectors through the 1990s. The
rise in the service sector's share in GDP marks a
structural shift in the Indian economy and takes it closer
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to the fundamentals of a developed economy (in the
developed economies, the industrial and service sectors
contribute a major share in GDP while agriculture
accounts for a relatively lower share).
The service sector's share has grown from 43.69 per cent
in 1990-91to 51.16 per cent in 1998-99. In contrast, the
industrial sector's share in GDP has declined from 25.38
per cent to 22.01 per cent in 1990-91 and 1998-99
respectively. The agricultural sector's share has fallen
from 30.93 per cent to 26.83 per cent in the respective
years. It is true that the industrial sector too has grown,
1990s (except in 1998-99). But the service sector has
grown at a higher rate than industry.
Some economists caution that if the service sector
bypasses the industrial sector, economic growth can be
distorted. Service sector growth must be supported by
proportionate growth of the industrial sector; otherwise
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the service sector grown will not be sustainable. This
project is a comprehensive study of the two important
sectors, namely manufacturing and service of China and
India.
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PROBLEMS FACED BY CHINA IN
THE SERVICE SECTOR:
n China, banks continue to be keen on providing
support to larger players and are playing a relatively
small role in financing the private firms who are
rewriting its history.IWhile its banking system made good progress in divorcing
itself from interference by government, it still has a long
way to go. There is evidence that the government still
encourages lending to ailing State Enterprises. Again one
gets to see the same moral hazard that is omnipresent.
Banks still don't consider bad loans given to State
Enterprises a serious problem.
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At the basic level the problems are similar to those faced
by any banking system that grows under the socialist
legacy. Competition is very much limited. Profit motive is
largely absent. The state ownership of banks and private
ownership of business is big mismatch. Unless banks are
also privatized, they are unlikely to develop profit motive.
the banking sector needs to be opened up for foreign
competition and foreign ownership. Deregulation of
interest rates will be another area of big change. The
change is already visible with many banks gearing up for
listing of their shares.
The state-owned banks saddled with about $150 bn of
NPAs are considered technically bankrupt. Though the
bad debts have been transferred to AMCs, it merely
transfers the burden from one to another. The bottom line
is that the system has to bear the cost of these NPAs.
With lack of alternative avenues of investment in the
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market place, banks are still flush with deposits and the
state guarantee is also construed as risk free investment.
The need of the hour is to totally liberate the banking
system .
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CHINA Vs. INDIA
A COMPARITIVE STUDY
hina and India each have a population of over
1 billion people. Their collective population
amounts to more than 33% of the world
population. Their countries are geographically large and
their population is composed of a wide range of ethnicity,
each speaking their own language or dialect. Yet, over the
last 20 years, China's GDP growth, GDP per capita growth
and labour productivity have been significantly higher than
that of India. Why is this? What should India do to
compete with China and establish itself as the world's
workshop, factory and supplier of quality goods and
services? Although India has the major human resource, it
has failed to utilise its potential to create a vibrant
manufacturing sector like that of China There was not
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much difference in the economic performance roughly until
1980, when the per capita incomes were also similar. Over
the last quarter century, both instituted economic reforms
and economic growth accelerated.
As the history goes, in 1947 India achieved independence
and it is in the year 1949 that in China communists
assumed power. Both the economies made modest
beginning toward industrialization. In the early 1950s,
China was better placed than India to extract resources
from agriculture to finance the planned industrialization
program. India didn't pay attention to agriculture until the
food crisis of the 1966-67.
China's current account balance stands at a huge plus, at
nearly $30 billions, while for India it has been a minus
throughout the last four decades.
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China's FDI strength stands apart. Over 75 percent of FDI
that China received, went to new enterprises. In India,
about 65 percent of the little FDI went into M&A.
Another area where India failed and China achieved
immensely is the area of labor reform. India succeeded in
overprotecting the interests of workmen making the
restructuring of the industry impossible
China embraced globalization and trade enthusiastically,
welcoming foreign direct investment with no inhibitions,
and gradually gaining control of world markets for low-tech
labor-intensive manufactures.
China initiated reforms a decade earlier than India's
reform. China's economy grew at double the rate of India's
during the '80s and early '90s. While successive Indian
governments restricted the import of technology from the
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West and Japan, the Chinese governments encouraged
them.
As a result, the gap widened considerably. While reforms
in India are supposed to have been initiated in 1991, the
doctrinaire socialist policy had begun to be diluted in the
second innings of Indira Gandhi.
The process of liberalization continued under Rajiv
Gandhi, and more dramatically after 1991. The growth rate
doubled from the previous rate, but still lagged that of
China.
The result has been that starting with more or less the
same per capita incomes 25 years back, Chinese incomes
today are double that of India's -- a result not only of faster
GDP growth, but also of a lower population increase.
Today, apart from higher incomes and lower poverty, the
areas in which China is far ahead of us are literacy, FDI,
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labor rationalization in the public sector and infrastructure
investments.
Thus, the post-reform China has successfully created
manufacturing conditions that have redefined the concept
of productivity. With interest rates being relatively low at
around 4-6 percent, high productivity of labor, enabling
infrastructure, lower input costs, Chinese private firms
have evolved themselves into mighty price warriors.
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CAUSES OF LIBERALISATION IN
CHINA
n the early 1990s was that after Tiananmen Square
in 1989, the conservative economic planners took
control of the country. At that time the State Owned
Enterprises (SOEs) ie. Chinas PSUs were virtually
bankrupt because of the tight economic controls that the
central planners imposed on the country.
IIn the 1980s, there was some private sector activity, but
when these activities became politically and ideologically
problematic for the leadership after Tiananmen, they
cracked down on private firms. So in 1991 there was a
substantial reduction of economic growth and the Chinese
external sector ran into difficulty. It was this difficulty that
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prompted the leadership to open up the Chinese economy
to FDIs.
LIBERALISATION-ONE STEP AT
A TIME
his liberalization strategy of the Chinese government
can be broadly classified into two stages:
TStage one:Restructuring SOEs, rather than privatisingthem.
Stage Two:Attracting FDI.
In the first fifteen years of liberalization, China
concentrated on aforesaid two areas.
Then in 1992, they substantially liberalised FDI controls.
This strategy has proved successful FDI came in response
to the weaknesses in the SOEs, as foreign firms didn't
think the SOEs could compete with them and to add to
that, the economic prospects of the country looked good.
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In 1998, Chinese govt also allowed privatisation,
especially of smaller SOEs. They allowed the banks to
lend capital to private entrepreneurs. They also improved
legal and political treatment of private entrepreneurs. Also,
they began to liberalise the policies toward the domestic
private sector. Reforms focused on bringing an element of
micro autonomy. These efforts set in motion a self-
propelling mechanism that led to the emergence of new
class of private enterprises who changed the economic
scenario considerably.
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TTHE TVE PHENOMENON:
he real force behind China's economic achievement
appears to be the country's ability to take the industry to
rural China as against the common model of industry
concentration in urban cities.
Harbingers of this revolution is something called 'Town
and Village Enterprises (TVEs). The TVE phenomenon
that led to worldwide spread of China's standard and
cheap products . By the 1980s the State Enterprises (the
public sector companies) were losing steam. This led to
displacement of many skilled workers. They had the
choice of returning to their native places.
About the same time the Non-Resident Chinese became
wealthy and were willing to play venture capitalists. They
provided funds to the homeland's businesses, which
promised a good return. They found that the rural
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entrepreneurship coupled with the skilled worker from the
big industry was an ideal combination to unleash a
revolution. They not only funded these businesses but also
acted as buyback agents of the production.
Special thrust was given to light and medium enterprises
where investments required are limited. This strategy
delivered results. Smaller private enterprises emerged as
a force to reckon with. It led to rapid economic growth.
Production of consumer goods increased. A consequent
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rise in exports and foreign currency earnings led to a
general rise in personal incomes.
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LIBERALISATION OF INDIAN
ECONOMY
ince the start of liberalization of its economy in
1991, India has been going through an epochal
transformation into one of the worlds fastest
growing economies. Its gross domestic product rate was
picked up from 1.3 % in 1191 to 1992 to 7.8 % in 119-1997
and despite a global slowdown, moved up from 4.4% in
2000-01 to 5.6% in 2001-2002. Its GDP for 2002-2007 is
currently targeted at 8%. New investment opportunities for
2002-2007 total sum of $1.5 trillion spread over the various
sectors such as agriculture, bio-technology, communications,
electricity, financial services, manufacturing, mining, trade
and transport.
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0
2
4
6
8
PERCENTAGE
YEARS
GDP GROWTH IN INDIA
1991
1992
2001
2002
Financial liberalization consists of 3 sets of measures:
1. to open up a country to the free flow of international
finance.
2. to remove controls and restrictions on the functioning of
domestic banks and other financial institutions so that
they get properly integrated as participants in the world
financial markets.
3. To provide autonomy from the government to the
central bank so that its supervisory and regulatory role
vis--vis the banking sector is associated from the
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political process of the country and hence from any
accountability to the people.
4. To ensure that not all these measures are immediately
contemplated or demanded but they represent the
ultimate goal of financial liberalization which may be
ushered in by stages.
The pre-liberalisation period visualized a subordination of the
financial system to the perceived needs of economic
development. To this end, the interest rates were kept low.
Banks and financial institutions were required to hold
government securities upto a certain percent of their total
liabilities, permitting the easy sale and cheap servicing of
public debt, credit was directed to priority sectors , especially
agriculture, the RBI was retained as a part of the government
and hence accountable to the parliament for its actions.
There were problems with this regime arising from the fact
that the economy was experiencing capitalist development
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and hence the credit needs of vast masses of small
producers and even small capitalist could not be met cheaply
from institutional sources. But within this overall constrain the
logic of the regime was to make the financial sector serve the
needs of development, which, it was believed, necessitated
its four features, namely:
its being anchored to the national economy
detatched from worlds financial flows
Its being obliged to give precedence to production
over speculation for which it also had to observe
control on the price and direction of credit.
Its being accountable to the people via the
government.
The purpose of financial liberalization is to reverse all these
features
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to detatch the infancial sector from its anchorage in the
domestic economy and to make it a part of the
international financial sector
To make it operate according to the dictates of the
market which means the end of cheap interest rates of
the regime of directed credit and of the distinction
between productive and speculative credit needs.
To remove it from the ambit of accountability to the
people.
In short, the purpose of financial sector reforms is to make
the financial sector an aliquot part of globalised finance.
An economy that has undertaken financial liberalization also
becomes vulnerable to crisis. When short term funds flow in
they tend to cause an appreciation of the exchange rate, the
consequence of which is to make imports cheaper relative to
home production and hence need to deindustrialization. But if
this is avoided through the central bank intervention that
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supports the exchange rate by holding foreign exchange
reserves, then that in turn enlarges liquidity in the economy
which is typically used either for an expansion of luxury
consumption or for an expansion of investment in the
domestic non-tradable sector such as real estate, or for
financing speculative booms in asset markets especially the
stock market. When short funds begin to flow out, there is
both a downward pressure on the exchange rate and a
collapse of asset prices, which reinforce one another and
cause an avalance of outflow. Efforts by the central bank to
manage the forex market by raising the interest rate to
induce short term funds to say or to come back, have very
little effect or even have the opposite effect of further
enhancing outflows by aggrevating the asset market to
collapse.
On the other hand,interest rate increases which leads to a
contraction of the real economy. Thus, while the inflow of
short term funds, generally, has little impact by way of
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increasing the growth rate of the real economy, the
withdrawal of short term funds does affect the real economy
adversely.
Effect of liberalization on the various cross-sections of the
Indian society:
Trade liberalization led to an increase in the poverty gap
in the rural districts where industries more exposed to
liberalization were concentrated.
Whatever the India-wide effects, of trade liberalization
were, rural areas with high concentration of industries
that were disproportionately affected by tariff reductions,
experienced slower progress in poverty reduction
The regionally disparate effects of liberalization are not
consistent with standard trade theory predicting labour
migration in reponse to wage and price shocks,
equalizing the incidents of poverty across regions.
There is little evidence of high levels of free allocation
with districts across industries.
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Especially rigid labour markets fostered by labour
market regulations in parts of India prevented the
reallocation of factors in the face of trade liberalization
in many areas.
As those employed in traded industries were not at the
top of the income distribution before trade reforms, the
reduction in income caused some to cross the poverty
line or fall even deeper into poverty.
This effect was aggrevated by the slower overall growth
in registered manufacturing employment areas with
inflexible labour laws which retarded the pull out of
poverty of the poorest subsistence farmers.
Liberalization has greatly benifitted the external sector. The
balance of payments, positions is quite comfortable. The
current account deficit is far from significant, and foreign
exchange reserves are growing steadily. The current level is
well above what we need for our developmental purposes.
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The exchange rate has remained steady equally encouraging
is a decline in the size of external debt and the debt servicing
burden. All these should boost confidence of the foreign
investors in the long term prospect of the economy and one
can expect them to continue investing in India.
The economic reform continues to remain focused on
facilitating foreign investment and liberalization of trade.
Policy liberalization has been significant in this respect. The
domestic market is exposed to external competition.
However, the economic reform still lacks its focus on the
imperative of restructuring and competitiveness building of
the indegenious industry that continues to suffer from
inherent disadvantages of high capital costs, poor
insfrastructure, irrational duty structure, strangulating labour
laws, cumbersome procedures and numerous systematic
inefficiencies.
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The basic objectives behind liberalization of the FDI policy
namely:
Access to latest technology
Management skills
Exports
Have not been achieved so far. But in many sectors it has
destabilized the indigenous enterprises and in certain hi-tech
sectors, the foreign companies have secured total control of
the markets, even as they have brought little by way of
investment. In other words, foreign companies are gaining
control of the domestic market at a relatively lower cost and
without developing significant stake in the economy.
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BIRDS EYE VIEW OF
MANUFACTURING SECTORS
OF
CHINA AND INDIA
hinas emphasis on manufacturing is confirmed
by the fact that among the three sectors in
China, manufacturing takes the largest slice of
the pie, while in India, it is third behind services and
agriculture. Apart from this, the Chinese are so competitive
on a global basis that most nations, including India, find
them as a force to reckon with in textiles, consumer
durables, and so on. An essential offshoot of this is the
huge trade surplus China enjoys. Its exports race ahead
despite global slow down and its foreign investment
figures are much higher than India
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Most people associate China's economy with over
investment in singular and unprofitable pursuit of export
products, low quality goods and marginal pricing. The truth
is that China's growth is the result of not only significant
investment, foreign and domestic, but by a sharp increase
in labour productivity, a growing export based on foreign
investment, strong domestic demand fed by low prices and
improved quality of products. The price competitiveness of
China's products is unmatched. China's businesses seem
to operate on the principle of sales maximization. The
strategy of sales maximization calls for setting of prices at
very low levels so as to create markets. The focus being
maximization of sales the resultant business model
necessitated concentration on such products that are
amenable to mass production and mass consumption.
With pricing set at rates unimaginable to competitors
abroad, the product offers tremendous value for money.
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That must explain why Nike produces 40% of its footwear
in China while Galanz has 30% of the global market for
microwave ovens because of quality enhancements in
Chinese factories.
China's lower prices are not just due to cheaper wages -
Indian wages are comparable - but to lower taxes, lower
cost of capital, higher productivity of workers and shorter
delivery time.
Productivity of Chinese workers can be 10 to 300%
higher than those of Indian workers, depending on the
product.
Chinese shipments reach the US less than a month
after they leave the factory gate compared to six to 12
weeks for Indian exports. Delays in India are due to
bureaucracy in customs, loading and unloading in ports
and long transit times.
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China has attracted 216bn in foreign investment
(1980-2000) compared with 120bn in India.
China's manufacturing sector in the 1990s expanded at
a rate of 12% per year, double the increase in India.
Whilst it is true that many Chinese state-owned
companies receive loans from state banks at very low
interest rates with long repayment periods, about 70% of
China's industrial output comes from the private sector,
including multinational companies that have prudent cost
accounting.
Lower taxes, import duties and raw material costs are
important factors but a competitive environment and a
higher level of component manufacturers also help.
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PRODUCT SPECIFIC EXAMPLES
1. China produces more than 25% of the world's
televisions and easily surpasses India in both domestic
sales and exports.
2. China is planning to increase its textile exports to $ 50
billion in 2006. It is already preparing for the global textile
market opening up totally. And in India we tax polyester
fibre and other raw materials at the highest possible rate.
3. China produces eight times more ceiling fans than India
and half the price advantage is because of India's high
indirect taxes that affect domestic and export sales.
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CAUSES OF STAGNATION OF
INDIAS MANUFACTURINGSECTOR
1. LACK OF INFRASTRUCTURAL DEVELOPMENT:The sheer speed with which infrastructure projects get
implemented in China is commendable. Financial Times
rightly commented (January 21, 2004) "if thousands of
villagers have to be moved to make way for roads or
power stations, so be it: investment in infrastructure
underpins China's success."
Eg. The way the giant Three Gorges Dam has come up in
China,in contrast to the Narmada Dam project is an
example of how the infrastructure projects in India are
frustrated by misguided individuals going to court. This is
how democracy has been used in India to hinder growth.
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Agitation, endless court cases, environmentalists, and
other manifestations of a democratic, rule-of-law society
have not only delayed implementation perhaps by a
decade, but also added enormously to the costs while
direct cost escalation is perhaps only a small part of the
total cost to the economy. One can only imagine the
output lost because of the delays in the starting of the
project.
2. OUTDATED LAWS: China is ahead of India, in labour-
intensive manufacture. Indian labour laws, which protect
existing employment, but at the cost of creating new jobs,
have created a bias in favour of capital-intensive
investments.
An Ambani prefers a refinery, in which the only comparative
advantage comes out of the duty structure, to manufacturing,
say, toys in billions and exporting them to the world.
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3. PROTECTIVE TREATMENT TO PUBLIC
SECTOR UNITS: China does not seem to be treating
its PSUs that is the state owned enterprises (SOEs)
protectively . Millions of jobs in state-owned enterprises
have been lost in preparation for world competition. But
new ones keep getting created in larger numbers. In
contrast, India not only condones over-manning, but also
keep thousands employed in factories that haven't
produced anything for decades. As a result, resources are
short for the much-needed investments.
4. STEP MOTHERLY TREATMENT TO
MANUFACTURITNG SECTOR:Wherever there is a tug-
of-war between agriculture and manufacturing, the
government always takes the side of agriculture. The price
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of cotton, sugar cane, fertiliser policy are only a few
examples of this short sighted approach.
5. DEPLETION OF RESOURCES: India
consumes almost thrice as much energy as any average
rich developed country produces. Generally, the rich
countries use less oil per unit of output than the
developing countries. This is because of variety of reasons
like better capital stock and modern infrastructure.
For Example, the fact that the rich countries are less
dependent on manufacturing also ahelps them to conserve
energy. This is where indias energy-inefficient ways stand
out. China, whose economy is powered by manufacturing, is
less energy-intensive than India. Indias energy intensity is
almost 24% higher than chinas despite the fact that both the
countries are at around the same level of development.
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INDIA THAILAND AFRICA CHINA
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REMEDIAL STEPS
ndia needs to immediately set right this situation and
give primacy to manufacturing as China has done.In
the process, the following steps may have to be
taken:I1. REDUCE INTEREST RATES: At real interest rates of 7
or 8 per cent, manufacturing companies will never be able to
compete globally because these interest costs, as a percentage
of total cost, become high.
2. ENSURE MOBILITY OF LABOUR. There has to be
the will to put through a modern labour policy, which will ensure
that industry has the right to move labour in and out. The only
way employment will increase in the manufacturing sector is if
we give the comfort to the owner that his labour is a variable
cost.
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3. TAX CUTS:. The indirect taxes are way too high and need
to be brought down to international levels. By having high
excise duties, we are killing domestic demand, the key
component of our growth.
4. REDUCE RED TAPE: Indian Government must free the
Indian entrepreneur from the shackles of state and federal
bureaucracy and release the savings through lower direct and
indirect taxes.
5. ENCOURAGE COMPETITION: The government must
make "competition" India's national password and allow the
Indian flair for invention and application to take root.
6. SECTOR REGULATOR: Develop infrastructure
regulatory bodies funded from outside the government
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budget. Establish multi-sector regulatory agencies at
the state level.
7. DEVELOP LONG TERM DEBT MARKET: Mobilise
long term insurance money in the sector andInstitute
pension reforms. Establish a fully funded pension
scheme to increase national savings and the demand
for long term debt, making more funds available for
infrastructure.
8. CONTRACTING PROJECTS TO PRIVATE
SECTOR: Establish a single body for contracting,
clearances and interacting with private developers and
investors. India should have one public sector agency
undertake the project design and contracting,
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negotiation and documentation on the reasons why
award decisions were made.
9. PORTS: Develop a new institutional structure for the
sector by separating policy, regulatory and commercial
functions.
10.AIRPORTS: The focus of the airport authority of India
has to be shifted from operations to policy planning and
statutory functions. A separate independent authority
needs to be created to handle economic regulation for
the sector such as the leases and concessions.
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11.ROADS: The money collected from petrol and diesel
must be used only for road development. Monitor and
gradually reduce public support for private road projects.
12.RAILWAYS: Corporatise Indian railways into indian
railways corporation and focus on the core business and
spin off the rest. Railways must get separate instituions for
policy regulation and management.
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COMPLICATIONS FACED BY
CHINA DUE TO INCREASED FDI
n the competitiveness side, it is seen that
increasingly, the gains of Chinese economic
growth have gone to foreign firms. the
Chinese balance of payments statistics indicates that in
the mid-1990s, the foreign income repatriations were only
about $6 billion. Today, they are about $30 billion. This is
a capital outflow from the current account. Some of that
money comes back in the capital account through
reinvestment, but, over the long run, the trend of
increasing capital repatriations has been dramatic. A lot of
the gains from economic growth have gone to foreigners
rather than Chinese entrepreneurs.
O
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Today, with the FDIs on a constant rise, India is not too far
away from facing a similar problem as China in this
regards.
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he achievements of China's two decades of
reforms are regarded as an economic miracle.
Its reforms have made it the fastest growing
economy in the world. What is remarkable is the rapidity
with which it all happened. Chinas success story shows
how a war-ravaged, communist country with scarce
resources could make a miracle happen. The
transformation was possible because china rightly
employed its major resource ie the human resource in the
productive, manufacturing sector. The Chinese experience
clearly demonstrates that the competitiveness does not
emanate from mere availability of resources. It emanates
when they are put to their best use.
T
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For quality of life to improve, even India we needs to put
the emphasis on manufacturing.for agriculture and
services to grow, we need more manufacturing. If the
domestic industry stops spending, the service industry will
find itself in throes of massive overcapacity. Our efforts to
help the service sector are laudable but the manufacturing
sector should not be ignored China did have a head start
compared to India in reforming its economy but they went
about it with great deal of planning. They invested heavily
in the manufacturing sector and created impressive
capacities in almost every sector of the economy. True,
they had a huge domestic market. But so do we. They
were looking at the global market when they created these
capacities. They also took their time to get into WTO so
that they could practice some amount of protectionism in
the intermediate period.
It is more difficult for Indian domestic private firms to grow
because they have missed the window of opportunity in
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the last 15 years. And now they have to compete with
Multi National Companies. That India would have to now
develop its manufacturing sector is certain. However, the
issue now is whether domestic firms can compete with
foreign firms.