Factors Driving Economic Growth Of India And China
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Published: Mon, 24 Apr 2017
China and India have a combine population of approximately two and a half billion people (The World Bank, 2000). This means that the two Asian giants control a sizeable segment of the world demand. A demonstration of the huge impact that the combined economies of these two countries can be found by adding their high GDP growth of the last five years, this way one can see vividly the effect of what has come to be referred to as CHINDIA (The World Bank, 2000). With the assumption that China would most likely dominate the next century, does India as a chance to prove critics wrong and overtake or catch up with China in terms of the size of its economic? It is no doubt that China’s sheer size gives it the upper hand over India where a number of other economic indicators still creates optimism of India economy surpassing or being at par with that of China.
On one side there is China or the People Republic of China which is synonymous with totalitarianism, with President Hu Jintao at the apex of the political leadership of the Communist Party of China (CCP), which has literary monopolized the state leadership and power (Roy, & Chai, 2006). On the other side, is India, one of the few Asian countries that can be said to practice a semblance of democracy, its leadership having being in the firm grip of the Indian National Congress that has perfected the art of governing through coalition and the resultant power sharing (Roy, & Chai, 2006).
One thing that can be used to show India resilience and potential as compared not just with China but most other countries of the world is the fact that despite having being drained by colonialism for 190 years it still can be considered as a favorite of the global economy (Roy, & Chai, 2006).
According to Khan, Economic rent is the money that must be received by an owner of a factor of production for them to rent out this factor. The factor of production can be land, labor or even capital. In labor, economic rent is the reservation or the minimum amount of money that the individual must receive for them to work. In land and capital, it is the amount of money that is required to reach the breakeven point as a result of utilization of the land or capital in any use.
Khan was one of the most vocal critics of the view that eradication of rents is an institutional qualification for economic growth. Khan pointed out that the most crucial thing is whether the economic benefits resulting from the good rents can overshadow cost of rent seeking. Khan actually focused on institutional analysis and his argument is that utilization of rents is closely associated with a number of economic rights. The issue of rent seeking is political due to the fact that the establishment and quest of rents needs a change in the economic rights structure which predicates on institution or legal changes. Therefore, the major issue that was raised by Khan was to do with the institutional as well as political changes the cost of input and the rent seeking output (Ngo, 2008).
Factors driving growth in recent years and the social and political bases of these factors
The economic reforms that successful governments in India have undertaken since 1991 have had extremely beneficial effect to Indian economy. Before then its economy had almost the same development strategies with that one of the China (Roy, & Chai, 2006). In fact the two economies are said to have broken out of their intentional insulation that they had adopted from the world economy and ushered in liberalization and the market oriented economic reform. For China it initiated the reform process of its closed, non-market, and centrally planned economy in 1978 (Roy, & Chai, 2006). Around the same time (1980s to be precise), India started its piecemeal and hesitant reforms which it essentially directed to its functioning market and large private sector which then were subject to rigid controls from the state. It was only after India underwent the severe macroeconomic crisis of the year 1991 that the powers that be in India accepted to undertake more systemic and far broader economic reforms (Indian Child, 2010).
The respective political environments under which these reforms were commenced and executed in the two countries and their respective implications were to a larger extent difficult. China continues to be an authoritarian, single party regime, although it has been liberalizing over the years, while India remains an open, largely participatory, multiparty democracy. In this paper I will be exploring the spectacular performance of India relative to the China in their competition for the dominance of the world market. I will also look at how India’s success in the field of information technology and the protectionist reaction that China’s increasing dominance in the world trade have induced the United States and western countries.
These reforms which were in formed by the need to contain the severe foreign exchange crisis of the time and which included liberalization of foreign investment and also exchange regimes, adjustments in government fiscal and monetary policies, reform together with modernization of the financial sectors, and reductions in tariffs and a host of other trade barriers continues to be relevant to the Indian economy up to date (Indian Child, 2010). Some of these beneficial effects that economic reforms have bequeathed the Indian economy include lower inflation, major improvements in foreign investment, and high growth rates (India Business Directory, 2010). In the period 1997-1998 real GDP grew at 5%, in the 1998-1999 it grew at 6.8%, the same grew at 6% in the period 1999-2000, this is a trend that has been observed in subsequent years which demonstrates the resilience of the India economy (India Business Directory, 2010). Direct investment flows and foreign portfolio have risen tremendously since the reforms were first instituted in the 1991, in the process contributing to a healthy foreign currency reserves which for instance stood at $32 billion in the year 2000, and a moderate current account deficit like the one for the period 1998-1999 which stood at 1% (India Business Directory, 2010).
Sustainability of social and political bases over the next two decades
It has been documented that India’s and China’s per capita real income started on similar level in the 1870s, although both experienced decreases in their respective per capita incomes India forged far much ahead of China until the World War One broke (Srinivasan, 2004). It should be noted that in the year 1950 India’s per capital income was close to 40 percent higher than that of China (Srinivasan, 2004). This means that China has caught up with India in regard to per capita income in course of the last three decades. The 10 percent growth rate of China that it experienced in between 1980-2001 has since slowed to the range of 7-8 percent in course of the period covering years 1998-2002 (Srinivasan, 2004). This growth is reported to have declined slightly between the years 20003-2006 due to the SARS outbreak and the slowing down of traditional China market of North America and Europe, not to mention the recession, it is still expected to decline further in the coming years due to a host of negative factors (The World Bank, 2000).
For India to overtaking or even be in the same level with China economically in the next two decades, there are a number of the aces that China hold against India which India has to contend with. First, despite these few hiccups it is important to appreciate the fact that China has earned its place as the fourth largest economy which is not only larger but also growing at a rate that cannot be ignored by the rest of the world. At $7.043 China GDP is second to that of the United States which can only mean more foreign investment in coming years (The World Bank, 2000). Other than being the most populated country in the world, China also has one of the largest human resource which is attracting foreign firm to tap in the cheap labor that these highly educated population is offering, this supported by an education system which is improving in reaps and bounds and which is supported by strong institutions like the Peking University, Tsinghua University, and Hong Kong University which are three institutions that are a common feature in the list of the top 40 institutions of higher learning globally (Roy, & Chai, 2006). At 90.9%, China literacy level can only be said to be decent which is another demonstration of China’s determination of emerging as the largest economy in the world by the year 2030 (Roy, & Chai, 2006). The same can be said of India whose one billion people provide investors with highly trained human resources (Roy, & Chai, 2006).
One advantage that comes with China expansiveness is the various climatic conditions which is an important factor that foreign investors put into consideration before investing. This therefore means that that China stands in good stead in attracting foreign investment. China infrastructure is in a pathetic state which is a characteristic that it share with India, in fact India infrastructure is considered worse off than that of China which is a further prove that India is far much behind China in the economic field, this is especially true in the rural areas where the state of the road, and rail are in a state that leaves a lot to be desired (World Bank, 2010). Still on infrastructure, only a tenth of the population is assumed to be accessing the internet which is not the case with India which has demonstrated an extraordinary zeal in investing in information technology and infrastructural investments. It would be extremely hard to sustain China economic growth without the electricity in majority of its rural areas and proper and passable road as is the case now (World Bank, 2010).
In keeping pace with the liberalization and globalization process, India Government has strived hard to bring its capital market in line with the international best practices via slow deregulation of it economy, by liberalizing its capital market in a country that depend to a larger extent on its primary market in meeting its rising needs of fund for investment in industry and trade, India expect to diversify and broaden its fund base for investing in industry and trade in course of the next two decade, this way it economy might be at par with that of China which is being shunned by international investors for primarily the same reason that India is trying to address through these measures (World Bank, 2010). Strengthening the capital market is also another process that India has been involved for some years now, in this regard it has embarked on a process that it believes can only be achieved though the introduction of new instruments and mechanisms, structural modifications, and through taking steps that safeguards investors’ interests through transparency and disclosures. This is also another process in the long line of measures that India hopes ones they are finalized, probably in the next couple of years, will go along way in stimulating its economic growth.
The economy of India
The economy of India has sky rocketed in terms of the growth that it has experienced in the recent days. When it comes to the purchasing power parity or the PPP, the economy of India is ranked in the forth position. The Gross Domestic Product is way much beyond three trillion dollars with a growth rate that ranks second in the world with a value of 8.1 percent (Balasubramanyam 1985).
The reason why the economy is growing at such a high rate is because there are so many activities that take place in this country and each has an impact on the economy of the entire country. Diversity of the economy is experienced in the art and craft sector, agriculture, industrial processes, and uncountable service industries just to mention a few. The service industry ought to be the greatest driving force towards the exaggerated growth of the economy but the majority of the community members in India earns their living through agriculture (Balasubramanyam 1985).India’s labor force is estimated to be more than 480 million people with 17% being employed the industrial processes, 23% being in other services and the major populace of 57% being in employed by the agricultural sector (Balasubramanyam 1985). The economy of India recently got a great boost as a result of intellectual citizens of India who are able to speak fluent English engaging in the export of different software services, specialists in software engineering and financial services among others.
The government of India is usually has overall control over every aspect of the economy and this is a trend that was adopted since the country gained independence. As a result, the private sector and the foreign investors are therefore subjected to a lot of government rules and regulations that are meant to control the Indian economy. However, there have been some new economic reforms that India has adopted limiting the control of the economy by the government as well as other activities such as investments both locally and internationally. It is through these reforms that new doors have opened for all who would wish to invest in future to do so in a more liberal manner (Balasubramanyam 1985). The success that has been realized in regard to the economy of India is a true breakthrough that comes along from the main economic crisis in the early 1990s. Despite the high growth of the economy of the country, a good section of the population is still suffering under the influence of poverty.
The Economy of China
A number of economic strategies have ensured that the china remains among the top countries with an economy that is growing at a very high rate. The economy of this Asian tiger has been growth at an almost constant rate of nine percent during the last decade. The Gross Domestic product ranks in the seventh position in the entire world (Yueh 2010). The population of china is a great wealth for the country in terms of manpower and the country has sufficient manpower that it even exports some in America. China is believed to have more than 1.3 citizens and this is the reason why the export of services is the highest in the country. The policies of china have for a long time been friendly so as to encourage business with other foreign countries and this has been enhanced by the economic as well as political strategies that have been put in place by those in the relevant authorities to ensure that china remains in the global market (Yueh 2010).
Among the areas that the Chinese government has addressed are medical market, agricultural technology, infrastructure such as communication networks, transport and other constructions. The Chinese reforms incorporate special provisions for foreign investors who would wish to invest in the country and this is a move that was felt by a lot of countries across the globe based on the fact that china is a giant country. The increased number of both imports and exports to and from china will reflect on the demand other products such as petroleum products, electronics, and other products in the global market (Yueh 2010).
Based on the above two economies, it is notable that most of the trends in terms of the economic growth and other factors reflect the same thing. These are two countries with a large amount of people in terms of population and as a result there is much more labor force, more than enough for the country and this is the reason why they are moving to the option of exporting labor to other countries and this is mostly done by china. Both China and India have a capitalist government and this is the reason why it looks probable that within the next two decades the two economies may be running hand in hand (Yueh 2010). According to Khan’s economic analysis, the economic rent analysis can be assessed based on three major factors and these are labor, land and capital. Looking, at the two countries the dominating factor of production is labor and this is one of the factors that has enabled china in particular to export human labor to other countries such as in the United States. Therefore the reason why the economy of these countries is doing good is because they have both put the factors of production into use in a struggle to ensure that their economy is growing. Opening up for foreign investors to invest in their country as China is doing and exporting labor and other resources are some of the things that are boosting the economy and slowly by slowly, the government of India is opening up their market to foreigners (Ngo, 2008).
New growth drivers that are likely to emerge given the current configurations and growth trajectories of the two economies
Based on the current configurations, there are a number of growth drivers that may emerge from after analyzing the two major economies. These economic drivers include; technological advancement, improved energy sources, sufficient food, favorable weather conditions, supportive government policies, enough resources such as shelter and clothing, industrial technology, sufficient finances, internet evolution, further fall of communism and rise of capitalism in china and India. These are just but a few of the economic drivers that are likely to be experienced in the future based on the growth trails of the economies of the two countries.
The human race advances its knowledge each and every day and this is directed towards making life easy for them. This is the reason why, technology keeps on being improved year in year out and as a result one of the major economic drivers that are likely to happen in the future is the technological advancements. Technology makes most of the activities to be easy and this will indeed be a boost to the business fraternity. Due to the increased business transaction the economy is likely to receive a good boost.
For industries to generate any kind of products there has to be the source of energy and this is diverse depending on the kind of plant and the products that is being produced. The main source of energy in the current industries is petroleum products and electricity. As the human knowledge advances so is the likelihood of developing a new source of energy that is more economical and this will have an impact on the global economy. Sufficient resources will have a direct impact on the workforce which will be boosted to produce more. The economy is also likely to receive a great boost as a result of a favorable weather as well as government policies that are supportive.
Both India and China have a lot of things that are in common in terms of their economies. As discussed earlier China has opened up for foreign investors and most of the policies that have been adopted are friendly to people who wish to invest from abroad. The economy is growing at a very high rate and one of the major reasons for this is that it has opened business to the rest of the word. On the other hand, India is doing as well in terms of the growth of the economy, however, most of the government policies that have been put in place to regulate business locally are not user friendly to the foreign investors. Most of the foreign investors have withdrawn from operations in the region and as a result, the economy of India is dependent mainly of the local people and the local market based on the reason that the country is yet to open up fully to the foreign investors. Therefore, over the next two decades, the likelihood that India will overtake China in terms of the size of its economy is very high but India needs to adopt some of the tactics that have been adopted by china to reach where it is today. It should also be noted that in both these countries, there is rise of capitalism and also China keeps on developing new ways to ensure that its economy grows bigger and better and as a result, it will not be an easy task for India to get to the level of China in terms of the economy.
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