India china Macro Economics by dhawanapoorv

VIEWS: 563 PAGES: 33

									Table of Contents

 INTRODUCTION ........................................................................................................................................ 4

 MACROECONOMIC Comparison........................................................................................................ 5

 1.      Gross Domestic Product (GDP) .............................................................................................. 6

 2.      Exports and Imports (Foreign Trade) .............................................................................. 10

 3.     Foreign Direct Investment (FDI) ......................................................................................... 14

 4.      Exchange Rates and Foreign Reserves ............................................................................ 16

 5.      Inflation ............................................................................................................................................. 18

 6.      Balance of Payment ..................................................................................................................... 20

 7.      Government Budget .................................................................................................................... 21

 8.      Unemployment ............................................................................................................................... 22

 9.      Interest Rate .................................................................................................................................. 25

 10. Savings Rate ................................................................................................................................... 27

 11. The Global Competitiveness Index .................................................................................... 29

 CONCLUSION ............................................................................................................................................ 31

 REFERENCES ............................................................................................................................................. 33
List of Tables

  1.   Table   1:   India and China GDP
  2.   Table   2:   FDI net inflows for India and China (in $ millions)
  3.   Table   3:   Inflation Rate in %
  4.   Table   4:   Balance of Payment for India and China in Billion $
  5.   Table   5:   China Interest Rate
  6.   Table   6:   India Interest Rate
  7.   Table   7:   Stages of Development

List of Figures

  1. Figure    1: Nominal GDP (India vs China)
  2. Figure    2: Real GDP (India vs China)
  3. Figure    3: GDP per Capita (India vs China)
  4. Figure    4: China composition of GDP
  5. Figure    5: India composition of GDP
  6. Figure    6: Exports (%of GDP)
  7. Figure    7: Imports (%of GDP)
  8. Figure    8: Merchandise Trade (%of GDP)
  9. Figure    9: India – China Bilateral Trade
  10. Figure   10: FDI net inflows
  11. Figure   11: Reserves of foreign exchange and gold of China
  12. Figure   12: Reserves of foreign exchange and gold of India
  13. Figure   13: Comparison of Reserves of foreign exchange and gold
  14. Figure   14: Inflation Rate (CPI) for India and China
  15. Figure   15: Balance of payment for India and China
  16. Figure   16: India Government Budget
  17. Figure   17: China Government Budget
  18. Figure   18: Unemployment rate in China
  19. Figure   19: Unemployment rate in India
  20. Figure   20: Unemployment rate in China Vs India
  21. Figure   21: China Interest Rate
  22. Figure   22: India Interest Rate
  23. Figure   23: The National Savings Rate for India and China
  24. Figure   24: The 12 pillars of competitiveness


China and India seem to be the hot topics in the world economy today. In the
international press, there is almost an obsession with these two economies, and how
their current growth presages the coming "Asian century". It is not just that they both
are countries with large populations covering substantial and diverse geographical areas,
but also with huge economic potential. Most of all they are cited as the current "success

These are two economies in the developing world that have apparently benefited from
globalization, with relatively high and stable rates of growth for more than two decades
and substantial diversification.

In India, the obsession with China is now well-developed, mostly in the form of a longing
eastern gaze. The rapid economic growth and structural transformation in China are not
just eyed with envy; they are typically invoked to justify the economic policy of choice.
Thus there are those who argue that the recent Chinese economic success is because of
liberalization and openness to foreign trade and investment. By contrast, others point
out that the early Communist history of land reforms and egalitarian policies formed the
essential basis upon which all subsequent change has depended.

China and India had similar development strategies prior to their breaking out of their
deliberate insulation from the world economy and the ushering in of market-oriented
economic reforms and liberalization. China began reforming its closed, centrally planned,
non-market economy in 1978. India always had a large private sector and functioning
markets which were subject to rigid state controls until the hesitant and piecemeal
reforms of the 1980s. These became systemic and far broader after India experienced a
severe macroeconomic crisis in 1991.

The political environments under which reforms were initiated and implemented in the
two countries and their consequences were very different. India continues to be an open,
participatory, multiparty democracy, while China has an authoritarian, one party regime,
though it is liberalizing.

In the outside literature, these economies are often treated as broadly similar in terms of
growth potential but in fact there are crucial differences between the two economies
which render such similarities very superficial, and which mean that individual policies
cannot be taken out of context of one country and simply applied in the other to the
same effect.


The difference between the two due to the nature of the economy, the institutional
conditions within which policies are formulated and implemented. India could be
described until recently as a traditional "mixed economy" with a large private sector, so
it was and remains a capitalist market economy with the associated tendency to
involuntary unemployment. So the need for macroeconomic policies to stimulate
demand, as common in capitalist economies, operated in addition to the usual
developmental role of the state. In India, the financial sector was typical of the "mixed
economy" and even bank nationalization did not lead to comprehensive government
control over the financial system; in any case, financial liberalization over the 1990s has
involved a progressive deregulation and further loss of control over financial allocations
by the state in India.

China, by contrast, has been for the most part a command economy, which until recently
had a very small private sector, and only recognized the legal possibility of home-grown
capitalists a few years ago. Throughout the period of "liberalization", that is the 1990s
and later, there have remained important forms of state control over macroeconomic
processes that have differed from more conventional capitalist macroeconomic policy.
Public enterprises accounted for more than half of GDP and more than two-fifths of
exports. The financial system in China still remains heavily under the control of the
state, despite recent liberalization. Four major public sector banks handle the bulk of the
transactions in the economy, and the Chinese authorities have essentially used control
over the consequent financial flows to regulate the volume of credit (and therefore
mange the economic cycle) as well as to direct credit to priority sectors. Off-budget
official finance (called "fund-raising" by firms) has accounted for more than half of
capital formation in China even in recent years, and that together with direct budgetary
appropriations have determined nearly two thirds of the level of aggregate investment.
This means that there has been less need for more conventional fiscal and monetary
policies, although the Chinese economy is now in the process of transition to the more
standard pattern.

The below listed are the key macroeconomic indicators on which comparison between
India and China is made.

   1. Gross Domestic Product
   2. Exports and Imports (Foreign Trade)
   3. Foreign Direct Investment
   4. Exchange Rates and Foreign Reserves
   5. Inflation
   6. Balance of Payment
   7. Government Budget
   8. Unemployment
   9. Interest Rate
   10. Savings Rate
   11. Global Competitive Index


The gross domestic product (GDP) or gross domestic income (GDI) is a basic
measure of a country's overall economic performance. It is the market value of all final
goods and services made within the borders of a country in a year. It is often positively
correlated with the standard of living. GDP can be determined in three ways, all of which
should in principle give the same result. They are the product (or output) approach, the
income approach, and the expenditure approach. The most direct of the three is the
product approach, which sums the outputs of every class of enterprise to arrive at the
total. The expenditure approach works on the principle that all of the product must be
bought by somebody, therefore the value of the total product must be equal to people's
total expenditures in buying things. The income approach works on the principle that the
incomes of the productive factors ("producers," colloquially) must be equal to the value
of their product, and determines GDP by finding the sum of all producers' incomes.

Comparison of GDP: India vs China

It has been reported by a survey done on GDP India vs. GDP China that India's GDP
(PPP) is four trillion whereas China's GDP (PPP) is ten trillion. As per the post-war history
of economics, China's economy has undergone a drastic change with seven percent
increase in its GDP. The growth in GDP of China has resulted from the rapid rise in the
manufacturing of high-tech goods in the country under the large-scale high-tech
manufacturing firms like Lenovo, and Huawei Technologies. The
infrastructural development in China has also been quite higher than that of India, which
has added to the growth of China GDP. In general, China spends much more in its
infrastructural facilities than India.

Supporting Data and Graphs

           Facts                           India                          China

    Nominal GDP (2008)                 $1.209 trillion                 $4.327 trillion

                                           7.3%                            9.1%
 GDP Growth Rate (2008)
                                           $1017                          $3259
  Per Capita GDP (2008)

Source: IMF, 2009

                                  Table 1: India and China GDP

INDIA’S Current GDP (2008) is around $1.209 trillion and that of China is around $4.327
trillion. The GDP growth rate of India is 7.3% and GDP growth Rate of China is 9.1 %
over the previous year.

The Growth Trends of India vis. a vis. China is as follows:

                                                 Nominal GDP
                                                (India vs China)
     Billion $

                        2,000.00                                                             China
                        1,500.00                                                             India
                                    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

                                                                                 Source: IMF, 2009
                                        Figure 1: Nominal GDP (India vs China)

                                           Real GDP Growth Rate
                                              (India vs China)
       Percentage (%)

                         4                                                                   India
                              2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

                                                                                 Source: IMF, 2009
                                         Figure 2: Real GDP (India vs China)

                             GDP per Capita
                             (India vs China)
US $

              2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

                                                                Source: IMF, 2009
                    Figure 3: GDP per Capita (India vs China)

                     China: Composition of GDP


                   40.10%                                              Agriculture

                               2008                                    Industry

                                                                Source: IMF, 2009
                       Figure 4: China composition of GDP

      India: Composition of GDP


Services         2008                                  Services

                                                Source: IMF, 2009
           Figure 5: India composition of GDP


Foreign trade is exchange of capital, goods, and services across international borders
or territories. In most countries, it represents a significant share of gross domestic
product (GDP). While international trade has been present throughout much of history,
it’s economic, social, and political importance has been on the rise in recent centuries.
Industrialization, advanced transportation, globalization, multinational corporations, and
outsourcing are all having a major impact on the international trade system. Increasing
international trade is crucial to the continuance of globalization. International trade is a
major source of economic revenue for any nation that is considered a world power.
Without international trade, nations would be limited to the goods and services produced
within their own borders.

Comparison of Foreign Trade: India vs. China

From the start, the two countries’ trade patterns have been largely dissimilar. In the
case of China, using its vast resources of cheap labor and domestic savings to initiate
infrastructure building and invite large amounts of FDI to spur the development of the
manufacturing industry in the coastal areas has been seen as one of the initial and
leading drivers for the country’s economic success. India’s strength, on the other hand,
is based on its knowledge-based sectors such as IT and pharmaceuticals, its more
developed financial markets and more robust private sector. Besides being the world’s
third-largest trader with a 6% share in world trade – compared with India’s 1% – China
is gradually becoming a manufacturing hub in Asia. It is now deeply involved in regional
production and distribution networks in East and Southeast Asia (including ten ASEAN
countries, plus Japan, China and South Korea). The share of China’s exports and imports
to East Asian countries in its total trade is more than twice that of India, showing China’s
stronger connection to the region.

Chinese export growth has been much more rapid, involving aggressive increases on
world market shares. This export growth has been based on relocative capital which has
been attracted not only by cheap labour but also by excellent and heavily subsidized
infrastructure resulting from the high rate of infrastructure investment. In addition, since
the Chinese state has also been keen on provision of basic goods in terms of housing,
food and cheap transport facilities, this has played an important role in reducing labour
costs for employers. In India, the cheap labour has been because of low absolute wages
rather than public provision and underwriting of labour costs, and infrastructure
development has been minimal. So it is not surprising that it has not really been an
attractive location for export-oriented investment, its rate of export growth has been
much lower, and exports have not become an engine of growth.

There is another issue relating to trade policy. In China, the rapid export growth
generated employment which was a net addition to domestic employment, since until
2002 China had undertaken much less trade liberalization than most other developing
countries. This is why manufacturing employment grew so rapidly in China, because it
was not counterbalanced by any loss of employment through the effects of displacement
of domestic industry because of import competition. This is unlike the case in India,
where increases in export employment were outweighed by employment losses
especially in small enterprises because of import competition.

There is one service sector, viz. Information Technology (IT), in which India has notably
outstripped China. In the year 2002, India’s IT exports were almost $10 billion,
compared with $1.5 billion from China. According to a report by consultants, 40% of
China’s IT exports involved Indian IT companies based in China (Luce and Kynge 2003).
The Chief Financial Officer of Infosys has said that India is five to seven years ahead of
China in the software sector, primarily because of the lack of facility with the English
language among Chinese and the absence of experienced project managers in China.

Supporting Data and Graphs

                                        Exports (% of GDP)

                   20                                                                        China

                   15                                                                        India

                        2000   2001   2002   2003   2004    2005   2006   2007    2008

                                                                          Source: World Bank, 2009
                                       Figure 6: Exports (%of GDP)


                                                        Imports (% of GDP)




                       15                                                                                     China


                                      2000    2001    2002   2003   2004    2005   2006     2007    2008

                                                                                          Source: World Bank, 2009
                                                       Figure 7: Imports (%of GDP)

                                               Merchandise Trade (% of GDP)




                                 30                                                                         China

                                 20                                                                         India


                                       2000    2001   2002   2003   2004    2005   2006   2007     2008

                                                                                          Source: World Bank, 2009
                                                 Figure 8: Merchandise Trade (%of GDP)

India – China Bilateral Trade

                                   India-China bilateral Trade


   million $

                                                                                 Imports from China
                                                                                 Exports to China
                        1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009   Balance of Trade



                                   Figure 9: India – China Bilateral Trade

Economic ties between India and China are rapidly emerging as one of the most
important bilateral relationships in the world. Regarding the magnitude of India-China

1. Trade between the two countries has grown very robustly. Each country’s aggregate
international trade is expanding by 23-24% annually. In comparison, India-China trade
grew at a 50% rate during 2002-2006 and will increase by a further 54% during 2007 to
reach $37 billion.

2. After adjusting for partner GDP (i.e., bilateral trade divided by the trading partner’s
GDP), India’s trade with China is greater than that with Japan, the US, or the entire
world. After similar adjustments, China’s trade with India is only slightly below that with
Japan, the US, or the entire world.

3. China already is (or will shortly become) India’s number one trading partner. From
China’s side, India already is one of its top ten trading partners. Also, China’s trade with
India is growing much faster than with any of the other nine. Thus, India is rapidly
becoming an increasingly important trading partner for China.

4. India’s overall international trade is significantly below that of China’s, in terms of
both absolute figures (for 2006, $306 billion vs $1,760 billion) as well as relative to GDP.

5. Even if the growth rate in India-China trade slows down to 25% annually (a
conservative projection) from the current rate of over 50%, bilateral trade between them
will be almost $75 billion in 2010 and $225 billion in 2015.


Foreign direct investment (FDI) is a measure of foreign ownership of productive
assets, such as factories, mines and land. Increasing foreign investment can be used as
one measure of growing economic globalization.

Comparison of FDI: India vs. China

It is sometimes argued that China can afford to have such a high investment rate
because it has attracted so much foreign direct investment (FDI), and is the second
largest recipient of FDI in the world at present. But FDI has accounted for only 3-5 per
cent of GDP in China since 1990, and at its peak was still only 8 per cent. In recent
times, the inflow of capital has not added to the domestic investment rate at all, but to
the holding of international reserves, which have increased by $100 billion per year.

In terms of economic diversification and structural change, China has followed what
could be described as the classic industrialization pattern, moving from primary to
manufacturing activities in the past 25 years. The manufacturing sector has doubled its
share of workforce and tripled its share of output, which, given the size of the Chinese
economy and population, has increasingly made China "the workshop of the world". In
India, by contrast, the move has been mainly from agriculture to services in the share of
output, with no substantial increase in manufacturing, and the structure of employment
has been stubbornly resistant to change. The recent expansion of some services
employment in India has been at both high and low value added ends of the services
sub-sectors, reflecting both some dynamism and some increase in "refuge" low
productivity employment.

The reason for rapid growth of FDI in China is the rapid economic growth in reform
period, abundance of labour and its low costs, rapid expansion of domestic market, role
of overseas Chinese companies and increasing integration with world economy while
India could not attract foreign investment in both products market and services market,
only seen as a service industry specially in IT. Also China’s financial system shows
greater strength in countries savings and investment while India’s savings and
investment occur outside the formal financial system.

Supporting Data and Graphs

                 2000           2001     2002           2003     2004           2005     2006       2007

China            38399          44241    49308          47077    54936          79127    78095      138413

India            3584           5472     5626           4323     5771           6677     17453      22950

                        Table2: FDI net inflows for India and China (in $ millions)

                                                FDI net inflows
                                                (India vs China)

  million $

                                                                                           FDI inflows China
                                                                                           FDI inflows India
                         2000     2001   2002    2003     2004   2005    2006     2007
                                                                                   Source: World Bank,2009
                                          Figure 10: FDI net inflows


Foreign Exchange Reserves (also called Forex reserves) in a strict sense are only
the foreign currency deposits and bonds held by central banks and monetary authorities.
However, the term in popular usage commonly includes foreign exchange and gold,
SDRs and IMF reserve positions. This broader figure is more readily available, but it is
more accurately termed official international reserves or international reserves.
These are assets of the central bank held in different reserve currencies, mostly the US
dollar, and to a lesser extent the euro, the UK pound, and the Japanese yen, and used to
back its liabilities, e.g. the local currency issued, and the various bank reserves
deposited with the central bank, by the government or financial institutions.

Comparison of Forex: India vs. China

Although China’s trade surplus with the United States has been growing, its overall trade
surplus is modest since it is running a growing trade deficit with Asia-Pacific countries
that offsets in large part its trade surplus with the US.

China has accumulated a substantial (projected at $1534 billion by the end of 2008)
foreign exchange reserves, exceeding its annual imports. India has done the same—its
reserves, around $275 billion at the end of 2008.

It is likely that if India’s reserves continue to climb, and outsourcing gathers further
momentum, there would be charges of ―currency manipulation‖ against Indian
authorities, as the Chinese are currently being charged with. China and India should
cooperate in resisting such accusations and pressures and decide on their exchange rate
policies in their own interests.

Supporting Data and Graphs

              Figure 11: Reserves of foreign exchange and gold of China

                        Figure 12: Reserves of foreign exchange and gold of India

Comparison of reserves of foreign exchange and gold of India and China

                          Reserves of foreign exchange and gold


  billion $

              1000                                                                          China

                        2004       2005      2006          2007   2008       2009
                     Figure 13: Comparison of Reserves of foreign exchange and gold


Inflation is a rise in the general level of prices of goods and services in an economy
over a period of time. When the price level rises, each unit of currency buys fewer goods
and services; consequently, inflation is also an erosion in the purchasing power of money
– a loss of real value in the internal medium of exchange and unit of account in the
economy. A chief measure of price inflation is the inflation rate, the annualized
percentage change in a general price index (normally the Consumer Price Index) over

Comparison of Inflation: India vs. China

According to the 2008 Economic Survey Report, India’s inflation rate was targeted by the
Reserve Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007. Inflation
rates for many investment goods have decreased dramatically in recent years. The price
of basic goods such as lentils, vegetables, fruits and poultry were expected to slow their
rise. The price of various manufactured goods also fell in 2007, and this contributed to a
reduced inflation rate.

 However, the beginning of 2008 has seen a dramatic rise in the price of rice and other
basic food stuffs. There has also been a no-less alarming rise in the price of oil and gas.
When coupled with rises in the price of the majority of commodities, higher inflation was
the only likely outcome.

Indeed, by July 2008, the key Indian Inflation Rate, the Wholesale Price Index,
has risen above 11%, its highest rate in 13 years. This is more than 6% higher
than a year earlier and almost three times the RBI’s target of 4.1%.

Inflation has climbed steadily during the year, reaching 8.75% at the end of May. There
was an alarming increase in June, when the figure jumped to 11%. This was driven in
part by a reduction in government fuel subsidies, which have lifted gasoline prices by an
average 10%. The Indian method for calculating inflation, the Wholesale Price Index, is
different to the rest of world. Each week, the wholesale price of a set of 435 goods is
calculated by the Indian Government. Since these are wholesale prices, the actual prices
paid by consumers are far higher.

In times of rising inflation this also means that cost of living increases are much higher
for the populace. Cooking gas prices, for example, have increased by around 20% in

 Inflation in China soared during the 1930s and 1940s, when the country’s economy
became highly unstable. The economic scenario worsened due to a civil war in the late
1940s. Food prices soared and hit purchasing power. In the early 1950s, the government
implemented a series of recuperative measures, such as currency reforms,
nationalization of banking institutions and the strict regulation of product prices and
money supply. These policies continued till 1978. Owing to this, China succeeded in
achieving record breaking price stability. Between 1950 and 1978, there was only a
marginal increase of 0.6% in the retail prices of consumer products. As the government
reduced its control, China’s inflation reappeared. In 1980, urban residents were hit by a

   7.5% inflation rate. Inflation spiked again in 1985 to 11.6%. In 1990, the government
   managed to control the inflation rate, bringing it down to 6.1%.

   Supporting Data and Graphs

                         2000           2001     2002           2003      2004           2005      2006          2007       2008       2009

                         4.009      3.779       4.297           3.806     3.767          4.246    6.177          6.372      8.349     8.664

China                      0.4      0.725       -0.767          1.167       3.9          1.817    1.467          4.767       5.92     -0.055

                                                       Table 3: Inflation Rate in %

                                                       Inflation Rate (CPI)
                                                          India vs China

        Percentage (%)


                           4                                                                                             China

                                 2000    2001   2002     2003     2004   2005     2006    2007   2008     2009
                                                                                                        Source: IMF, 2009
                                         Figure 14: Inflation Rate (CPI) for India and China


   Balance of Payments is the difference between the money coming into a country and
   the money leaving the same country. In economics, the balance of payments, (or
   BOP) measures the payments that flow between any individual country and all other
   countries. It is used to summarize all international economic transactions for that
   country during a specific time period, usually a year. The BOP is determined by the
   country's exports and imports of goods, services, and financial capital, as well as
   financial transfers. It reflects all payments and liabilities to foreigners (debits) and all
   payments and obligations received from foreigners (credits). Balance of payments is one
   of the major indicators of a country's status in international trade.

   Comparison of Balance of Payment: India vs. China

                      2000     2001          2002       2003        2004           2005      2006        2007      2008        2009

                  -4.599        1.41         7.061      8.773       0.781     -10.285       -9.299   -11.285    -26.621      -27.491

China           20.519        17.405        35.422     45.875      68.659    160.818       253.268   371.833    426.107      371.504

                             Table 4: Balance of Payment for India and China in Billion $

                                                 Balance of Payment
        Billion ($)

                       -50   2000    2001    2002    2003   2004   2005     2006    2007   2008   2009
                                    Figure 15: Balance of payment for India and China


Government Budget is an itemized accounting of the payments received by
government (taxes and other fees) and the payments made by government (purchases
and transfer payments). A budget deficit occurs when the government spends more
money than it takes in. The opposite of a budget deficit is a budget surplus.

Comparison of Government Budget: India vs. China

                       Figure 16: India Government Budget

                      Figure 17: China Government Budget


Unemployment occurs when a person is available and willing to work but currently
without work. The prevalence of unemployment is usually measured using the
unemployment rate, which is defined as the percentage of those in the labor force who
are unemployed. The unemployment rate is also used in economic studies and economic
indices as a measure of the state of macroeconomics.

Comparison of Unemployment: India vs. China

In China, unemployment rate stands at 4.30 percent of the labor force. The labour force
is defined as the number of people employed plus the number unemployed but seeking
work. The non labour force includes those who are not looking for work, those who are
institutionalized and those serving in the military. China's economy is the second largest
in the world after that of the United States. During the past 30 years China's economy
has changed from a centrally planned system that was largely closed to international
trade to a more market-oriented that has a rapidly growing private sector. A major
component supporting China's rapid economic growth has been exports growth.

Supporting Data and Graphs

                    Unemployment Rate in China over the years

                        Figure 18: Unemployment rate in China

In India, unemployment rate stands at 7.32 percent of the labour force. The labour
force is defined as the number of people employed plus the number unemployed but
seeking work. The non labour force includes those who are not looking for work, those
who are institutionalised and those serving in the military. India's diverse economy
encompasses traditional village farming, modern agriculture, handicrafts, a wide range of
modern industries, and a multitude of services. Services are the major source of
economic growth, accounting for more than half of India's output with less than one third
of its labour force. The economy has posted an average growth rate of more than 7% in
the decade since 1997, reducing poverty by about 10 percentage points.

                    Unemployment Rate in India over the years

                        Figure 19: Unemployment rate in India

                                 Unemployment India vs China


% of labour force


                          2004    2005   2006   2007   2008   2009


                         Figure 20: Unemployment rate in China Vs India


Comparison of Interest Rate: India vs. China

China benchmark interest rate stands at 5.31 percent. In China, interest rates decisions
are taken by The People's Bank of China Monetary Policy Committee. The PBC
administers two different benchmark interest rates, the benchmark lending rate, which is
the one year PBC lending rate and the benchmark rate of central bank lending that is the
rediscount rate.

       Chinese Interest Rates over the years (by individual months)

                             Table 5: China Interest Rate

                            Figure 21: China Interest Rate

India benchmark interest rate stands at 3.25 percent. In India, interest rate decisions
are taken by the Reserve Bank of India's Central Board of Directors.

      Indian Interest Rates over the years (by individual months)

                             Table 6: India Interest Rate

                            Figure 22: India Interest Rate

10.          SAVINGS RATE

The National Savings Rate is a measure of the amount of money citizens of that
country are saving or investing for the long-term. National savings include savings left
over from personal, business and government.

Comparison of Saving Rate: India vs. China

Savings rate of India is 35.6 % and of China is 51% of GDP.

As per global competitiveness report India stands at 20th position in National Savings
rate as compared to 7th rank of China

The comparison of Gross National Savings Rate as percentage of GDP of both the
economies is shown below:


                                                                            China                India







                            Figure 23: The National Savings Rate for India and China

Though public saving is declining in both the countries while the private saving is
increasing at an almost similar rate.

Savings rate of both the economies is rising with increase in income level and growth
rates while inflation has a negative effect.

The elements functioning behind the increased rate of savings in China involve the

             More than expected development
             Relatively young population
             Restraints in consumption as a result of an underdeveloped financial
             A defective social security arrangement                                   
             A broadening income inequality
             Increased savings in the corporate sector enterprises receiving profits


The World Economic Forum has based its competitiveness analysis on the Global
Competitiveness Index (GCI), a highly comprehensive index, which captures the
microeconomic and macroeconomic foundations of national competitiveness. The
concept of competitiveness involves static and dynamic components: the productivity of
a country clearly determines its ability to sustain its level of income; it is also one of the
central determinants of the returns to investment, which is one of the key factors
explaining an economy’s growth potential.

The GCI provides a weighted average of many different components, each of which
reflects one aspect of competitiveness. All these components can be grouped into 12
pillars of competitiveness:

                       Figure 24: The 12 pillars of competitiveness

The stability of the macroeconomic environment is important for business and,
therefore, is important for the overall competitiveness of a country. Although it is
certainly true that macroeconomic stability alone cannot increase the productivity of a
nation, it is also recognized that macroeconomic disarray harms the economy. The
government cannot provide services efficiently if it has to make high-interest payments
on its past debts. Running fiscal deficits limits the government’s future ability to react to
business cycles. Firms cannot operate efficiently when inflation rates are out of hand. In
sum, the economy cannot grow in a sustainable manner unless the macro environment
is stable.

Comparison of GCI: India vs. China

India has a GCI ranking of 49 (2009-10) with an overall score of 4.3 whereas China has
a GCI ranking of 29 (2009-10) with an overall score of 4.74. Both countries’ GCI
rankings improved by 1 point as compared to 2008-09.

As shown in the below figure, economies have been categorized in 3 different stages
based on GDP per capita:

                           Table 7: Stages of Development

      According to the GCI report, India is in stage 1 i.e. factor driven whereas China
      is in stage 2 i.e. efficiency driven.

      The Macroeconomic stability sub-components rankings:



      From the above data it can be observed that India is ranked lower in all the
      macroeconomic sub components as compared to China.

      For India only national savings rate is the advantageous factor as its rank is less
      than the total Indian GCI rank whereas for China 3 advantageous factors are
      national savings rate, interest rate spread and government debt.


                                 India             China

Gross Domestic Product       $1.209 trillion   $4.327 trillion

GDP growth rate                  7.3%              9.1%

Population (2007)              1.1 billion       1.3 billion

Inflation, CPI (2009)            8.6%            -0.055 %

FDI                           $22 billion       $138 billion

Export of goods and               27%               35%
services (% of GDP)

Imports of goods and              30%               27%
services (% of GDP)

Foreign Reserves              $256 billion     $1968 billion

Balance of Payment            $ -27 billion    $ 371 billion

Government Budget (%              -1.4              -1.4
of GDP)

Unemployment       (%   of       6.8 %              4%
Labour Force)

Interest Rate                   3.25 %            5.31 %

Savings   Rate     (%   of      35.6 %             51 %

Global Competitiveness             49                29
Index Ranking

Comparing India and China

•   China and India have pursued different development strategies.

•   China used the fastest route to reach economic development which is foreign
    direct investment (FDI).

•   On the other hand, India’s homegrown entrepreneurs may give it a long-term
    advantage over the Chinese inefficient financial system and capital market.

•   India’s strategy may enable it to catch up with and perhaps even overtake China.

•   However, there is a wide gap in GDP, FDI, Trade, Foreign Reserves and other
    Macroeconomic Factors.

    Reasons for the Wide Gap in various Macroeconomic Factors

1. It’s the history; India’s economic reforms only began in 1991, more than a
   decade after China.

2. India has had to deal with a national savings rate half that of China’s and 90
   percent less FDI.

3. Moreover, India is an extensive, messy democracy driven by ethnic and religious

4. India has also had a longstanding, volatile dispute with Pakistan over Kashmir.
   China, on the other hand, has enjoyed two decades of relative tranquility, it has
   been able to focus almost exclusively on economic development.

    Considering the present scenario China seems to be ahead than India in most of
    the macroeconomic comparisons. However, the stimulating growth rate of India
    given the several constraints it is operating under indicates a very bright future
    and potential for catching up with the developed world and maybe even
    surpassing China in the future.


 6.   Global Competitive Report


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