Book proposal and book review

215 The China Business Model. Copyright © 2017 N. Nigam. Published by Elsevier Ltd. All rights reserved.

http://dx.doi.org/10.1016/B978-0-08-100750-1.00010-3DOI:

CHAPTER 10

China versus India: Emerging Giants in the World Economy Nirjhar Nigam ICN Business School, Metz, France

The key issue is the shift of the centre of gravity from the West to the East, the rise of China and India.

Klaus Martin Schwab (German Economist)

10.1 INTRODUCTION

The dawn of the 21st century witnessed a spectacular uprising of China and India as global market leaders. The effects of this phenomenon rever- berated across the entire global economy and brought about a shift in the products markets, patterns of buying and selling, investment strategies, as well as natural resources and the environment (Winters & Yusuf, 2007). India and China have become epicenters of world economy due to their unprecedented economic growth, spanning across three decades. China has consistently registered high growth rates since 1980, whereas India has ranked amongst the top 10 fastest growing nations between 1980–1990 and 1990–2000 (Izurieta & Singh, 2008). This unparalleled economic suc- cess is popularly attributed to, largely, the integration of these countries into the global economy (Ahluwalia, 2002; Chow, 2007; Mahtaney, 2007; Nolan, 2004; Rodrik & Subramanian, 2005). Without a doubt, both India and China are economies which hold great promise of becoming titans in the global economic panorama.

China became the leading manufacturing factory for the World while India has positioned itself as a major outsourcing and Information Technology hub for multinationals. Their emergence on the global eco- nomic stage has become the subject of discussion in developed nations, amongst policy makers and academics, within international media, and the general public.

China and India, as economies, are carved out of strong funda- mentals and are pillared upon a plethora of well-established corporate

The China Business Model216

giants within the global corporate landscape. According to the Global Competitiveness Report (2015–2016) covering 140 countries, India is ranked at 55th position while China holds the 28th position. These two countries have achieved high rankings in key parameters like Market Size (3rd rank for India and 1st for China), Innovation (42nd rank for India and 31st rank for China), and sound financial market development (53rd rank for India and 54th rank for China), despite the fact that corrup- tion and efficiency of legal system remain a cause of concern for both the countries.

The Indian economic view, fueled by a plethora of steady reforms since 1991, has started reflecting strong growth patterns and integration into the global economy. A noteworthy example is the financial sec- tor reforms—prompting a complete overhaul in the Indian Banking Sector and enabling an easy market-entry for private entities and for- eign banks. Today, the National Stock Exchange (NSE) is the 12th largest stock exchange in the world per number of transactions, while Bombay Stock Exchange (BSE) is ranked 11th by market capitalization. China’s role in the global economy, however, is much greater than India’s. Since 1978, China’s expansion has arguably already been the largest growth spurt ever experienced by the world economy. There are two main stock exchanges in mainland China: the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SZSE). Shanghai Stock Exchange (SHSE) holds the fifth position as measured by market capitalization whereas Shenzhen Stock Exchange (SZSE) is ranked eighth, worldwide.

With unprecedented growth rates, rising foreign direct investment (FDI), and enormous population growth, people are curious to know where these nations are headed to. Will China and India emerge as super- powers and dominate the world economy? How are they currently posi- tioned in terms of global economic growth? What is their predicted growth chart? Can India and China leverage their enormous demographic dividends? How has this impacted the rest of the world? Our objective is to seek answers to such questions in this chapter.

In this chapter, we provide a comparative study between China and India, relevant to their current global economic standing and future pros- pects regarding demographics, economic growth, investment climate, global competitiveness, ease of doing business, and environmental per- formance. We provide current statistics and future projections for each country related to its demographic and economic growth. We provide the ranking of both countries pertaining to their global competitiveness,

China versus India: Emerging Giants in the World Economy 217

ease of doing business, and environmental performance. For this purpose, we rely primarily on secondary data sources from credible International organizations such as: United Nations, World Bank Data, International Monetary Fund, the World Factbook of Central Intelligence Agency, World Economic Forum, United Nations Conference on Trade and Development (UNCTAD), and Yale Center for Environmental Law & Policy (YCELP) and national sources such as: Reserve Bank of India (RBI) and National Bureau of Statistics of China.

Our study can help familiarize people with the investment and busi- ness nuances prevalent in India and China, and develop basic foundations required for investing in these countries or initiating business opportunity. It can also help the policy makers and academics review the prevailing conditions and develop reforms in order to carve out better future for these countries, their people, and for the global economy.

10.2 DEMOGRAPHICS1

As of 2015, China has the highest population—with over 1.4 billion inhabitants, while India is ranked second with an estimated figure of 1.3 billion people. Together, this amounts to 37% of the total world popula- tion. Recent projections indicate that India’s population is likely to sur- pass China’s population by 2022, with its recorded population growth rate of 1.22% and fertility rate of 2.48 children per woman. On the contrary, China’s population growth rate was 0.45% and fertility rate was 1.6 chil- dren per woman. It is also estimated that India’s population will grow to 1.5 billion by 2030 and 1.7 billion by 2050. In contrast, China’s popula- tion is expected to remain fairly constant until 2030 and decrease slightly thereafter. Fig. 10.1 shows these population trends and forecasts for both countries.

Further, China’s “One Child Policy,” implemented in 1979, has caused a continuous decline in the ratio of employable population (15–64 years) to the total population. As a result, China’s employable population will start declining sharply between 2020 and 2030, as shown in the Fig. 10.2. It is expected that India will surpass China, in working age population by the year 2030, while India continues to witness an upsurge in employable

1 The statistics related to population come from United Nations Department of Economic and Social Affairs (2015) http://esa.un.org/unpd/wpp/Publications/Files/WPP2015_ Volume-II-Demographic-Profiles.pdf.

The China Business Model218

workforce owing to higher population growth and higher fertility rate. According to United Nations projections, advanced economies’ working age population will also shrink by almost 5% by 2050. Thus, India could leverage its demographic dividends and accelerate its economic growth. India has to bear in mind, however, that a large population can serve as

Figure 10.1 Population trend and forecast for India and China (1950–2100). United Nations, Department of Economic and Social Affairs, Population Division. (2015). World population prospects: The 2015 revision. New York: United Nations.

Figure 10.2 Comparison of working age (15–64) population for India and China 1950– 2100. United Nations, Department of Economic and Social Affairs, Population Division. (2015). World population prospects: The 2015 revision. New York: United Nations.

China versus India: Emerging Giants in the World Economy 219

an effective labor force and foster economic development only if properly educated, trained, and provided a healthy environment in which to flour- ish. Otherwise it can prove detrimental to the country’s economic growth. It currently remains to be seen whether India can benefit from its large working age population or not, and to what extent.

10.3 WHICH COUNTRY WILL BENEFIT FROM ITS LARGE EMPLOYABLE POPULATION?

Chinese economy previously grew at an unprecedented growth rate, leveraging its demographic dividend, but this trend can soon change owing to China’s one child policy and, for the first time in decades, its working population saw a decline in 2012. Furthermore, World Bank reports indicate that China might witness a further decrease of more than 10% in its working age population by 2040, despite relaxation mea- sures of its one child policy. This could equate to a net loss of 90 million workers and can have significant negative impact on its economic growth and generate a slowdown. On the other hand, India is poised to benefit from its growing and young workforce in the coming years as economists agree that having a large and growing workforce at a time when many other large economies are dealing with ageing populations brings about a demographic dividend. In 2015, the mean age in India was recorded to be 27.3 years as compared to 36.8 years in China. The United Nations study of global population trends, predicts entry of 150 million Indians to the global workforce by 2030. Thus, in future India can greatly benefit from its young population if properly educated and trained.

Social elements such as health, education, and technical skills also play a vital role in shaping a country’s young population and directing them toward economic progress. These become even more important for densely popu- lated countries like India and China. Let us see this with the help of data.

According to the Global Competitiveness Reports (2014–2015, 2015–2016) which ranks 144 and 140 countries, respectively on higher education and technical skills, India climbed up from 98th position to 84th, while China moved up from 56th rank to 44th rank. In 2015, India ranked 90th and China ranked 68th in the health and primary education category (see Table 10.1). It is clear that China is leading when it comes to social infrastructure relevant to health and education. Although India has shown some signs of improvement in 2015–16, it is still far behind China on such a scale.

The China Business Model220

Additionally, in 2015 the literacy rate in India was 71.2% and 96.4% in China. The lower literacy rate can also be a distinguishing factor for the slow economic growth in India. Another factor for consideration is the unemployment rate which, in 2014, was 4.1% in China compared to 7.3% in India. This reflects China’s ability to create more jobs for its growing population in contrast to India’s. Experts have also suggested that if India is to make progress, there needs to be a shift in its economic policies favor- ing a high-quality educational system easily accessible to all, and creation of enough jobs for its employable population in order to reap the benefits of demographic dividends. How India improves upon these critical factors to increase its economic growth will be interesting to observe.

10.4 WHAT ABOUT ADVANCED ECONOMIES AND REST OF THE WORLD?

Alarmingly, within the next 40 years, most of the developed countries in East Asia and Europe will have one-third of their population over 65 years of age. According to an OECD report (2015), the world is age- ing at an alarming rate. This was further verified by the current statistics published by United Nations wherein 12% of the global population or 901 million people are over age 60, and this number is expected to grow at a rate of 3.26% per year. In 2015, three countries—Germany (21%), Italy (22%), and Japan (26%)—are termed as super-aged societies. In the next 5 years, Bulgaria, Finland, Greece, and Portugal are expected to join them, and in the next decade, Austria, France, Sweden, United Kingdom,

Table 10.1 Performance of India and China in social infrastructure Parameters India China

Rank in 2015

Rank in 2014

Change in rank

Rank in 2015

Rank in 2014

Change in rank

Health and primary education

84 98 +14 44 56 +12

Higher education and training

90 93 +3 68 65 −3

Source: World Economic Forum. (2014–2015). The Global Competitiveness Report 2014–2015. Geneva: World Economic Forum; World Economic Forum. (2015–2016). The Global Competitiveness Report 2015–2016. Geneva: World Economic Forum. http://reports.weforum.org/global-competitiveness- report-2014-2015/economies/#economy, http://reports.weforum.org/global-competitiveness- report-2015-2016/economies/#economy.

China versus India: Emerging Giants in the World Economy 221

Canada, Cuba, and South Korea are also predicted to join this list. The number of people in the world aged 60 years and above is projected to reach 1.4 billion by 2030 and 2.1 billion by 2050, possibly rising to 3.2 billion by 2100. On average, nearly one-fourth of the population in every major area of the world, except Africa, will be 60 years of age or more by 2050. Furthermore, the diminishing income gap between developed- and emerging nations will decrease immigration flows and shrinkage of workforce in the Eurozone by 20% and 15% in the United States. This shrinking workforce, as a result of ageing, will slow down annual eco- nomic growth from an average of 3.6%, in the next 10 years, to ~2.4% in 2050–60. The World must deal with the problem of ageing and its diminu- tive effects on economic growth.

A few notable consequences to consider are: (1) increased burden on a country’s social security system when more people are claiming pen- sion benefits, and lesser people working and paying taxes, (2) increased Government spending on health care and pensions, and (3) because of the shrinkage of workforce due to ageing, employed people may have to pay higher taxes to support the balance in social infrastructure. This is a defi- nite challenge for Governments and policy makers worldwide and needs deep consideration.

According to the World Population Prospects Report by United Nations (2015), the period of 2015–50 will witness nine countries as the main contributors of half of the world’s population growth: India, Nigeria, Pakistan, Democratic Republic of the Congo, Ethiopia, United Republic of Tanzania, United States of America, Indonesia, and Uganda. These countries are ordered in this list according to their contributions to the population, from highest to lowest, India will continue enjoy- ing a dynamic and young workforce, but, will it be able to deliver and help anchor the global economy into stability? To answer this question, we need to understand the Indian business and economic context and Sections 10.5 and 10.6 are devoted to this quest.

10.5 ECONOMIC GROWTH

In terms of global economic contributions, it is clear that India and China have established themselves as new epicenters of world growth, registering average growth rates of 8% and 10% respectively in the recent past. The aftermath of the 2008–09 global financial crisis caused fluctuations across the world economy. Despite this, these two countries continue to sustain

The China Business Model222

consistent growth rates. This has attracted the attention of global inves- tors and global institutions alike. In Section 10.6, we analyze the historical events leading to these phenomenal high growth rates.

The 1990s marked a decade of beneficial reforms for the Indian econ- omy, with the inception of policies toward economic liberalization and globalization by the Government of India. Many regulations and restric- tions were also withdrawn, making the economy more market-oriented, and private and foreign investment much easier. By 2007, India conse- quently developed into a trillion-dollar economy (according to exchange rate) and in 2014, India was ranked as the ninth largest economy per nominal GDP, and third largest in purchasing power parity (PPP).

Meanwhile, in China, Deng Xiaoping reformed the Chinese economy in 1978 by moving away from a centrally planned framework and incor- porating capitalist structures and policies. This boosted the Chinese econ- omy with such fervor that the resulting growth has spanned across the last 35 years. An annual growth rate of 10.12% in GDP from 1983 to 2013 has earned China the title of the world’s second largest economy according to nominal GDP. China surpassed the $1 trillion mark in 1998 and secured the first rank of PPP in 2014.

Recent data, as shown in the Fig. 10.3, suggests, however, that India would overtake China in its growth rate and this trend has already com- menced. India is expected to benefit from recent policy reforms and the

Figure 10.3 GDP growth rate India versus China, current trends and forecast. IMF staff estimates, International Monetary Fund World Economic Outlook (April 2015). http://www. imf.org/external/pubs/ft/weo/2015/01/pdf/text.pdf.

China versus India: Emerging Giants in the World Economy 223

resulting growth in FDIs. The growth rate—7.2% in 2014, grew to 7.5% in 2015 and is expected to increase further in 2016.

On the other hand, growth rate in China dropped to 6.8% in 2016 and might drop further to 6.3% in 2016. China is undergoing an industrial slump which has worsened in recent months, even beyond the specula- tions of the country’s leaders. Manufacturing, which was China’s strength and contributed to 59% of the Chinese GDP, has taken a hit with the slowdown in European Union, Japan, and South Korea—China’s largest trading partners. Unfortunately, manufacturing and construction, which were considered China’s biggest growth proponents are now amongst the biggest burdens on its economy. To make matters worse, Chinese stock markets continue to be volatile, causing concern in the minds of investors.

For over two decades, both India and China have shown consistent growth in their GDP’s and have been the major contributors to the World Economy. Since 2014, 25% of the total World GDP came from India and China combined. While China contributed 16.32%, India contributed 6.83% to the total World GDP. China also remains the biggest contrib- utor, just ahead of the United States, which contributed 16.14% to the World GDP. It will be interesting to see the sector-wise composition of China and India’s GDP and how their economies have shaped between 1980-2014.

Observing the changing sectorial composition of GDP for bother countries: India 1980–2014 (Fig. 10.4) and China for 1980–2014

Figure 10.4 Changing sectorial composition for India (1980–2014). Planning Commission, Government of India.

The China Business Model224

(Fig. 10.5), we notice that GDP of both the countries experienced a shift toward services and away from agriculture. The GDP composition of India (sector wise) in 2014 was as follows: Agriculture (17.9%), Industry (30%), and Services (53%). India’s growth has been primarily lead by a boom in the services sector while the agricultural contribution toward the GDP has gradually diminished. The manufacturing sector has yet to stand up to its expectation.

This shift can be particularly observed in the Fig. 10.4. The contribu- tion of Agriculture toward the GDP has gradually declined, despite the fact that at least 60% of the rural population is dependent on it and Indian farmers feel overburdened. Indian agriculture is still dependent on rain. If rain fails, the crops fail. Getting credit for farmers is not an easy task and because of their low literacy, they are exploited by local money lenders charging exorbitant interest rates.

There is also a big difference between the price a farmer gets for his crops and the price a consumer pays for them: The middle man, who knows that these poor farmers do not have sufficient knowledge of cur- rent market conditions, pays meager amounts to them and then sells the stock for higher prices to the consumers, thereby making a sizeable profit for himself. This process is detrimental to both the farmers and the con- sumer. Another issue for the agricultural sector is the lack of proper stor- age facilities for farmers to store their crops, and the reason for tonnes of agricultural product wastage. The issue of concern is that the Government

Figure 10.5 Changing sectorial composition for China (1980–2014). National Bureau of Statistics of China.

China versus India: Emerging Giants in the World Economy 225

has not been pro-active in preventing these grave situations hindering required progress in the agricultural sector in India.

According to the Economic Survey (2014–2015), India’s service sec- tor grew at the rate of 10.6%, compared to 9.1%, the year before. This established India as the second-fastest growing service sector while first place went to China. For India, the pillars on which its service sector has grown are Information Technology and Outsourcing services. Availability of a large and talented workforce specializing in cost-effective and in- demand software technologies, alongside high level English language fluency, and a demand from foreign investors, have been important attrib- utors to the enormous growth visible in the Indian Service Sector. In addition, India specializes in providing worldwide quality services in the banking and insurance domain, data entry services and business consul- tancy to name a few.

As mentioned, India’s growth has been primarily fueled by the explo- sive growth in the services sector, while the manufacturing sector has been largely under-utilized. In order to boost the Indian economy further, the Government should take a clue from China where the manufacturing sector has been nurtured and utilized in an optimum manner, leading to phenom- enal revenue generation and establishing its name in the global arena.

The uprising of China from a simple, rural, and agricultural economy to a manufacturing and service sector giant has had rapid transforma- tive effects across its infrastructure, urbanization, per capita income, and an impressive GDP growth. China’s GDP in 2014 was primarily contrib- uted by three sectors: (1) Agriculture (9%), (2) Industry (Construction and Manufacturing) (43%), and (3) Service Sector (48%). Fig. 10.5 shows the changing sectorial composition of China.

Over the years, Industry has been the solid cornerstone of the tremen- dous growth of China’s GDP. Chinese Government gave much thought and attention to developing its industries by introducing favorable mecha- nisms and policies, and now China ranks second in its industrial output and is also termed the “manufacturing hub of the western world.” The agricultural and service sector, however, were not given much focus and hence their growth rates were, traditionally, suboptimal. Despite this, the service sector is improving and registered its most-impressive performance in 2013, owing to China’s 12th Five-Year Plan (2011–15) that forcefully addresses the development of services sector, making it the major contrib- utor toward the country’s GDP, surpassing the industry sector.

The China Business Model226

The service sector currently contributes the most toward GDP, but manufacturing and industrial sectors were the major catalysts which helped China in reviving 680 million people from poverty during the record period during 1992–2011. In contrast, India has not been as effi- cient as China in alleviating poverty. About 22% of the Indian population remains below the poverty line, compared to just 6% in China. India could learn from China and start concentrating on the development of its man- ufacturing sector, creating more jobs and focusing on rural development in an attempt to alleviate poverty.

Regarding currency, China’s shows a gradual appreciation in value with respect to India’s, as seen in Fig. 10.6. On January 1996, 1 Chinese Yuan was equal to 4.23 Indian Rupee, which has grown to 10.18 Indian Rupee as of January 1, 2015. The last 6 years have seen a consistent appre- ciation of the Chinese Yuan. Despite the fact that, during the crisis period Yuan was almost frozen, the appreciation was closer to 7% per year. This pattern changed in 2015 when Chinese Central Bank diminished its cur- rency value by 3% in an effort to boost its exports.

China has been witnessing a continuous decline in its exports and by devaluing the currency it intends to make manufactured products

12 1 CNY to INR

1 CNY to INR

10

8

6

4

2

0

2 /1

/1 9 9 6

3 /1

/1 9 9 7

4 /1

/1 9 9 8

5 /1

/1 9 9 9

6 /1

/2 0 0 0

7 /1

/2 0 0 1

8 /1

/2 0 0 2

9 /1

/2 0 0 3

1 0 /1

/2 0 0 4

1 1 /1

/2 0 0 5

1 2 /1

/2 0 0 6

1 /1

/2 0 0 8

2 /1

/2 0 0 9

3 /1

/2 0 1 0

4 /1

/2 0 1 1

5 /1

/2 0 1 2

6 /1

/2 0 1 3

7 /1

/2 0 1 4

Figure 10.6 Comparison of Indian Currency (INR) with Chinese Currency (CNY) from 1996–2014. IMF staff, International Monetary Fund World Economic Outlook (April 2015).

China versus India: Emerging Giants in the World Economy 227

low-cost for other countries to buy, thus racing ahead of its competitors. If other Asian countries (mainly Japan and Korea) follow suit and devalue their currencies in a bid to get competitive edge over others, it could ignite a crisis in the Asian markets. Experts feel that the same could hap- pen with Indian Rupee which also depreciated by 5% against the USD and shows signs of further depreciation in 2016.

10.6 INDIA AND CHINA: CURRENT POSITIONING AND FUTURE PROSPECTS

An interesting pattern emerges observing Table 10.2. Until 2010, the top 10 biggest nations in PPP were: United States, China, Japan, India, Germany, Russia, United Kingdom, France, Brazil, and Italy. Six out of 10 are developed countries. By 2014, however, emerging economies started to rise up the list. China overtakes the United States and becomes the world’s largest economy by 2014 and is set to maintain its position in 2020 (as predicted by Euromonitor International, International Monetary Fund statistics). China registered a PPP growth rate of 7.1% in 2000 which increased to 13.3% by 2010. By 2020, China’s global share of PPP is expected to reach 20.7%.

India overtook Japan to become the world’s third-largest economy and will continue to maintain its place in future, owing to its young and growing population that will contribute immensely toward the growth of GDP.

Now, let us look at the projections for the year 2020, in terms of GDP measured by PPP, for the following three countries: (1) Russia seems poised to become the fifth largest economy, ahead of Germany. (2) Brazil looks all set to become the seventh largest economy, ahead of France and United Kingdom. Being amongst the world’s major export- ers of energy and natural resources, Russia and Brazil’s growth chart look promising although Russia will have to work on diversifying its economy further to avoid any obstacles in its growth. (3) While Mexico would have raced ahead of Italy to become the world’s 10th largest economy.

Interestingly, the list of largest economies now contains five advanced nations and five emerging nations. The balance of power seems levelled at this point of time and a pattern is visible that emerging economies are catching up with the advanced nations.

Table 10.2 Top 10 largest economies by GDP (purchasing power parity): 2010 and 2020 Rank Country-2010 GDP (US million) Country 2014 GDP (US million) Country 2020 GDP (US million)

1 United States 14,808,081 China 18,088,054 China 28,124,970 2 China 9,711,244 United States 17,348,075 United States 22,644,910 3 Japan 4,267,492 India 7,411,093 India 10,225,943 4 India 3,912,911 Japan 4,767,157 Japan 6,196,979 5 Germany 2,861,117 Germany 3,748,094 Russia 4,326,987 6 Russia 2,221,755 Russia 3,576,841 Germany 3,981,033 7 United Kingdom 2,183,277 Brazil 3,275,799 Brazil 3,868,813 8 France 2,154,399 Indonesia 2,685,893 United Kingdom 3,360,442 9 Brazil 2,138,888 France 2,591,170 France 3,214,921

10 Italy 1,767,120 United Kingdom 2,569,218 Mexico 2,838,722

Source: Euromonitor International from IMF, International Financial Statistics and World Economic Outlook/UN/National Statistics (2015).

China versus India: Emerging Giants in the World Economy 229

10.7 THE DIMINISHING GROWTH RATE OF ADVANCED NATIONS

The global financial crisis of 2008–09, ageing of population, shrinking of employable workforce, along with the proliferation of emerging nations measured by their contributions to the global GDP and PPP, are some of the key elements of the slowdown which advanced nations are expe- riencing. The United States enjoyed the status of world’s largest econ- omy for a long time, but its world GDP share according to PPP is on a decline. It was 17.1% in 2000, which dropped to 16.14% in 2014 and is forecasted to drop to 15% by 2019. Japan’s economy recovered slightly in the mid-2000s after a prolonged period of slowdown, but after the global crisis of 2008–09, it plunged further, owing to its dependence on trade. Prolonged deflation and ageing population are other contributors to its continued downturn. Japan’s contribution to world GDP has fallen from 4.9% in 2010 to almost 4% in 2014 and is estimated to be at the same level by 2019. The European Union (EU) also saw a decline from 18.77% in 2000 to 16.94% in 2014, and is expected to be 15% in 2019. Fig. 10.7 shows this decline of advanced economies while India and China show an upward trend. Many advanced economies face challenges of reducing public debts and government budget deficits while the emerging coun- tries sustain their growth.

Figure 10.7 GDP share of World Total GDP (PPP) for India, China, United States, Japan, Eurozone (EU), and rest of the world. IMF staff estimates, International Monetary Fund World Economic Outlook.

The China Business Model230

In an earlier paragraph, we have seen a movement of worldwide power from advanced nations toward rising economies. This ascent in the signif- icance of rising economies will impact worldwide investment flow, trade and commerce dynamics, and the environment. Substantial consumer mar- kets, rising incomes, and huge population in developing economies will open vast opportunities for businesses worldwide, and opportunities like luxury goods will become attractive as middle classes continues to grow in spending power. In China, the number of family units with yearly extra cash above US$10,000 (in nominal terms) was 57.1 million families in 2010 and is expected to grow to 222 million families by 2020. Notwithstanding populace maturing in a few emerging nations including China, the popu- lation in developing markets is, for the most part, more youthful than in developed economies. Youthful customers are increasingly demonstrating abilities to make substantial purchases: automobiles, houses, and consumer goods, for example. Thus, foreign capital will keep flowing into develop- ing nations. Rising nations will likely produce more investors, too, which will enhance their impact in the worldwide economy. Foreign investors will need to confront overwhelming regulations and corruption, and find mea- sures to adapt to the local environment. For India and China, it is evident that FDI will play a crucial role in further developing these two economies. Can foreign investors and policy makers leverage their options within these two economies? An exploration of the prevalent investment and business climate in these countries will be discussed in Section 10.8.

10.8 INVESTMENT CLIMATE IN INDIA AND CHINA

China and India have favorable climates for international business. Various studies recently conducted by prestigious institutions such as Ernst and Young (2008), KPMG (2008), PricewaterhouseCoopers (2008), UNCTAD (2013–2015) have confirmed this. In particular, UNCTAD’s World Investment Prospects Survey 2013–15 found out that China was the most attractive destination for FDI, while India ranked 6th in this list (as seen in Fig. 10.8).

In the same survey, 159 Transnational Corporations (TNCs) were asked to choose the top promising economies and China secured the first posi- tion by earning 46% of the total votes. United States came second, fol- lowed by India as the third most promising nation (Fig. 10.9). Notably, 6 of the top 10 promising countries are from the emerging nations’ list. According to a study conducted by Zelaya and Yuce (2014) about the

China versus India: Emerging Giants in the World Economy 231

Figure 10.8 Most promising investor economies of FDI (2013–15). UNCTAD. (2013–2015). World investment prospects survey. New York and Geneva: United Nations Conference on Trade and Development. Available from http://unctad.org/en/PublicationsLibrary/web- diaeia2013d9_en.pdf. World Investment Prospects Survey Note: Based on 64 Investment Promotion Agencies (IPA) responses.

Figure 10.9 Most promising investor economies for FDI (2013–15). UNCTAD. (2013–2015). World investment prospects survey. New York and Geneva: United Nations Conference on Trade and Development. Available from http://unctad.org/en/ PublicationsLibrary/webdiaeia2013d9_en.pdf. World Investment Prospects Survey Note: Based on 159 Transnational Corporations (TNCs) responses.

The China Business Model232

reasons behind increasing FDI of multinational companies in China and India, it was revealed that bigger market size, rapid GDP growths, low wages, easy labor availability, and flexible regulations as the main deter- ministic factors.

According to the survey, (and in comparison to India), China is the most promising investor economy and top prospective host economy for TNCs, consequently attracting more FDI. Let us try to investigate some reasons for this.

First, China introduced pro-FDI and flexible trade policies in 1979— much earlier than India—and received the first-mover’s advantage. These policies included: low labor costs, incentivized investment schemes, and liberal policies for foreign investors. Second, China has heavily invested in building and nurturing its manufacturing sector, which has contrib- uted significantly to its GDP and attracted many foreign investors. Third, China has a higher literacy rate than India—an appealing factor for foreign investors.

Alternatively, India incorporated its FDI plans only in the 1990s, with gradual progress made in the 2000s to remove restrictions and facilitate for- eign investments. This late implementation by India and the early-adopter advantage of China is one reason between the disparities in results between them. Moreover, entry into India’s manufacturing sector was more restrictive than into China’s. With time, India has made efforts to remove restrictions for foreign entry into most of the industries and simplify associated proce- dures. This has increased the inflow of foreign capital in recent years.

Despite these facts, India may have an advantageous position in com- parison to China regarding language and business culture. Having been under the British rule for over three centuries, India is reminiscent of a business culture, administrative procedures, and judicial system which many western countries can relate to. Furthermore, the prevalence of English language as the main language of business tilts the balance in favor of India for English-speaking nations.

Having seen the investment climate and FDI, it is necessary to under- stand the Banking system in India and China: how it is regulated and the financial stability it provides to the country and its global positioning.

10.9 BANKING SYSTEM IN INDIA AND CHINA

China’s regulators are classified mainly by the range of activities they supervise. Banks are regulated fundamentally by the China Banking

China versus India: Emerging Giants in the World Economy 233

Regulatory Commission (CBRC), securities and monetary markets by the China Securities Regulatory Commission (CSRC), and insurance by the China Insurance Regulatory Commission (CIRC). The Chinese Central Bank, also called as the People’s Bank of China (PBOC), is responsible for governing and maintaining financial stability and drafting regulatory poli- cies related to systematic risks and monetary policies. Additional duties of the PBOC covers: control of foreign exchange rate, and setting limits on deposit and lending interest rates. Both the exchange rate and the interest rate limits, however, are eventually decided by the State Council, the most elevated government body. Like all central banks it can act as a lender of last resort during financial exigencies.

On the other hand, India has a boisterous, straightforward, transparent, and stable financial market, which has progressively evolved from a pro- foundly controlled system to a liberalized one. RBI, which is the central bank of India, was established on April 1, 1935 and is responsible for for- mulating the monetary policies, regulating foreign exchange markets, and supervising credit markets. It also prescribes and controls the lending and deposit interest rates and can act as a lender of last resort to other banks in times of financial distress. The Securities and Exchange Board of India (SEBI) which was established by SEBI Act of 1992, is a regulator for secu- rities market in India. SEBI has statutory powers to protect the interest of investors and regulate the securities market in relation to issue of security and promote the development of securities market of India.

10.9.1 Chinese Banking System The existing banking structure of China has gradually evolved from a soviet-style mono-bank system (PBOC) to a plural banking system, since the inception of reforms in 1978. Before the reforms, PBOC was the only major bank responsible for managing deposits for state-owned enterprises (SOEs), and played the major role in mobilization of household savings. After the reforms, PBOC was granted the status of Central Bank. A series of banking sector reforms (1978–84) were adopted, wherein “big four” state-owned banks were reinstated and separated from PBOC—each des- ignated with a function distinct from the other three. The big four state- owned banks were originally responsible for serving distinct economic sectors and to grant loans for policy objectives. With the reform of 1994, however, they were absolved of their policy lending objectives and were reinstated as commercial banks, with the capacity to enter into direct competition with one another (Wong and Wong, 2001).

The China Business Model234

As a result of these reforms, the current Chinese banking struc- ture now encompasses various financial institutions in the form of com- mercial banks, policy banks, co-operative banks, and nonbank financial institutions. By the end 2014, China’s banking system comprised of 5 state-owned commercial banks (SOCBs), 12 joint-stock commercial banks (JSCBs), 133 city commercial banks, and 665 rural commercial banks. The co-operative banking system in China consisted of 1596 urban credit co-operatives and 89 rural co-operative banks. Furthermore, there are 3 policy banks along with China Development Bank and 41 foreign banks. Chinese nonbanking financial institutions encompass financial leas- ing companies, auto financing companies, trust and investment companies, postal saving institutions, and asset management companies. Table 10.3 provides information on the assets of the various financial intermediaries of China. The banking system in China is dominated by the SOCBs and JSCBs that comprise nearly 60% of the total assets.

JSCBs were primarily conceived for specialized financial products; today they offer a wide range of financial services. These banks are partly owned by local government, SOEs, and—in a few cases—private corpora- tions. Since the reform of 1994, the Chinese banking system introduced three policy banks for handling the policy objectives which were pre- viously met by SOCBs. They grant loans for infrastructure projects and

Table 10.3 Financial intermediaries in China (as at end-December 2014) Category Assets (RMB 100 million) % of total assets

1. Commercial banks a. State-owned commercial banks 710,141 41.2 b. Joint-stock commercial banks 313,801 18.2 c. City commercial banks 180,842 10.5 d. Rural commercial banks 115,273 6.7

2. Co-operative banks a. Urban credit co-operative 88,312 5.1 b. Rural co-operative banks 9570 0.56

3. Policy banks 156,140 9.1 4. Other institutions

a. NBFIs 50,123 2.91 b. Postal savings 70,981 4.12 c. Foreign banks 27,921 1.62

Total (1+2+3+4) 1,723,104 100

Source: www.crbc.gov.cn, http://www.cbrc.gov.cn/chinese/files/2015/0F19960DD41D4206A246251 A7225773E.pdf.

China versus India: Emerging Giants in the World Economy 235

work on the principle of no-profit no-loss. They do not enter into com- petition with other commercial banks and largely fund themselves from central bank loans and governmental deposits.

10.9.2 Indian Banking System The Indian banking system has gradually evolved over several decades to become robust, elaborate, and financially stable. It caters to the credit needs of varied kinds of consumers and borrowers in the country. The main objective is to mobilize savings and promote economic develop- ment. The RBI is the central bank and the supreme authority for regulat- ing the banking system. The commercial banks in India accept deposits and lend loans to retail consumers as well as corporate clients. They com- prise public sector banks, private sector banks like ICICI and HDFC, and foreign banks like Barclays and HSBC. State Bank of India is the largest commercial bank, according to assets. The co-operative banks in India play an important role of providing rural credit and are built on the princi- ple of co-operation and mutual help. Furthermore, there are development banks like IDBI, IFCI which provide long term loans for the development of the industrial sector. Lastly, there are nonbanking financial companies (NBFCs) that consist of asset finance companies, investment companies, loan companies, and infrastructure finance company.

The Indian banking system consists of scheduled commercial banks (public sector banks, private sector banks), foreign banks, co-operative banks comprising of urban co-operative banks and rural co-operative credit institutions, and NBFCs. According to RBI, in 2013–14 there were 27 public sector banks, 23 private sector banks (old+ new), 45 foreign banks, 90 co-operative banks, and 428 NBFCs. Table 10.4 provides the structure of Financial Intermediaries in India. It is observed that the Indian banking system is dominated by the scheduled commercial banks which constitute nearly 73% of the total assets.

In both countries, commercial banks play a dominant role—especially the state owned public sector banks. As such, the relative significance of commer- cial banks in both the countries is similar. Foreign banking share is more sig- nificant in India than in China, while the share of co-operative banks is more in China, compared to India. Lastly, NBFCs have more share in total assets in India than in China. Both China and India have an elaborate banking system comprising of commercial banks, co-operative banks, foreign banks and NBFCs.

The China Business Model236

10.10 FINANCIAL STABILITY INDICATORS FOR INDIA AND CHINA

Having discussed their banking systems, we now delve into understand- ing the financial stability for these two countries. First, we present a com- parative analysis of selected financial stability indicators for both India and China and then provide global positioning for these countries.

10.10.1 Nonperforming Loans (NPLs) India and China The International Monetary Fund (IMF) compilation guide on Financial Soundness Indicators (IMF, 2014) recommends reporting loans as nonper- forming when “(i) payments of principal and interest are past due by three months (90 days) or more, or (ii) interest payments equal to three months (90 days) interest or more have been capitalized (reinvested into the prin- cipal amount), refinanced, or rolled over (that is, payment has been delayed by agreement). In addition, NPLs should also include those loans with payments less than 90 days past due that are recognized as nonperforming under national supervisory guidance.” Although IMF provides guidelines on nonperforming loans (NPLs), various countries have their own slightly different implementations of it.

In the Fig. 10.10, we provide information on NPLs for India and China: Indian banks outperformed China’s Bank between the period 2001 and 2007. However, after 2007, China has had very low levels of NPLs compared with Indian banks. China has reduced its NPLs from 29% in 2001 to 1% in 2015 whereas India has reduced its NPLs from nearly 11% in 2001 to 4% in 2015. Although China fared better in 2015 on asset

Table 10.4 Financial intermediaries in India (2012–2013) Category Assets (INR 100 million) % of total assets

1. Scheduled commercial banks a. Public sector banks 62,318,798 65 b. Private sector banks

i. Old private sector banks 4,044,366 4 ii. New private sector banks 13,649,183 14

c. Foreign banks 4,917,430 5 2. Co-operative banks 262,000 0.3 3. Nonbanking financial companies 11,177,000 12 Total (1+2+3) 1,723,104 100

Source: Reserve Bank of India. Note: Information on development banks not readily available.

China versus India: Emerging Giants in the World Economy 237

quality against India, both countries have shown improvements in asset quality over a period of 15 years. During the 2000s, extremely high lev- els of NPL’s were being registered on account of small, SOEs. Chinese banks in 2000s often worked under the instructions of government and granted loans under credit programmes for small SOEs. In the mid-2000s, the Chinese government began to acknowledge the relevance of a robust banking system and started undertaking measures2 to reduce the large vol- umes of NPLs. So far, it appears that Government efforts have paid off and NPLs have dropped to as low as 1%. Indian banks showed better asset quality than China’s bank but recently asset quality has deteriorated, largely attributable to bad loans from the infrastructure and steel sectors.

10.10.2 Capital Adequacy Ratio (CAR) India and China According to IMF, Capital Adequacy Ratio (CAR) is calculated using total regulatory capital as the numerator, and risk-weighted assets as the denomi- nator. It ascertains the capital adequacy of banks and inhibits them from taking excess of debt beyond a certain level. This level of CAR is decided generally by the central banks that regulate the banking system. It is also

2 For detailed measures refer to page 15: http://www.brookings.edu/~/media/research/ files/papers/2013/07/01-chinese-financial-system-elliott-yan/chinese-financial-system- elliott-yan.pdf.

Figure 10.10 Evolution of nonperforming loans India and China (2001–15). International Monetary Fund, Financial Soundness Indicators http://data.imf.org/regular. aspx?key=60949720.

The China Business Model238

known as CRAR: Capital to Risk-weighted Assets Ratio. As per Basel III norms, a CAR of 8% should be maintained by banking institutions to with- stand any shocks on their balance sheets. India and China both maintain higher levels than this. Indian public sector banks should maintain a CAR of 12% as per the guidelines of RBI, while Indian scheduled commercial banks in the private sector should maintain a CAR of 9%. The CBRC released a consultation draft of new measures on capital management for banks on August 15, 2011. In principle, other commercial banks should satisfy the fol- lowing conditions by the end of 2016: (1) Core Tier 1 Capital Adequacy Ratio: not less than 7.5 %; (2) Tier 1 Capital Adequacy Ratio: not less than 8.5 %; (3) Capital Adequacy Ratio: not less than 10.5 %. With approval of the CBRC, banks can meet the standards by the end of 2018. Rural co-operative banks and rural banks should satisfy the following conditions by the end of 2018: (1) Core Tier 1 Capital Adequacy Ratio: not less than 7.5 %; (2) Tier 1 Capital Adequacy Ratio: not less than 8.5 %; (3) Capital Adequacy Ratio: not less than 10.5 %. Fig. 10.11 provides the statistics on CAR for India and China. Both India and China have satisfactory levels of CARs. As of 2015, Chinese bank have CAR of 13% whereas Indian banks have CAR of 12.6% which is sufficiently higher than the required regulatory levels.

10.10.3 Comparison of Lending and Deposit Rates in India and China In the Fig. 10.12, we provide a comparison of lending and deposits rates for banks in India and China. The difference between lending rate and deposit rate, also called net margin, is higher on average for India. In

Figure 10.11 Capital adequacy ratio for India and China (2013–15). International Monetary Fund, Financial Soundness Indicators http://data.imf.org/regular.aspx?key= 60949720.

China versus India: Emerging Giants in the World Economy 239

China, banks are allowed to set their own deposit and lending rate, but only within the limits set by PBOC. RBI established changes in 2011, which authorized the bank to decide the interest rate they wanted to pay on their savings bank accounts (based on amount and duration of deposit). This could vary from one bank to another and also depend on the bank’s profitability and liquidity. Despite variable rate of interests which banks decide according to their own policies, RBI rules direct the banks to pro- vide at least 4% of interest. In our study we take 4% as the rate of interest as it would cover most of the cases.

Fig. 10.13 provides the real interest rates for India and China. The real interest rates are lower in China, which implies that an Indian lender is earning more than Chinese lender. On the other hand, real cost of funds

Figure 10.12 Lending and deposit interest rate in India and China (2011–14). World Bank Database and Reserve Bank of India http://data/worldbank.org/indicator/FR.INR. DPST/countries, https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=9059.

Figure 10.13 Real Interest rate comparison India and China. World Bank Database and Reserve Bank of India http://data/worldbank.org/indicator/FR.INR.RINR/countries.

The China Business Model240

for the borrower is lower in China than in India, which makes borrow- ing costs feasible for businesses in China. In 2011, China shows negative real interest rate, which means that inflation was higher than the nominal interest rate.

10.11 GLOBAL POSITIONING

10.11.1 Return on Assets Return on assets is often used as an indicator to understand the profitabil- ity of the banking system. Here we provide information (refer Table 10.5) on India and China’s banking system along with major advanced econo- mies and some emerging market countries. While most of the advanced economies plunge to negative returns on assets, or show very low return on assets, emerging economies maintained a positive return on assets from 2007 to 2015, despite the global financial crisis. Although China’s return on assets has dropped to 0.6% in 2015 from 1.2%, both India and China maintain a stable return on assets ratio.

Table 10.5 Return on assets comparison between selected advanced economies and emerging economies

2007 2008 2009 2010 2011 2012 2013 2014 2015

Advanced economies

France … 0.1 0.3 0.6 0.4 0.3 0.5 0.3 … Germany 0.3 −0.1 0.2 0.4 0.5 0.4 0.4 0.4 … Greece 1.0 0.9 0.4 0.0 −9.5 −1.8 … −3.5 −39.1 Italy 0.8 0.3 0.3 0.3 −0.9 0.1 −0.8 −0.2 0.2 Japan 0.5 0.3 −0.2 0.2 0.3 0.3 0.4 0.3 0.3 Portugal 1.2 0.3 0.4 0.5 −0.3 −0.3 −0.5 −1.5 0.5 Spain 1.1 0.8 0.6 0.5 0.1 −1.4 0.4 0.5 0.6 United Kingdom 0.4 −0.1 0.0 0.3 0.3 0.3 0.2 0.8 … United States 1.2 −0.1 0.2 0.9 1.2 1.4 0.4 0.3 0.4 Emerging economies

Russia 3.0 2.1 0.7 2.0 2.5 2.4 1.9 0.9 … China 0.9 1.0 0.9 1.1 1.3 1.3 1.3 1.2 0.6 India 0.9 1.0 1.0 1.0 0.9 1.0 0.8 0.8 0.8 Brazil 3.5 2.1 1.7 1.9 1.7 1.4 1.4 1.4 1.5

Source: International Monetary Fund, financial Soundness Indicators http://data.imf.org/regular. aspx?key=60949720. Note: …, data not available.

China versus India: Emerging Giants in the World Economy 241

10.12 NONPERFORMING LOANS (NPLS)

In Fig. 10.14, we provide an average of NPLs to gross loans for a 15-year period, for selected advanced economies and emerging economies. In the advanced economies, we can observe that Greece and Italy have high- and rising levels of NPLs. For these two nations, the bulk of NPLs comes from the period between 2011 and 2015, when both countries recorded high NPL ratios. Since the onset of the global financial crisis, NPLs for Greece increased eight times from 4.6% in 2007 to 34% in 2015, and for Italy, they tripled to 18% (2015) of total loans, from just 5.8% in 2007. In the emerging economies, we have China followed by Russia and India equal levels. China saw high rising levels of NPLs in the year 2001–05 and even in years prior. One of the major challenges in China’s transi- tion from a planned to market economy is reforming the banking sec- tor. Earlier, the banks traditionally enjoyed the status of being the primary money-lenders to SOEs. This practice was often based upon political, instead of economic rationales, and had taken deep roots into the Chinese economy. By late 1990s, almost 40% of Chinese bank loans could not be repaid (Naughton, 2007). During the mid-2000s, Chinese government was actively involved in reducing NPL’s ratio and restructuring the bank- ing sector. Consequently, by 2015, the ratio had reduced to 1.5. On the

Figure 10.14 The share of bank nonperforming loans to total gross loans in selected advanced economies and emerging economies (% average of 2001–15). World Bank Database http://data.worldbank.org/indicator/FB.AST.NPER.ZS/countries.

The China Business Model242

contrary, in 2015, the following advanced countries were struggling with high NPL to total gross loan ratio: Greece (34 NPL ratio), Italy (18 NPL ratio), Portugal (12.3 NPL ratio) and Russia (7.4 NPL ratio) and Spain (7 NPL ratio).

The financial sector reforms in India and China were introduced at approximately the same time and resulted in significant improvement, especially in the asset quality of banking systems. Remarkably, the Chinese banking system has emerged significantly larger in size, than that of India. In 2014, China had four banks listed amongst the top five Global banks as measured by asset size. Whereas, India does not even have 1 bank listed in top 50 Global banks. This clearly reveals that China’s banking industry is much larger as compared to India. For economic growth, and for provid- ing ambient investment climate, both countries need to continue improv- ing their banking systems and offer a viable and profitable experience to consumers and businesses.

As previously mentioned, India and China have begun to attract FDI in recent years, and have become top prospective host and most promising investor economies. In order to sustain and keep up with investor confi- dence, they need to find creative ways to improve their global competi- tiveness and business environment, which is analyzed in the Section 10.13.

10.13 GLOBAL COMPETITIVENESS3

Global competitiveness is an important determinant for attracting and sus- taining investment inflow and profitable business activity. Its constituent pillars are: fair and transparent processes for policy formations, regula- tions, and implementations, combined with an autonomous judicial system. Any weakness in these can adversely affect the level of global competitive- ness, impact investor sentiment, and harm business opportunities. A ranking of 140 countries is done by the Global Competitiveness Report, based on 12 pillars: (1) institutions, (2) infrastructure, (3) macroeconomic environment, (4) health and primary education, (5) higher education and training, (6) goods market efficiency, (7) labor efficiency market, (8) financial mar- ket development, (9) technological readiness, (10) market size, (11) business sophistication, and (12) innovation. In Table 10.6, the Global Competitiveness ranking for India and China for 2014 and 2015 is highlighted.

3 The Global Competitiveness Report (GCR) is a yearly report published by the World Economic Forum since 2004.

China versus India: Emerging Giants in the World Economy 243

In 2015, India ranked 55th out of 140 countries whereas China ranked 28th. This regular higher-ranking of China compared to India in global competitiveness pillars, reveals that China is providing better investment opportunities than India.

India moved up 16 spots in 2015 after struggling from almost 5 years of decline in ranking. This improved ranking is primarily attributed to the pro-business decisions and policies implemented by the Government, and has also strengthened the business community’s faith in the government. On the other hand, China maintained its last year’s rank of 28th and in the past 6 years has been able to sustain a stable performance. Overall, China trumps India in the Global Competitiveness ranking.

In analysis, the biggest obstacle for foreign companies in India is cor- ruption and efficiency of the judiciary. The Institutions indicator, in Table 10.6 tries to measure the independence of judiciary and level of corruption in public and private contracting. In this respect, India has a ranking of 60 where as China ranks 51st. While India has seen a significant improvement by moving up by 10 spots, China has, on the other hand fallen back by 4.

Table 10.6 Ranking for India and China in Global Competitiveness Report (2015–16) Parameters India China

Rank 2015

Rank 2014

Change Rank 2015

Rank 2014

Change

Institutions 60 70 +10 51 47 −4 Infrastructure 81 70 +6 39 46 +7 Macroeconomics environment 91 101 +10 8 10 +2 Health and primary education 84 98 +14 44 46 +2 Higher education and training 90 93 +3 68 65 −3 Good market efficiency 91 95 +4 58 56 −2 Labor market efficiency 103 112 +9 37 37 0 Financial market development 53 51 −2 54 54 0 Technological readiness 120 121 +1 74 83 +9 Market size 3 3 0 1 2 +1 Business sophistication 52 57 +5 38 43 +5 Innovation 42 49 +7 31 32 +1 Overall rank 55 71 +16 28 28 0

Source: World Economic Forum. (2014–2015). The global competitiveness report 2014–2015. Geneva: World Economic Forum; World Economic Forum. (2015–2016). The global competitiveness report 2015–2016. Geneva: World Economic Forum. Authors Analysis http://reports.weforum.org/global- competitivenes-report-2014-2015/economies/#economy, http://reports.weforum.org/global- competitivenes-report-2014-2016/economies/#economy.

The China Business Model244

Infrastructure in China outperforms India by a huge margin. China’s ranking in 2015 is 39th as compared to India which is ranked 81st. This pillar is based on quality of transport, electricity, and telephony infrastruc- ture. For India, there are no easy measures to improving its infrastructure challenges and, according to experts, over $200 billion per year is neces- sary for handling this situation. An advantage to India, however, is its high savings rate which can be utilized for this purpose. Increased inflow of for- eign capital also seems to be another helpful option.

Regarding macroeconomic stability, China again supersedes India by a large percentage. India holds the 91st position while China is at the 8th position. The importance of macroeconomic stability is crucial for sus- tained growth because such instabilities have the potential to disrupt an entire economy, as was observed during the financial crisis of 2008–09: massive fluctuations in global markets, instability of currency, job losses, and loss of investor confidence. What is worrisome for India is that mac- roeconomic stability is a decisive factor for attracting foreign investors. India’s performance in the efficiency enhancer’s index (higher education, goods market, labor market) is also not as good as China’s. With respect to financial market development, however, India is at 53rd position and China is at 54th place. Out of nine pillars this is the only pillar where India is at the forefront.

In India, although positive improvements to some of the basic drivers of global competitiveness can be seen (institutions, infrastructure, and mac- roeconomic environment), much work needs to be done in other areas, like technological readiness—ranked 120th. According to 2014 Internet usage statistics, only one out of five Indians has access to internet, and regarding cell phone connectivity, just two in five Indians have a basic cell phone. In contrast, half of China’s population has Internet and cell phone connectivity.

China has maintained its ranking, but in order to ensure it can sustain its growth and maintain its ranking long term, it must formulate a self- sustaining model of growth through innovation and domestic consump- tion—relying less on external trade and investment. Although China ranks better than India, in Global Competitiveness, both need to improve their efforts in order to sustain, and cater to, the demands of market dynam- ics and investor sentiments in the wake of increasing scrutiny by regula- tors and media. It will be interesting to see the performance of India and China with respect to the ease of doing business in these countries.

China versus India: Emerging Giants in the World Economy 245

10.14 DOING BUSINESS AND ENVIRONMENT CHALLENGES

To calculate the “Doing Business Rankings,” World Bank takes into account 11 parameters that impact businesses across their entire lifecy- cle: (1) Ease of doing business, (2) Starting a business, (3) Dealing with construction permits, (4) Getting electricity, (5) Registering property, (6) Getting credit, (7) Protecting minority investors, (8) Paying taxes, (9) Trading across borders, (10) Enforcing contracts, and (11) Resolving Insolvency (refer to the Table 10.7).

India is seen as one of the fastest-growing economies in the world, but it still lags behind its other BRIC counterparts: China, Russia, and Brazil. As of June 2015, India is ranked 130th among 189 countries. Since last year, India has moved up 12 places which is remarkable progress owing to its large economy.

Over the years, India has introduced various reforms to facilitate busi- ness. There are now no minimum capital requirements and no need to obtain a certificate to begin business operations. The number of days required to setup a business have decreased from 127 in 2004 to just 29 in 2015: a significant increase in efficiency. To further improve its tax sys- tem, India incorporated an online system for Value Added Tax registration and replaced the physical stamp previously required, with an online ver- sion. The establishment of debt recovery tribunals helped accelerate the process of debt recovery cases and lowered the cost of credit. NPLs also decreased by 28% and lowered interest rates on larger loans. These are

Table 10.7 Doing business ranking for BRIC and Singapore (June 2015) Brazil Russia India China Singapore

Ease of doing business rank 116 51 130 84 1 Starting business 174 41 155 136 10 Dealing with construction permits 169 119 183 176 1 Getting electricity 22 29 70 92 6 Registering property 130 8 138 43 17 Getting credit 97 42 42 79 19 Protecting minority investors 29 66 8 134 1 Paying taxes 178 47 157 132 5 Trading across borders 145 170 133 96 41 Enforcing contracts 45 5 178 7 1 Resolving insolvency 62 51 136 55 27

Source: Doing Business Report, World Bank Group, June 2015 http://www.doingbusiness.org/ rankings.

The China Business Model246

good indicators of the way things are changing in India and if this pace is maintained, India could benefit greatly from the reforms.

In the World Bank’s 2015 “Ease of Doing Business” report, China was ranked 84th amongst 189 countries. It is ahead of India and Brazil in its ranking, but still behind Russia. Although China has introduced many reforms to open its doors for foreign investors, a few broad sectors of the economy still remain either restricted or prohibited to FDI. There are bureaucratic challenges interwoven within the Chinese business land- scape that are impediments to further progress. As an example, long wait- ing periods for obtaining construction permits and a difficult tax-paying system makes starting, and running, businesses a cumbersome task. Many foreign companies conducting business in China have raised concerns about the increasing cost of labor, lack of qualified labor force, weak inves- tor protection rights, lack of transparency, insufficient intellectual property rights, weak enforcement and lack of regulatory interpretation, competi- tion with Chinese companies, internet censorship, forced transfer of tech- nology, and challenges in obtaining administrative licenses and approvals.

Table 10.7 reveals that both China and India must implement further reforms to improve their rankings in the “Ease of Doing Business” where Singapore is the benchmark and, as of 2015, the best country to start a business in—having held its position for 10 consecutive years.

Both countries still have serious problems related to starting a busi- ness: dealing with construction permits, paying taxes, cross-border trading, contract enforcement, and insolvency procedures—all of which thwarts its development. China and India both have the ability to keep growing, but in order to sustain their immense growth rate they need to provide a transparent, flexible, easy, liberalized, and harmonious business environ- ment. Both countries should work toward improving these parameters and improve its ranking and business environment.

10.15 ENVIRONMENTAL PERFORMANCE

The Environment Performance Index (EPI) ranks countries based on their performance in two important categories: (1) protection of human health from environment hazards and (2) protection of ecological systems.

According to the 2014 EPI, India is ranked 155th amongst 178 coun- tries in its efforts to address environmental challenges. On the same parameter, China ranks 118th (with Brazil 77th and Russia 73rd). India has scored lowest on water sanitation, biodiversity, and habitat, along with

China versus India: Emerging Giants in the World Economy 247

climate energy indicators compared to other BRIC nations in the list. In particular, India needs to work in the area of protection of human health from environmental hazards. Alarmingly, for some major cities, China and India’s air quality are among the worst in the world, far exceeding the World Health Organization thresholds. According to Air Quality Index,4 if a city is in the scale of 201–300, it is “heavily polluted” and its inhabit- ants are at severe risk of health issues. Currently, in major cities like Delhi, Mumbai, Beijing, and Shanghai, the air quality index level fluctuates between 300 and 500+ levels on daily basis—implying severe, irreversible health hazards for their populations.

The staggering level of air pollution in major Chinese cities like Beijing and Shanghai has triggered Government efforts to tackle it. Since January 1, 2014, 15,000 of the largest SOEs are now required to disclose real time data on air and water pollution. Historically, SOE’s have been the greatest pollution offenders and some the least transparent with dis- closures. These efforts have come in the wake of announcements of “air pollution control and responsibility” contracts, to hold provincial leaders liable for meeting strict reduction targets. It still remains to be seen, how- ever, whether the efforts and measures implemented by China are effective or not. We hope that these efforts are able to bring change to the millions of citizens living in China who are at high risk of developing air related problems and other health issues.

On the other hand, India is yet to formulate strict policies to con- trol its environmental hazards (air quality, water pollution, biodiversity and habitat, and energy challenges). Table 10.8 shows positive- and nega- tive trends for both nations. Unfortunately, there are very few indica- tors that show a positive 10-year trend, while the remaining are either negative or exhibit no change. Undoubtedly, India and China will con- tinue their economic and population growth spurts, but their greatest challenge will be the control and prevention of environmental hazards, and utilization of resources in an ecologically safe and friendly manner. How they cope with these challenges, while sustaining growth will be interesting to see and policy makers from both nations must give serious thought to this impending obstacle to bigger growth and contributions to the global economy, without being at risk of repercussions of their reckless actions in the years to come.

4 Government agencies use air quality index (AQI) to communicate the level of air pollu- tion to the people and warn them about the health hazards.

The China Business Model248

10.16 CONCLUSION

In this chapter, we have made an effort to familiarize the readers with recent statistics and information related to India and China with respect to: demographics, economic growth, investment climate, global competi- tiveness, ease of doing business, and environment performance indicators. We evaluate the progress of these countries with respect to each other and also their future positioning with respect to developed nations and BRIC countries.

Undoubtedly, both China and India are emerging leaders of world economy. However, their challenges are: to continue to sustain rapid and profitable economic growth, and to solve challenges related to demo- graphics, quality of education, public health, infrastructure, policies, and frameworks, in order to make the process of doing business easier.

FDI will continue to be an important determinant in the economic growth of these nations and the level of efficiency with which the policy makers and Governments address impending obstacles and deficiencies in their current systems, will determine the levels of success these nations can

Table 10.8 Environmental performance index for BRICS countries Parameters Brazil Russia South

Africa India China

Rank 2014

Rank 2014

Rank 2014

Rank 2014

10-Year trend

Rank 2014

10-Year trend

Health impacts 95 64 130 127 Positive 80 Positive Air quality 29 49 48 174 Negative 176 Negative Water and

sanitation 84 92 107 124 Positive 109 Positive

Water resources 86 62 56 87 No change 67 No change Agriculture 70 171 66 117 Positive 166 Negative Forests 115 57 1 57 Positive 80 No change Fisheries 53 92 97 67 No change 89 Negative Biodiversity

and habitat 75 106 84 125 No change 76 No change

Climate energy 57 38 65 104 No change 21 No change Overall rank 77 73 72 155 118

Source: EPI, Environmental performance Index is a joints project between the Yale Center for Environmental Law & Policy (YCELP) and the Center for International Earth Science Information Network (CIESIN) at Columbia University, in collaboration with the World Economic Forum a support from the Samuel Family Foundation and the McCall MacBain Foundation. http://www.epi. yale.edu/about.

China versus India: Emerging Giants in the World Economy 249

achieve. It is not feasible to say conclusively, at this point, which nation will supersede the other, but one thing is certain: both India and China have tremendous potential and will become economic powerhouses and contribute significantly to the global economy in the years to come.

REFERENCES Ahluwalia, M. S. (2002). Economic reforms in India since 1991: Has gradualism worked?

Journal of Economic Perspectives, 16(3), 67–88. Chow, G. C. (2007). China’s economic transformation (2nd ed.). Oxford: Blackwell. Economic Survey, (2014–2015). Economic survey-volume I. Union Budget. Government of

India. Ernst & Young. (2008). European attractiveness survey 2008. Available from <http://ec.europa.

eu/internal_market/services/docs/services-dir/studies/2008_european_attactiveness_ survey_en.pdf>.

International Monetary Fund (IMF), (2014). Compilation Guide on Financial Soundness Indicators. Washington: International Monetary Fund.

Izurieta, A., & Singh, A. (2008). Does fast growth in India and China harm U.S. workers?: Insights from simulation. Centre for Business Research. Working Paper No. 378. Available from <http://econpapers.repec.org/paper/cbrcbrwps/wp378.htm>.

KPMG. (2008). Global corporate capital flows 2008/9 to 2013/14. A study of the investment intentions of companies in 15 countries around the world, KPMG. Available from <http:// www.maths-fi.com/KPMG_Global_Corporate_Capital_Flows_June_2008.pdf>.

Mahtaney, P. (2007). India, China and globalisation: The emerging superpowers and the future of economic development. Basingstoke: Palgrave Macmillan.

Naughton, B. (2007). The Chinese Economy: Transitions and Growth. MIT Press. Nolan, P. (2004). Transforming China: Globalisation, transition and development. London:

Wimbledon Publishing Company. OECD, (2015). Aging and employment policies. Poland: OECD Economic Department. PricewaterhouseCoopers. (2008). 11th annual global CEO survey. PricewaterhouseCoopers.

Available from <https://www.pwc.com/gx/en/ceo-survey/pdf/pwc_11th_annual_ global_ceo_survey_e.pdf>.

Rodrik, D., & Subramanium, A. (2005). From “Hindu Growth” to productivity surge: The mystery of the Indian growth transition. IMF Staff Papers, 52(2) Available from <https:// www.imf.org/External/Pubs/FT/staffp/2005/02/pdf/rodrik1.pdf>.

UNCTAD, (2013–2015). World investment prospects survey. New York and Geneva: United Nations Conference on Trade and Development. Available from <http://unctad.org/ en/PublicationsLibrary/webdiaeia2013d9_en.pdf>.

Winters, A., & Yusuf, S. (2007). Introduction. In A. Winters & S. Yusuf (Eds.), Dancing with the giants: China, India and the global economy. Washington, DC: World Bank Publications.

Wong, R. Y. C., & Wong, S. M. L. (2001). Competition in China’s Domestic Banking Industry. Cato Journal, 21(1) (Spring/Summer 2001).

World Economic Forum, (2014–2015). The Global Competitiveness Report 2014–2015. Geneva: World Economic Forum.

World Economic Forum, (2015–2016). The Global Competitiveness Report 2015–2016. Geneva: World Economic Forum.

World Population Prospects, 2015. World population prospects the 2015 revision. Department of Economic and Social Affairs, Population Division. United Nations, New York, 2015.

Zelaya, M., & Yuce, A. (2014). Foreign direct investment decisions into China and India. Asian Economic and Financial Review, 4(3), 300–316.