It has become conventional wisdom that China is the biggest
story of our time. Now, as India goes through a similar
process characterized by historically high rates of growth and
further integration into the global economy, it appears that
the path that China and India follow will influence the global
economy and business environment. Perhaps, then, India is
the next big story.
Yet China and India, despite their massive populations and
growing importance, are quite different. Their economic
structures, sources of growth, areas of competitive advantage,
and the impact they have will remain different in the coming
years.
…
History
For much of human history, what China and India had in
common was the fact that they were the richest nations on
earth. Long before Europe emerged, China and India had
higher standards of living and more numerous technical and
scientific inventions. Yet starting in the early nineteenth
century this began to dramatically change with both countries
experiencing a long relative decline, eclipsed ultimately by
Europe and North America. By mid twentieth century, both
countries were relatively poor. The reversal of China’s fortunes
began in 1978 when Deng Xiao Ping came to power and
instituted market oriented economic policies. India’s reversal
began in the early 1990s when, in response to a financial
crisis, the government reversed decades of socialistic policies
and began a gradual path toward market orientation. Since
those policy reversals, both countries have grown rapidly. For
the first time since the early nineteenth century, they have
expanded their share of global GDP.
Population and income
China and India together account for nearly 40% of the
world’s population. The combined output of China and India
accounts for almost 25% of global GDP when measured
appropriately. Specifically, when GDP is measured using PPP
(purchasing power parity) exchange rates which reflect the
actual purchasing power of a country’s currency, China has
the world’s second largest economy after the US. India is
fourth after the US, China, and Japan. Moreover, China and
India together accounted for roughly half of global GDP
growth in 2005. On a per capita basis, however, China must
be considered a lower middle income country with a per
capita GDP roughly one seventh that of the US. India’s per
capita GDP is a little more than half that of China’s. In
addition, China’s economy has grown faster than
Trade
In 2005, China’s international trade dwarfed that of India.
According to the WTO, China’s merchandise exports were
US$764 billion versus US$96 billion for India. By comparison,
Korea’s exports were US$290 billion and Thailand’s were
US$110 billion. Roughly 91% of China’s exports were
manufactured goods versus 75% for India. While India is
better known for its exports of services, here again China
leads. In 2004, China’s service exports were US$62 billion
versus US$40 billion for India. On the other hand, 60% of
China’s service exports were travel and transportation services
while in India the figure was 22%. A large share of India’s
service exports were related to information technology and IT
related services.
Sources of growth:
Why has China’s economy grown faster than India’s? Pundits
offer many explanations. Some say that China’s
authoritarianism allows the government to make quick,
unpopular decisions that are more difficult and time
consuming in democratic India. For example, the Chinese
government can quickly raze slums with impunity in order to
build highways. India’s democratic government must satisfy
competing interest groups before such decisions can be made.
Others suggest that India’s strict regulatory environment and
aversion to foreign capital diminish investment in India in
comparison to relatively more open China. Still others say
that China’s better physical infrastructure enables more
efficient and sophisticated investment than can take place in
India.
Each of these explanations offers elements of truth. Yet they
do not tell the whole story. Moreover, much evidence
suggests they are not entirely correct. For example, China’s
economic takeoff in the early 1980s took place before much
of the investment in infrastructure took place and even before
much of China’s opening to the global economy took place.
Thus it would seem that India’s poor infrastructure and
insularity are not necessarily barriers to strong growth. In
addition, although India has some grievous regulations, its
capital markets are far more efficient than those of China.
Indeed Indian entrepreneurs probably have a better chance of
obtaining capital from local banks than their Chinese
counterparts. Finally, democracy can hardly been seen as an
obstacle to growth. After all, many democracies have
performed exceptionally well (Japan, Ireland) while many
authoritarian countries have sunk into poverty and despair
(Soviet Union, much of Africa and the Middle East). Indeed in
the information age, the argument can be made that
democracy and the free flow of information offers an
economic advantage.
Perhaps, then, it is best to consider some simple facts about
growth….
Read the full report here:
http://www.deloitte.com/dtt/cda/doc/content/US_ChinaIndiaReality_Research.pdf
About Deloitte Research
Operating through a network of research professionals, senior consulting and accounting practitioners, academics and technology partners, Deloitte Research delivers innovative, practical insights companies can use to improve their overall business performance. Through its in-depth publications, surveys, reports and commentary, Deloitte Research identifies, analyzes and explains major issues that drive today’s business dynamics and shape tomorrow’s marketplace.