China in India’s economic Strategy Rajeev Anantaram Senior Associate Editor, Business Standard

Assumptions Given the comparative sizes of the economy, Chinese planning vis-a vis India will be largely exogenous while it will be the reverse with India, There will be an increasing convergence in the economic profiles of the two countries over the next decade owing to a slowdown in China’s economy and India’s current growth rates. The difference in global footprint will also diminish as the size of India’s economy and its economic engagement with the world increases. India’s subsequent trajectory will be more non-linear than China’s

Where do things stand today: A comparative snapshot GDP (Current $): China ($5 trillion), India (1.3 trillion) (2009) 4X GDP (PPP): China ($8.3T), India(3.43T); 2.4 X Growth rates ( ): China (10.3), India (7.1) Per capita GDP (constant 2000$): China (2200), India (758); 2.9X Fiscal deficit (2010): China (2.8%), India (10.3%) Exports (2009): China $1T, India $187 billion; 5.4X Imports (2009): China $1T, India $315 billion; 3.2X Production and consumption of almost all major commodities 3-5 times higher in China R&D (%of GDP): China 1.42%, India 0.89% 3

4 GDP (Current US $ Billion ) Source: World Development Indicators, 2010

5 GDP Growth (Annual, %) Source: World Development Indicators, 2010

6 Gross Fixed Capital Formation (% of GDP) Source: World Development Indicators, 2010

7 Gross Domestic Savings (% of GDP) Source: World Development Indicators, 2010

Salient Features of China’s growth Bottom up development following reforms (1978) State still a very important player in the domestic economy. Manufacturing is the main driver of growth (35% of GDP) High levels of savings and investment (almost 50% of GDP) Investment and exports are drivers of aggregate demand. Share of domestic consumption is low. FDI has played a transformative role, though the share of FDI in GDP has been declining since Changing focus from mass manufacturing to innovation led growth—mixed results.

Features of India’s growth Paradigm Top down, capital intensive industrialization policy. Aggregate demand driven by domestic consumption, though the role of investment and exports is increasing. Savings and investment rates high, even if low by East Asian standards (35% of GDP). Secular trend is upwards, even during the downturn. S &I ratios 10 percentage points higher than in the 1990s. Private entrepreneurship flourishing particularly since Services the main driver though manufacturing share to increase. Relatively solid design and innovation capabilities.

Spillover effects of China’s growth(a non-exhaustive list) Changing Nature of the Regional Production System Resource Intensive growth Model (energy) Impact on commodity Prices FDI as a zero sum game?

Regional Production system China has emerged as the center of a Regional Production system that covers most of East & South east Asia. Intermediate goods have been sourced from these regions to be assembled in China. The Chinese government has traditionally supported this RPS through lower tariffs on intermediaries leading to a ‘dual’ system of trade. Trade is vertical, with FFEs importing components to be assembled in China and exported back home or to third countries. However, more intermediate components are being domestically produced.

Regional Production Systems [continued] RPS has led to a division of labor that increasingly reflects “deep integration”. Especially in electronics, 62% of components are sourced from East & South East Asia (very high for industries as well) Trade intensity within the region is greater than what would be predicted by a classical gravity model (function of GDP and distance b/w countries) China has thus managed to position itself as an engine of regional growth and not as a competitor. RPS changing b/c more intermediates are being sourced domestically: complementarities-  competition.

Finished Products China actually runs a trade deficit with East and South East Asia in finished products Direct effects: Not always negative especially to countries with underdeveloped manufacturing sectors. Countries in South East Asia are importing Chinese finished products and re-exporting them. Indirect effects: No evidence that Chinese manufactured exports undermined exports from other parts of Asia (other countries such as Brazil[leather products] suffered)

China’s resource Intensive growth Model China is increasingly reliant on imports of energy. Per capita consumption is still low, but will increase with rising incomes. Indirect effects: Impact on Global prices Distributional impact on poor in importing countries Impact on Climate Change Direct effects: Downstream impact of China’s aggressive augmentation of domestic hydropower capacity

Impact on Global Commodity Prices Industrial strategy has shifted from importing finished and semi-finished products to raw materials. Commodity Prices will head north. Demand is especially high for ferrous and non-ferrous metals, which has kept global prices high Simple division of labor theories do not work because who earns the rent from the commodity export trade has bearing on poverty alleviation. China often imports raw materials and exports the value added products (wood furniture and steel) undercutting the importing countries. Case study: Timber trade with South East Asia

Competition for FDI FDI has played a very important role in Asian integration, powered by capital flows from Japan. Most FDI was in manufacturing due to a tendency to ‘unbundle’, which in turn led to the vertical specialization theory China benefitted from similar unbundling from Hong Kong and China. No diversion of FDI from other Asian countries even though China attracted huge flows. Some studies show Asian countries benefitted from FDI flows to China. Individual determinants of FDI more important.

India & China: Complement or Compete? Regional Production Systems: Imports are higher end of the technology spectrum where India cannot compete. Low and middle end goods are increasingly produced domestically or from existing suppliers. Can India muscle in? China is increasingly vacating the lower end, but can India move to occupy that space? Competition for energy and commodities will intensify, though both countries are trying to lower resources intensity of GDP. FDI’s growth will be largely exogenous and depends on the enabling environment within India.

India’s strategy While China cannot be ignored because of its size, growth rate and openness, India’s response set will be largely exogenously determined. Public spending in agriculture should increase. Investments in Physical and human capital. Aggressive implementation of the new manufacturing policy. Continue aggressive quest for resources while investing in productivity increases. Administrative reform, transparent regulation especially towards attracting FDI.

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