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    CROUCHING TIGER

    HIDDEN DRAGON

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    Introduction

    One heartening feature of the evolution of the world economy during the last two to three

    decades has been the outstanding economic success of China and India two of the worlds

    most populous and hitherto extremely poor countries. Starting out with the worlds largest

    absolute numbers of people living in poverty, in narrow economic terms the two countries

    have achieved impressive growth.

    China has undoubtedly been the fastest growing country in the world over the last quarter of

    a century, achieving historically unprecedented, almost double-digit, growth rates since1980.

    Similarly, although not as fast as China, Indias economic growth has nevertheless also been

    one of the highest in the world since 1980, its per capita growth rate tripling between 1950-80

    and 1980-2005 (Kelkar, 2005). India was among the ten fastest.

    China and India have both made remarkable progress since about 1980, when each embarked

    on economic reform, though under wholly different circumstances. In China, the end of the

    1970s marked the emergence of a pragmatic, outward-oriented economic and political regime

    under the aegis of the communist party. It was closely associated with the rise within the

    party of Deng Xiao Ping and his open door policy. Over the following 20 years, Chinas

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    economic growt averaged nearl 10 percent taking into account a recent upward revi ion of

    Chinas GDP statistics.

    In India, the 1980s marked a different kind ofturning point as the country began to undertake

    deregulation ofinternalinvestment activity and regional decentralization of economic

    decision-making.4 This policy shift helped raise the rate of growth from the so-called Hindu

    rate of 1.5 percent annual growth of GDP per capita to about 4 percent.This acceleration in

    economic growth continued into the 1990s and the data suggests thatis has increased further

    during the new century and, forthe lastthree years, the annual GDP growth rate has averaged

    nearly 8 per cent a rate never achieved before in India.

    There are two important points to note about Indias and Chinas overall economic

    development that relate to the world economy. First, China has emerged as the second

    largest economy in the world afterthe US, having overtaken Japan. While the Indian

    economy is not quite as large, serious students ofthe subject suggestthat India is likely to

    grow fasterthan China overthe nexttwenty to thirty years and to have overtaken it by 2050

    .This claim is based on a number of assumptions, one ofthe more important of which is that

    India is thoughtto have a higherlevel of institutional development than China. The second

    pointis that, notwithstanding this projected fast economic growth, even in the year 2030

    Chinas GDP per capita in terms of constant purchasing power parity will still be a fourth of

    that ofthe US, and the corresponding figure for India will be less than one seventh. In

    considering the future evolution ofthe world economy, this point deserves proper

    consideration.

    We will continue to see both these economic powerhouses develop and reform as their

    respective models or stages of growth evolve as they create wealth and see their

    demographics change. The drive and dynamism both these economies provide to the world

    has and will become ever more important as they continue to develop and engage more

    intricately with the global economy.

    This report provides some terrific insights into that evolution and the longer-term

    comparative factors driving the success of both economies. We now increasingly have a

    genuine double act from China and India in terms of dynamic economic growth engines

    willing and enthusiastic to engage with the global economy. This can only be beneficial for

    the continued growth and stability ofthe region and the world economy as a whole.

    INDEX

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    Number Content

    1

    Introduction to both the economies.

    2What type of economies are India and China?

    3When did both the economies get liberalized?

    4

    The phase of liberalization in both economies.

    5What different policies were used during

    liberalization in both economies?

    6Strengths and weaknesses of both the

    economies.7

    Current scenario of both the economies.

    8Flaws of both the economies.

    9Which economy is stronger and why?

    10Future of both the economies.

    INDIA AND CHINA AT A GLANCE

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    INTRODUCTION TO INDIA

    India is a country with a rich history and culture. Home to the Indus

    Valley civilization and a region of historic trade routes and vast empires,

    the Indian subcontinent was identified with its commercial and cultural

    wealth for much of its long history. Four major world religions, Hinduism,

    Buddhism, Jainism and Sikhism originated here, while Zoroastrianism,

    Judaism, Islam and Christianity arrived in the first millennium AD and

    mingled into the regions diverse culture. India became a modern nation-

    state in 1947 after a struggle for independence that was marked by

    widespread nonviolent resistance. The history of India can be divided into

    four major segments, the ancient era, the medieval era, the modern era

    and the post-independence era. On 26 January 1950, India became a

    republic and a new constitution came into effect.

    The history of India is a mingle between the East and the West. India has

    always been an invaders paradise, while at the same time its natural

    isolation and magnetic religions allowed it to adapt to and absorb many of

    the peoples who penetrated its mountain passes. No matter how many

    Persians, Greeks, Chinese nomads, Arabs, Portuguese, Britishers and

    other raiders had their way into this great country, many of them merged

    into the society giving rise to a country full of diversity in terms of

    culture, religion, language and architecture.

    PROFILE

    Geography

    Area: 3.29 million sq. km. (1.27 million sq. mi.); about one-third the size

    of the U.S.

    Cities: CapitalNew Delhi (pop. 12.8 million, 2001 census). Other major

    citiesMumbai, formerly Bombay (16.4 million); Kolkata, formerly

    Calcutta (13.2 million); Chennai, formerly Madras (6.4 million); Bangalore

    (5.7 million); Hyderabad (5.5 million); Ahmedabad (5 million); Pune (4

    million).

    Terrain: Varies from Himalayas to flat river valleys and deserts in the

    west.

    Climate: Alpine to temperate to subtropical monsoon.

    People

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    Nationality: Noun and adjectiveIndian(s). Population (2010 est): 1.17

    billion; urban 29%.Annual growth rate: 1.376%.Density: 324/sq.

    km. Religions: Hindu 80.5%, Muslim 13.4%, Christian 2.3%, Sikh

    1.9%, other groups including Buddhist, Jain, Parsi within 1.8%,

    unspecified 0.1% (2001 census).

    Languages: Hindi, English, and 16 other official languages.

    Education: Years compulsoryK-10. Literacy--61%.Health: Infant

    mortality rate--49.13/1,000. Life expectancy--66.46 years (2009 est.)

    Work force (est.): 467 million.

    Agriculture--52%; industry and commerce--14%; services and

    government--34%.

    Government

    Type: Federal republic.

    Independence: August 15, 1947.

    Constitution: January 26, 1950.

    Branches: Executivepresident (chief of state), prime minister (head of

    government), Council of Ministers (cabinet). Legislativebicameral

    parliament (Rajya Sabha or Council of States, and Lok Sabha or House of

    the People). JudicialSupreme Court.

    Political parties: Indian National Congress (INC), Bharatiya Janata Party

    (BJP), Communist Party of India-Marxist, and numerous regional and

    small national parties.

    Political subdivisions: 28 states,* 7 union territories (including National

    Capital Territory of Delhi). Suffrage: Universal over 18.

    Economy

    GDP (FY 2009 est): $1.095 trillion ($1,210 billion).

    Real growth rate (2009 est.): 6.5%.

    Per capita GDP (PPP, FY 2008): $3,100.

    Natural resources: Coal, iron ore, manganese, mica, bauxite, chromite,

    thorium, limestone, barite, titanium ore, diamonds, crude oil.

    Agriculture: 17% of GDP. Productswheat, rice, coarse grains, oilseeds,

    sugar, cotton, jute, tea.

    Industry: 28.2% of GDP. Productstextiles, jute, processed food, steel,

    machinery, transport equipment, cement, aluminum, fertilizers, mining,

    petroleum, chemicals, and computer software.

    Services and transportation: 54.9% of GDP.

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    Trade: Exports (FY 2009 est)--$164.3 billion; engineering goods,

    petroleum products, precious stones, cotton apparel and fabrics, gems

    and jewelry, handicrafts, tea. Services exports $101.2 billion in 2008-09,

    represent more than one third of Indias total exports.

    Software exports--$35.76 billion. Imports (FY 2009 est)--$268.4 billion;

    petroleum, machinery and transport equipment, electronic goods, edible

    oils, fertilizers, chemicals, gold, textiles, iron and steel. Major trade

    partnersU.S., China, U.A.E., EU, Russia, Japan.

    INTRODUCTION TO CHINA

    China, one of the countries that can boast of an ancient civilization, has a

    long and mysterious history - almost 5,000 years of it! Like most other

    great civilizations of the world, China can trace her culture back to a

    blend of small original tribes which have expanded till they became the

    great country we have today.

    It is recorded that Yuanmou man is the oldest hominoid in China and the

    oldest dynasty is Xia Dynasty. From the long history of China, there

    emerge many eminent people that have contributed a lot to the

    development of the whole country and to the enrichment of her history.

    Among them, there are emperors like Li Shimin (emperor Taizong of the

    Tang), philosophers like Confucius, great patriotic poets like Qu Yuan and

    so on.

    Chinese society has progressed through five major stages - Primitive

    Society, Slave Society, Feudal Society, Semi-feudal and Semi-colonial

    Society, and Socialist Society. The rise and fall of the great dynasties

    forms a thread that runs through Chinese history, almost from the

    beginning. Since the founding of the Peoples Republic of China on

    October 1st, 1949, China has become a socialist society and become

    stronger and stronger.

    PROFILE

    Geography-

    Total area: 9,596,961 sq. km. (about 3.7 million sq. mi.).

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    Cities: CapitalBeijing. Other major citiesShanghai, Tianjin, Shenyang,

    Wuhan, Guangzhou, Chongqing, Harbin, Chengdu.

    Terrain: Plains, deltas, and hills in east; mountains, high plateaus, deserts

    in west.

    Climate: Tropical in south to subarctic in north.

    People

    Nationality: Noun and adjectiveChinese (singular and plural).

    Population (July 2010 est.): 1,330,141,295.

    Population growth rate (2010 est.): 0.494%.

    Health (2010 est.): Infant mortality rate--16.51 deaths/1,000 live births.

    Life expectancy--74.51 years (overall); 72.54 years for males, 76.77

    years for females.

    Religions: Officially atheist; Daoist (Taoist), Buddhist, Christian 3%-4%,

    Muslim 1%-2%.

    Language: Mandarin (Putonghua), plus many local dialects.

    Education: Years compulsory--9. Literacy--93%.

    Labor force (2009 est.): 812.7 million. Labor force by occupation (2008

    est.): Agriculture and forestry--39.5%, industry--27.2%, services--

    33.2%.

    Government-

    Type: Communist party-led state.

    Constitution: December 4, 1982; revised several times, most recently in

    2004.

    Independence: Unification under the Qin (Chin) Dynasty 221 BC; Qing

    (Ching or Manchu) Dynasty replaced by a republic on February 12, 1912;

    Peoples Republic established October 1, 1949.

    Branches: Executivepresident, vice president, State Council, premier.

    Legislativeunicameral National Peoples Congress. JudicialSupreme

    Peoples Court.

    Administrative divisions: 23 provinces (the P.R.C. considers Taiwan to be

    its 23rd province); 5 autonomous regions, including Tibet; 5 municipalities

    directly under the State Council.

    Political parties: Chinese Communist Party, 76 million members; 8 minor

    parties under Communist Party supervision.

    Economy-

    GDP (2009): $4.814 trillion (exchange rate-based).

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    Per capita GDP (2009): $3,678 (exchange rate-based).

    GDP real growth rate (2009): 8.7%.

    Natural resources: Coal, iron ore, petroleum, natural gas, mercury, tin,

    tungsten, antimony, manganese, molybdenum, vanadium, magnetite,

    aluminum, lead, zinc, uranium, hydropower potential (world s largest).

    Agriculture: ProductsAmong the worlds largest producers of rice,

    wheat, potatoes, corn, peanuts, tea, millet, barley; commercial crops

    include cotton, other fibers, apples, oilseeds, pork and fish; produces

    variety of livestock products.

    Industry: Typesmining and ore processing, iron, steel, aluminum, and

    other metals, coal; machine building; armaments; textiles and apparel;

    petroleum; cement; chemicals; fertilizers; consumer products, including

    footwear, toys, and electronics; food processing; transportation

    equipment, including automobiles, rail cars and locomotives, ships, and

    aircraft; telecommunications equipment, commercial space launch

    vehicles, satellites.

    Trade: Exports (2009)--$1.194 trillion: electrical and other machinery,

    including data processing equipment, apparel, textiles, iron and steel,

    optical and medical equipment. Main partners (2008)--United States

    17.7%, Hong Kong 13.3%, Japan 8.1%, South Korea 5.2%, Germany

    4.1%. Imports (2009)--$921.5 billion: electrical and other machinery, oil

    and mineral fuels, optical and medical equipment, metal ores, plastics,

    organic chemicals. Main partners (2008)--Japan 13.3%, South Korea

    9.9%, Taiwan 9.2%, U.S. 7.2%, Germany 4.9%.

    The Pinyin System ofRomanization

    On January 1, 1979, the Chinese Government officially adopted the pinyin

    system for spelling Chinese names and places in Roman letters. A system

    of Romanization invented by the Chinese, pinyin has long been widely

    used in China on street and commercial signs as well as in elementary

    Chinese textbooks as an aid in learning Chinese characters. Variations of

    pinyin also are used as the written forms of several minority languages.

    Pinyin has now replaced other conventional spellings in China s English-

    language publications. The U.S. Government also has adopted the pinyin

    system for all names and places in China. For example, the capital of

    China is now spelled Beijing rather than Peking.

    Population Policy

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    With a population officially over 1.3 billion and an estimated growth rate

    of 0.494%, China is very concerned about its population growth and has

    attempted with mixed results to implement a strict birth limitation policy.

    Chinas 2002 Population and Family Planning Law and policy permit one

    child per family, with allowance for a second child under certain

    circumstances, especially in rural areas, and with guidelines looser for

    ethnic minorities with small populations. Enforcement varies, and relies

    largely on social compensation fees to discourage extra births. Official

    government policy prohibits the use of physical coercion to compel

    persons to submit to abortion or sterilization, but in some localities there

    are instances of local birth-planning officials using physical coercion to

    meet birth limitation targets. The governments goal is to stabilize the

    population in the first half of the 21st century, and 2009 projections from

    the U.S. Census Bureau are that the Chinese population will peak at

    around 1.4 billion by 2026.

    INDIA AND CHINA AS A DEVELOPING

    ECONOMY

    India is a low income developing economy. One fourth of its population

    lives in condition of misery. Poverty is not only acute but is also a chronic

    malady in India. At the sane time there exist unutilized natural resources.

    Following are some reasons for it be ing a developing economy:

    LOW PER CAPITA INCOME.

    INDIA-----The per capita income of an Indian in 2008 was $1040. It is the lowest in

    the world. During 1960-80,developed economies grew at a rate faster than the Indian

    economy, but during 1990-2009, Indian economy has grown at a faster rate than the

    developed countries.

    CHI -According to an International Monetary Fund analysis, the growth rate of the

    Chinese economy hit a five-year low in 2008. From an impressive double-digit rate of

    12.7% in 2007, Chinas economic growth plummeted to 9.6%. The IMF also revealed

    that Chinas per capita income in 2008 was equivalent to $3,180.The Gross

    Domestic Product (GDP) estimates based on Purchasing Power Party totaled $7.8

    trillion. Owing to this, China became the second -largest economy in the world.In

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    1990, Chinas average per capita national income was around $350. Within a

    decade, there was a threefold increase, taking the figure to $1,000. At the end of

    2008, the figure tripled yet again and Chinas average per capita national income

    reached another high of $3,000. If Chinas average na tional income continues to rise

    at an annual rate of 8%, the countrys per capita income will reach $8,500 by 2020

    and will touch the $20,000 mark by 2030. Hence, Chinas average per capita income

    will exceed the current income of Taiwan and Korea and the country will qualify for

    an OECD membership.

    China has experienced a high rate of economic growth (see Table 1).

    Except for a couple of years in the beginning of 1990s when the Chinese

    government urged reform of the state-owned corpora- tions, the annual

    growth rate of GDP reached upto 10%.

    OCCUPATIONALPATTE N:

    INDIA-primary producing. One of the most important characteristic of a

    developing country. A very high proportion of working population is engaged in

    agriculture, which contributes a very large share in the national income. In

    India in 2008, about 58% of the population was engaged in agriculture and its

    contribution to national income was 17.5%. we can say that agriculture

    continues to be a depressed industry as the productivity per person engag ed

    in it is very low.

    CHINA-The rapid economic growth has brought out many changes in the

    composition of industrial sectors. And it has affected the occupational

    structure, which in turn resulted in the development of a new class structure in

    China. According to the distribution of GDP, the portion of sector (Agriculture,

    Forestry, and Fishing) had dropped from 50.5% in 1952 to 28.1% in 1978. In

    2001, the portion consisted of 15.2% of the total GDP. Meanwhile, because of

    industrialization, the portion of the Secondary (Manufacturing) and Tertiary

    (Services) sector had expanded. In 2001, the portion of the Secondary sector

    held 51.2% and that of the Tertiary sector composed 33.6% of the total GDP.

    Heavy population pressure.

    Ticking Population Clock

    INDIA-The main problem in India is the high level of birth rates coupled with a falling

    level of death rates. The rate of growth of population which was about 1.31% per

    annum during 1941-40 has risen to 1.93% during 1991-20001. The chief cause of

    this rapid spurt is the steep fall in death rate from 49 per thousand during 1911-20 to

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    7.4 per thousand in 2008. To maintain a rapidly growing populati on the requirements

    of food,clothing,shelter,medicine,schooling etc. all rise imposing greater economic

    burdens. Moreover a rising population leads to n increase in the labor force,

    according to the Tenth Plan labor force is expected to rise by about 35 mi llion

    leading to more unemployment.

    CHINA-As the worlds population surpassed 6 billion (6,000,000,000) in

    October 1999, Chinas population represented more than 1/5 of this total

    (20.8%) one out of every five people in the world lives in China.

    Today, Chinas population exceeds 1.25 billion (1,250,000,000), a

    number that continues to increase minute-by-minute on Beijings official.

    Chinas population increases each year by approximately 12 -13 million people, a

    number that exceeds the total population of individual countries such as Belgium,

    Greece, Cambodia, or Ecuador. Annual population growth in China actually exceeds

    the current population ofOhio, Illinois, or Pennsylvania. Both the crude birth rate and

    the crude death rate declined significantly betw een 1949 and 1997, except for the

    early years of the 1960s.the combination of rising population pressure and stalled

    economic growth can be destabilizing for China in the future .

    PREVALENCE OFCHRONICUNEMPLOYMENTAND

    UNDEREMPLOYMENT.

    INDIA- In India labor is an abundant factor and consequently it is very difficult to

    provide gainful employment to entire population. Unemployment is structural and is

    the result of a deficiency of capital. The Indian economy does not find sufficient

    capital to expand its industries to such an extent that the entire labor force is

    absorbed. Moreover, in the agricultural sector of the Indian economy a much larger

    number of laborers are engaged in production than are really needed. Accordingly

    the marginal product of labor in agriculture is often negligible. Thus, there exists

    disguised or concealed unemployment in agriculture.

    CHINA-According to the 2008 estimates by Chinas National Bureau of

    Statistic, the total number of the urban unemployed was 8.30 million. The

    countrys total unemployment rate stood at 4.0%.

    Year-on-year estimates of Chinas unemployment rate

    Year Unemployment Rate 2004 10.10% 2005 9.80% 2006 9.00% 2007

    4.20% 2008 4.00%

    Source: Central Intelligence Agencys World Fact book

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    Over the past five years, the Chinese government has succeeded in controlling its

    unemployment situation. The Chinese government has also provided basic life

    support facilities to workers who were laid-off by state-owned enterprises. It even did

    justice to its ambitious unemployment insurance policy.

    STEADILY IMPROVINGRATE OFCAPITALFORMATION.

    INDIA-During the fifties and sixties of the 20 th century, basic characteristic of the

    Indian economy was the existence of capital deficiency which is reflected in two

    ways- firstly, the amount of capital per available was low; and secondly, the rate of

    capital formation was also low. An important indicator of low capital per head

    available in underdeveloped countries is the consumption of energy. Energy use of

    India was 529 kg of oil equivalent per capita in 200 7 as compared to USA, which

    was 7766.

    CHINA-In 2009, capital formation contributed 8 percentage points, or 92 percent, of

    Chinas GDP growth, according to the latest date released by the National Bureau of

    Statistics (NBS) February 2 .A penny saved may be a penny earned, but in China a

    penny saved is usually invested in an infrastructure project or an increase in

    manufacturing capacity. Chinas gross domestic savings rate, after averaging 40% or

    so of GDP for most of the 1990s, has grown over the past couple of years to close

    to 50% of GDP. This is an unprecedented number, and while a portion of this saving

    has been invested abroad in US Treasury bonds thus funding the US current

    account deficit and keeping US interest rates low the vast majority has been

    invested in the domestic Chinese economy. Gross capital formation was around 45%

    of GDP last year, and it powered an economic expansion that saw GDP rise by

    9.5%.

    1961-77 1977-98

    Saving rate 30 37.4

    Investment rate 18.5 26.8

    Rate of capital formation 12.6 22.2

    MALDISTRIBUTIONOF WEALTH/ASSETS

    INDIA- inequality in asset distribution is the principal cause of unequal distribution of

    income in the rural areas. It also signifies that the resorce base of 50% of the

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    househols is so weak that it can hardly provide them anything above the

    subsistence level of income, it is also revealed that 60% of the poor rural

    households owned only 9.3% of area operated, they had only 14% of cattle heads

    and just 10% of wooden ploughs.

    CHINA-Before reforms began, China had a planned economy where the

    means of production and some means of livelihood were nationalized. To

    minimize income inequality, govern- ment adopted policies on income

    distribution and re- distribution that carried distinctive planning and ad -

    ministrative features. In the urban economy, workers wages were

    centrally planned and administered, with the central government setting

    unified wage standards and scales. To pursue industrialization, the

    government invested substan- tial funds in urban industries and regarded

    rural areas as a base for the supply of grain. To accumulate more funds

    for industrialization, authorities deliberately suppressed the price of grain

    and other farm products, aggravating the urban-rural income gap. In

    1978, ur- ban per capita income was 2.6 times rural per capita income.32

    At the time, Chinas overall level of economic and social development was

    low: Approximately 250 million rural people lived below the poverty line.

    While egalitarianism figured prominently in income distri - bution in cities,

    it did not apply nationwide. There was considerable income inequality

    within rural areas and a clear income gap between urban and rural areas.

    33 This meant Chinas reform and transition did not begin from an

    egalitarian pattern of distribution and that todays widening income

    inequality is more or less tied to past income inequality.

    POOR QUALITYOFHUMANCAPITAL.

    INDIA-A glaring feature. Besides physical capital, training and knowledge

    of the population also forms a part of capital. as a result the expenditure

    on education,skill formation, research and development are all include in

    it. The Indian public expenditure on primary to higher education and R&D

    in 2002-04 was a 3.3% of GDP. The corresponding figure for the USA was

    5.9% of the GDP. Moreover, India has been ranked at no 134 on the basis

    of Human Development Index in 2007.

    CHINA- The investment from governments at various levels in China

    takes up 2.05 percent of the GDP (Gross Domestic Product) while that on

    the material capitals 30 percent.As said earlier, these two figures in the

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    United States are respectively 5.4 and 17 percent. This phenomenon is

    caused by rate of return of the material capitals higher than that of labor

    capital. However, the fact is that Chinas present wage policies lead to the

    serious imbalance and distorted situation as mentioned above. Individuals

    can not receive directly all the benefits brought about by education. For

    instance, under the current policies, technical workers have relatively low

    wages, but the aggregate return brought about by these workforces with

    high skill to the society is considerable. As far as health is considered,by

    1975, insurance coverage reached about 90% of the population (almost

    all urban population and 85% of the rural population).

    PREVALENCE OFLOW LEVELOFTECHNOLOGY.

    INDIA-The Indian economy suffers from this basic weakness.the low

    productivity per hectare in Indian agriculture and the low level of

    productivity per worker in agriculture and industry are largely a

    cosequence of technological backwardness. In India ,the vast majority of

    farmers are too poor to buy even the essential outputs suh as improved

    seeds,fertilisers and insecticides. However with the liberalisaton of the

    economy,new technology is being adopted by a large number of

    enterprises for their survival.

    CHINA-The history of science and technology in China is both long

    and rich with many contributions to science and technology. In antiquity,

    independently of Greek philosophers and other civilizations, ancient

    Chinese philosophers made significant advances in science, technology,

    mathematics, and astronomy. The first recorded observations of comets,

    solar eclipses, and supernovae were made in China. Chinas economic

    boom and political ambition have fuelled unprecedented investment in

    science and technology. Since 1999, the countrys spending on researchand development (R&D) has trebled, and it has now become the worlds

    second largest R&D investor. Also,Chinas efforts in the food production

    and agricultural field have been very impressive as compared to any other

    country in the Asia Pacific region. China has continued to be a major net

    exporter of agricultural products. This can be attributed to the concerted

    focus on developing food sciences and technologies and using these

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    technical advances to improve agriculture and food production. One good

    example is the use of scientific and technological advances in Chinas Jilin

    Province in the northeast, where more than 264 improved crop breeds

    were developed, 80 of which have been used successfully in production.

    According to the National Bureau of Economic Research, more than

    220,000 farmers participating in training programs in this area, the

    satisfactory results and community involvement in this region speaks for

    the rest of China in the countrys sustained efforts in furthering

    improvements and advances in agriculture and food production for the

    nation.

    LOW LEVELOFLIVINGOFTHE AVERAGE INDIAN.

    INDIA-Failure to maintain a balanced diet manifest in India in the low

    calorie intake and low level of consumption of protein. Nearly 28% of the

    population in India lived below poverty line in 2004-05. Acording to world

    development indicatos, 46 % of the child population In India sufers from

    malnutrition. The average protein content of the Indian diet is only 59

    grams per day as against more than double the level in developed

    countries. Moreover as per 2001 census only 36% of the household had

    access to safe drinking water. Hence all these are partly responsible for

    the low level of efficiency of the workers.

    I ia:Summa y

    Table S00-011:DISTRIBUTIONOFHOUSEHOLDS BYTYPE OFCENSUS

    HOUSESOCCUPIED

    Total % Rural % Urban %

    Total number of

    households

    191,963,

    935

    100.

    0

    138,271

    ,559 72.0

    53,692,

    376 28.0

    L Permanent

    99,431,7

    27 51.8

    56,829,

    478 41.1

    42,602,

    249 79.3

    L.

    1 Semi permanent

    57,664,3

    27 30.0

    49,401,

    997 35.7

    8,262,3

    30 15.4

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    L.

    2 Temporary:

    L.

    2.

    1

    Total 34,815,6

    19

    18.1

    32,009,

    547

    23.1 2,806,0

    72

    5.2

    L.

    2.

    2 Serviceable

    22,096,4

    80

    11.5

    20,358,

    391

    14.7 1,738,0

    89

    3.2

    L.

    2.

    3 Non-serviceable

    12,719,1

    39

    6.6

    11,651,

    156

    8.4 1,067,9

    83

    2.0

    L.

    2.

    4 Unclassifiable

    52,262

    0.0

    30,537 0.0 21,725

    0.0

    Source: Table H-4 (Appendix) India :

    Census of India 2001

    Source : Office of the Registrar General, India Created on 17 April 2003.

    CHINA-Across China, there were over 400 million fewer people living in

    extreme poverty in 2001 than 20 years previously. By 2001, China had

    met the foremost of the Millennium Development Goals to reduce the

    1990 incidence of poverty by half and it had done so 14 years ahead of

    the 2015 target date for the developing world as a whole. Widespread

    poverty, extreme income inequalities, and endemic insecurity of

    livelihood. By means of centralized economic planning, the Peoples

    Republic was able to redistribute national income so as to provide the

    entire population with at least the minimal necessities of life (except

    during the three bad years of 1959, 1960, and 1961) and to

    consistently allocate a relatively high proportion of national income to

    productive investment. Equally important to the quality of life were the

    results of mass public-health and sanitation campaigns, which rid the

    country of most of the conditions that had bred epidemics and lingering

    disease in the past. The most concrete evidence of improved living

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    standards was that average national life expectancy more than doubled,

    rising from around thirty-two years in 1949 to sixty-nine years in 1985.

    In 1987 the standard of living in China was much lower than in the

    industrialized countries, but nearly all Chinese people had adequate food,

    clothing, and housing. In addition, there was a positive trend toward rapid

    improvements in living conditions in the 1980s as a result of the economic

    reforms, though improvements in the standard of living beyond the basic

    level came slowly. Until the end of the 1970s, the fruits of economic

    growth were largely negated by population increases, which prevented

    significant advances in the per capita availability of food, clothing, and

    housing beyond levels achieved in the 1950s. The second major change in

    the standard of living came about as a result of the rapid expansion of

    productivity and commerce generated by the reform measures of the

    1980s. After thirty years of austerity and marginal sufficiency, Chinese

    consumers suddenly were able to buy more than enough to eat from a

    growing variety of food items. Stylish clothing, modern furniture, and a

    wide array of electrical appliances also became part of the normal

    expectations of ordinary Chinese families.

    LiberalizationINDIA

    WHEN DID INDIA GET LIBERALIZED?

    Globalization and liberation are directly linked with each other. The first

    wake of globalization started in India when the economic liberalization

    policies were undertaken in the 1990s by Dr Manmohan Singh, the then

    Finance Minister of the country. Since then, the economy of India has

    improved to a great extent and has significantly led to the rise in the

    standard of living of the citizens. Even though the power at th e center has

    changed hands, the pace of the reforms has never slackened till date.

    Before 1991, changes within the industrial sector in the country were

    modest to say the least. The sector accounted for just one-fifth of the

    total economic activity within the country. The sectoral structure of the

    industry has changed, albeit gradually. Most of the industrial sector was

    dominated by a select band of family-based conglomerates that had been

    dominant historically. Post 1991, a major restructuring has taken pl ace

    with the emergence of more technologically advanced segments among

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    industrial companies. Nowadays, more small and medium scale

    enterprises contribute significantly to the economy.

    Liberalization in the 1990s

    It was in the 1990s that the first initiation towards globalization and

    economic liberalization was undertaken by Dr Manmohan Singh, who was

    the Finance Minister of India under the Congress government headed by

    P.V. Narasimha Rao. This is perhaps the milestone in the economic

    growth if India and it aimed towards welcoming globalization. Since, the

    liberalization plan, the economic condition gradually started improving

    and today India is one of the fastest growing economies in the world with

    an average yearly growth rate of around 6-7%.

    Globalization and foreign investment

    One of the main aspects of globalization is foreign investment. India today has

    emerged as one of the perfect markets for foreign investors due to its vast market

    base. More and more foreign companies are investing in the Indian market to get

    more returns. The foreign institutional investments (FII) amounts to around US$ 10

    billion in FY 2008-09, while the rate of Foreign direct investments (FDI) has grown

    around 85.1% in 2009 to US$ 46.5 billion from US$ 25.1 billion (2008) .

    PHASE OFLIBERALIZATION

    Indias reforms have been piecemeal and incremental, giving the casual observer the

    impression that nothing has been happening. If one takes the totality of reforms over

    the last decade, however, the change is unmistakable. The analogy is with the hour

    hand of the clock, which looks completely static, and yet completes a full circle every

    12 hours.

    Other industries were either subject to strict industrial licensing or reserved for the

    small-scale sector. The tight control of the government on industry was aptly

    captured by a leading cartoonist in a 1980s comic strip showing the industry minister

    tell his staff, We shouldnt encourage big industry that is our policy, I know. But I

    say we shouldnt encourage small industries either . If we do, they are bound to

    become big.

    The reforms of the last 10 years have gone a long way toward freeing up the

    domestic economy from state control. State monopoly has been abolished in virtually

    all sectors, which have been opened to the private se ctor. The License Raj is a thing

    of the past. The small-scale industry reservation still persists but even here progress

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    has been made. Apparel, with its large export potential, was recently opened to all

    investors.

    Imports were also subject to excessively high tariffs. The top rate was 400 percent.

    As much as 60 percent of tariff lines were subject to rates ranging from 110 to 150

    percent and only 4 percent of the tariff rates were below 60 percent. The exchange

    rate was highly over-valued. Strict exchange controls applied to not just capital

    account but also current account transactions. Foreign investment was subject to

    stringent restrictions. Companies were not permitted more than 40 percent foreign

    equity unless they were in the high-tech sector or were export-oriented. As a result,

    foreign investment amounted to a paltry $100-200 million annually.

    Today, import licensing has been completely abolished. This includes textiles and

    clothing, which remain protected in developed countries through the multi -fiber

    arrangement. The highest tariff rate has come down to 45 percent (including the tariff

    surcharge and the so-called Special Additional Duty) with the average tariff rate

    declining to less than 25 percent. The foreign investment regime is as liberal as i n

    other developing Asian countries.

    Progress has also been made in many areas that were previously off limits to

    reforms. Insurance has been opened to private investors, both domestic and foreign.

    Diesel oil and gas prices have undergone some increases. At least symbolic

    reductions have also been made in fertilizer and food subsidies. The value - added

    tax has undergone substantial rationalization.

    These reforms have paid handsomely. The economy has grown at more than 6

    percent coupled with full macroeconomi c stability. This compares with a growth rate

    of 3.5 percent during 1950 -1980. The rate of inflation has been low and foreign

    exchange reserves are sufficient to finance imports for more than eight months.

    Rising incomes have helped bring down poverty. Acc ording to official figures, the

    proportion of poor in total population has declined from 40 percent in 1993 -1994 to

    26 percent in 2000.

    But, perhaps, the greatest change in the last 10 years has been in the attitude

    toward reforms. Whereas the vocal suppor ters of reforms within India were rare

    during the 1980s, virtually every political party today recognizes the need for

    continued reforms. Differences on which reforms to undertake first and at what pace

    still exist, but few disagree that reforms must continue. Initial fears that changes in

    governments will bring the reform process to a halt or even reverse it have proven to

    be without foundation.

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    China

    WHEN DID IT TAKE PLACE?

    The Chinese economic reform refers to the program of economic reforms called

    "Socialism with Chinese characteristics " in the People's Republic of China (PRC)that were started in December 1978 by reformists within the Communist Party of

    China (CPC) led by Deng Xiaoping. The goal of Chinese economic reform was to

    transform China's stagnant, impoverished planned economy into a market economy

    capable of generating strong economic growth and increasing the well -being of

    Chinese citizens.

    China had one of the world's largest and most advanced economies prior to the

    nineteenth century, while its wealth remained average in global terms. The economy

    stagnated since the 16th centuryand even declined in absolute terms in the

    nineteenth and much of the twentieth century, with a brief recovery in the 1930s.

    From 1949 to 1978, Mao's disastrous collectivization, Great Leap Forward and

    Cultural revolution devastated the Chinese economy, resulting in the destruction of

    much traditional culture and a massive drop in living standards. AfterMao's death,

    his main leftist supporters, led by the Gang of Four, were ousted in a coup, and

    reformists lead by Deng Xiaoping took power.

    Economic reforms began in 1978 and occurred in two stages. The first stage, in the

    late 1970s and early 1980s, involved the decollectivization of agriculture, the opening

    up of the country to foreign investment, and permission for entrepreneurs to start upbusinesses. However, most industry remained state-owned, inefficient and acted as

    a drag on economic growth. The second stage of reform, in the late 1980s and

    1990s, involved the privatization and contracting out of much state-owned industry

    and the lifting of price controls, protectionist policies, and regulations, a lthough state

    monopolies in sectors such as banking and petroleum remained. The private sector

    grew remarkably, accounting for as much as 70 percent of China's GDP by 2005[4],

    a figure larger in comparison to many Western nations. From 1978 to 2010,

    unprecedented growth occurred, with the economy increasing by 9.5% a year.

    China's economy became the second largest after the U.S..

    The success of China's economic reforms has resulted in massive changes in

    Chinese society. Poverty was reduced and both wealth and wealth inequality

    increased, leading to a backlash lead by the Maoist New Left. In the academic

    scene, scholars have debated the reason for the success of Chinese economic

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    reforms, and have compared them to attempts to reform socialism in the Eastern

    bloc and the growth of other developing economies.

    PHASE OFLIBERALIZATION

    Economic reforms began after Deng Xiaoping and his reformist allies ousted theGang of FourMaoist faction. By the time Deng took power, there was widespread

    support among the elite for economic reforms. As de facto leader, Deng's policies

    faced opposition from party conservatives but were extremely successful in

    increasing the country's wealth.1978-84-Deng's first reforms began in agriculture, a

    sector long neglected by the Communist Party. By the late 1970s, food supplies and

    production had become so deficient that government officials were warning th at

    China was about to repeat the "disaster of 1959" - the famines which killed tens of

    millions during the Great Leap Forward.[9] Deng responded by decollectivizing

    agriculture and emphasizing the Household-responsibility system, which divided the

    land of the People's communes into private plots. Farmers were able to keep the

    land's output after paying a share to the state. This move increased agricultural

    production, increased the living standards of hundreds of millions of farmers and

    stimulated rural industry.Reforms were also implemented in urban industry to

    increase productivity. A dual price system was introduced, in which state -owned

    industries were allowed to sell any production above the plan quota, and

    commodities were sold at both plan and market prices, allowing citizens to avoid the

    shortages of the Maoist era. Private businesses were allowed to operate for the first

    time since the Communist takeover, and they gradually began to make up a greater

    percentage of industrial output. Price flexibility wa s also increased, expanding the

    service sector.The country was opened to foreign investment for the first time since

    the Kuomintang era. Deng created a series of special economic zones for foreign

    investment that were relatively free of the bureaucratic regulations and interventions

    that hampered economic growth. These regions became engines of growth for the

    national economy.1984-93-During this period, Deng Xiaoping's policies continued

    beyond the initial reforms. Controls on private businesses and government

    intervention continued to decrease, and there was small -scale privatization of state

    enterprises which had become unviable. A notable development was the

    decentralization of state control, leaving local provincial leaders to experiment with

    ways to increase economic growth and privatize the state sector. [Township and

    village enterprises, firms nominally owned by local governments but effectively

    private, began to gain market share at the expense of the state sector. Conservative

    elder opposition, lead by Chen Yun, prevented many major reforms which would

    have damaged the interests of special interest groups in the government

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    bureaucracy. Corruption and increased inflation increased discontent, contributing to

    the Tiananmen Square protests of 1989 and a conservative backlash after that event

    which ousted several key reformers and threatened to reverse many of Deng's

    reforms.However, Deng stood by his reforms and in 1992, he affirmed the need to

    continue reforms in his southern tour.He also reopened the Shanghai Stock

    Exchange closed by Mao 40 years earlier.

    Although the economy grew quickly during this period, economic troubles in the

    inefficient state sector increased. Heavy losses had to be made up by state revenues

    and acted as a drain upon the economy.Inflation became problematic in 1985, 1988

    and 1992. Privatizations began to accelerate after 1992, and the private sector

    surpassed the state sector in share of GDP for the first time in the mid -1990s.

    China's government slowly expanded recognition of the private economy, first as a

    "complement" to the state sector (1988) and then as an "important component"

    (1999) of the socialist market economy.

    Post-2005

    The conservative Hu-Wen Administration began to reverse many of Deng Xiaoping's

    reforms in 2005.Observers note that the government adopted more egalitarian and

    populist policies. It increased subsidies and control over the health care sector ,

    halted privatization, and adopted a loose monetary policy, which lead to the

    formation of a U.S.-style property bubble in which property prices tripled. The

    privileged state sector was the primary recipient of government investment, which

    under the new administration, promoted the rise of large "national champions" which

    could compete with large foreign corporations.

    Diffe e p li ies use uri g

    liberaliza i

    I ia

    Dr, Man Mohan Singh proposed The thrust will be to increase the efficiency and

    international competitiveness of industrial production, to utilize foreign investment

    and technology to much greater degree than in the past to improve the performance

    and rationalize the scope of the public sector, and to reform and modernize the

    financial sector so that it can more efficiently serve the needs of the economy.

    We review policy changes in five major areas covered by the reform program: fiscal

    deficit reduction, industrial and trade policy, agricultural policy, infrastructure

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    development and social sector development. Savings, Investment and Fiscal

    Discipline.

    Fiscal profligacy was seen to have caused the balance of payments crisis in 1991

    and a reduction in the fiscal deficit was therefore an urgent priority at the start of the

    reforms. The combined fiscal deficit of the central and state governments wassuccessfully reduced from 9.4 percent of GDP in 1990 -91 to 7 percent in both 1991-

    92 and 1992-93 and the balance of payments crisis was over by 1993. However, the

    reforms also had a medium term fiscal objective of improving public savings so that

    essential public investment could be financed with a smaller fiscal deficit to avoid

    crowding out private investment. This part of the reform strategy was unfortunately

    never implemented.

    Public savings deteriorated steadily from +1.7 percent of GDP in 1996 -97 to 1.7

    percent in 2000-01. This was reflected in a comparable deterioration in the fiscal

    deficit taking it to 9.6 percent of GDP in 2000 -01. Not only is this among the highest

    in the developing world, it is particularly worrisome because Indias public debt to

    GDP ratio is also very high at around 80%. Since the total financial savings of

    households amount to only 11 percent of GDP, the fiscal deficit effectively preempts

    about 90 percent of household financial savings for the government. What is worse,

    the rising fiscal deficit in the second half of the 1990s was not financing higher levels

    of public investment, which was more or less constant in this period.

    These trends cast serious doubts on Indias ability to achieve higher rates of growth

    in future. The growth rate of 6 percent per year in the post -reforms period was

    achieved with an average investment rate of around 23 percent of GDP. Accelerating

    to 8 percent growth will require a co mmensurate increase in investment. Growth

    rates of this magnitude in east Asia were associated with investment rates ranging

    from 36-38 percent. While it can be argued that there was overinvestment in East

    Asia, especially in recent years, it is unlikely t hat India can accelerate to 8 percent

    growth unless it can raise the rate of investment to around 29 -30 percent of GDP.

    Part of the increase can be financed by increasing foreign direct investment, but

    even if foreign direct investment increases from the p resent level of 0.5 percent of

    GDP to 2.0 percent -- an optimistic but not impossible target -- domestic savingswould still have to increase by at least 5 percentage points of GDP.

    Private savings have been buoyant in the post-reform period, but public savings

    have declined steadily. This trend needs to be reversed. Both the central

    government and the state governments would have to take a number of hard

    decisions to bring about improvements in their respective spheres.

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    Total tax revenues of the center were 9.7 percent of GDP in 1990-91. They declined

    to only 8.8 percent in 2000-01, whereas they should have increased by at least two

    percentage points. Tax reforms involving lowering of tax rates, broadening the tax

    base and reducing loopholes were expected to raise the tax ratio and they did

    succeed in the case of personal and corporate income taxation but indirect taxes

    have fallen as a percentage of GDP. This was expected in the case of customs

    duties, which were deliberately reduced as part of trade refo rms, but this decline

    should have been offset by improving collections from domestic indirect taxes on

    goods and by extending indirect taxation to services. This part of the revenue

    strategy has not worked as expected. The Advisory Group on Tax Policy for the

    Tenth Plan recently made a number of proposals for modernizing tax administration,

    including especially computerization, reducing the degree of exemption for small

    scale units and integration of services taxation with taxation of goods These

    recommendations need to be implemented urgently.

    There is also room to reduce central government subsidies, which are known to be

    highly distortionary and poorly targeted (e.g. subsidies on food and fertilizers), and to

    introduce rational user charges for services such as passenger traffic on the

    railways, the postal system and university education.Overstaffing was recently

    estimated at 30 percent and downsizing would help reduce expenditure.

    State governments also need to take corrective steps. Sales tax systems need to be

    modernized in most states. Agricultural income tax is constitutionally assigned to the

    states, but no state has attempted to tax agricultural income. Land revenue is a

    traditional tax based on landholding, but it has been generally neglected and

    abolished in many states. Urban property taxation could yield much larger resources

    for municipal governments if suitably modernized, but this tax base has also been

    generally neglected. State governments suffer from very large losses in state

    electricity boards (about 1 percent of GDP) and substantial losses in urban water

    supply, state road transport corporations and in managing irrigation systems.

    Overstaffing is greater in the states than in the center.

    I us rial Poli yIndustrial policy has seen the greatest change, with most central government

    industrial controls being dismantled. The list of industries reserved solely for the

    public sector -- which used to cover 18 industries, including iron and steel, heavy

    plant and machinery, telecommunications and telecom equipment, minerals, oil,

    mining, air transport services and electricity generation and distribution -- has been

    drastically reduced to three: defense aircrafts and warshi ps, atomic energy

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    generation, and railway transport.Industrial licensing by the central government has

    been almost abolished except for a few hazardous and environmentally sensitive

    industries. The requirement that investments by large industrial houses ne eded a

    separate clearance under the Monopolies and Restrictive Trade Practices Act to

    discourage the concentration of economic power was abolished and the act itself is

    to be replaced by a new competition law which will attempt to regulate

    anticompetitive behavior in other ways.

    The main area where action has been inadequate relates to the long standing policy

    of reserving production of certain items for the small -scale sector. About 800 items

    were covered by this policy since the late 1970s, which meant t hat investment in

    plant and machinery in any individual unit producing these items could not exceed $

    250,000. Many of the reserved items such as garments, shoes, and toys had high

    export potential and the failure to permit development of production units with more

    modern equipment and a larger scale of production severely restricted Indias export

    competitiveness. The Report of the Committee on Small Scale Enterprises (1997)

    and the Report of the Prime Ministers Economic Advisory Council (2001) had both

    pointed to the remarkable success of China in penetrating world markets in these

    areas and stimulating rapid growth of employment in manufacturing. Both reports

    recommended that the policy of reservation should be abolished and other measures

    adopted to help small-scale industry. While such a radical change in policy was

    unacceptable, some policy changes have been made very recently: fourteen items

    were removed from the reserved list in 2001 and another 50 in 2002. The items

    include garments, shoes, toys and auto components, all of which are potentially

    important for exports. In addition, the investment ceiling for certain items was

    increased to $1 million. However, these changes are very recent and it will take

    some years before they are reflected in economic performance.

    Industrial liberalization by the central government needs to be accompanied by

    supporting action by state governments. Private investors require many permissions

    from state governments to start operations, like connections to electricity and water

    supply and environmental clearances. They must also interact with the state

    bureaucracy in the course of day-to-day operations because of laws governing

    pollution, sanitation, workers welfare and safety, and such. Complaints of delays,corruption and harassment arising from these interactions are common. Some states

    have taken initiatives to ease these interactions, but much more needs to be done.

    Tra e Poli y

    Trade policy reform has also made progress, though the pace has been slower than

    in industrial liberalization. Before the reforms, trade policy was characterized by high

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    tariffs and pervasive import restrictions. Imports of manufactured consumer goods

    were completely banned. For capital goods, raw materials and intermediates,

    certain lists of goods were freely importable, but for most items where domestic

    substitutes were being produced, imports were only possible with import licenses.

    The criteria for issue of licenses were nontransparent, delays were endemic and

    corruption unavoidable. The e conomic reforms sought to phase out import licensing

    and also to reduce import duties.

    Import licensing was abolished relatively early for capital goods and intermediates

    which became freely importable in 1993, simultaneously with the switch to a flexible

    exchange rate regime. Import licensing had been traditionally defended on the

    grounds that it was necessary to manage the balance of payments, but the shift to a

    flexible exchange rate enabled the government to argue that any balance of

    payments impact would be effectively dealt with through exchange rate flexibility.

    Removing quantitative restrictions on imports of capital goods and intermediates wasrelatively easy, because the number of domestic producers was small and Indian

    industry welcomed the move as making it more competitive. It was much more

    difficult in the case of final consumer goods because the number of domestic

    producers affected was very large (partly because much of the consumer goods

    industry had been reserved for small scale production) . Quantitative restrictions on

    imports of manufactured consumer goods and agricultural products were finally

    removed on April 1, 2001, almost exactly ten years after the reforms began, and that

    in part because of a ruling by a World Trade Organization disp ute panel on a

    complaint brought by the United States.

    Progress in reducing tariff protection, the second element in the trade strategy, has

    been even slower and not always steady. As shown in Table 3, the weighted

    average import duty rate declined from the very high level of 72.5 percent in 1991 -92

    to 24.6 percent in 1996-97. However, the average tariff rate then increased by more

    than 10 percentage points in the next four years. 1 In February 2002, the government

    signaled a return to reducing tariff prote ction. The peak duty rate was reduced to 30

    percent, a number of duty rates at the higher end of the existing structure were

    lowered, while many low end duties were raised to 5 percent. The net result is that

    the weighted average duty rate is 29 percent i n 2002-03.

    1 The sharp increase in average duty rates in 2000 01 reflects th imposition of tariff on many agricultural

    commodities in anticipation of the removal of quantitative restrictions. Since these items were protected by

    quantitative restrictions in the mid-1990s, the combined protection provided by tariffs and quantitative

    restrictions was probably higherin the mid-1990s.

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    Although Indias tariff levels are significantly lower than in 1991, they remain among

    the highest in the developing world because most other developing countries have

    also reduced tariffs in this period. The weighted average import duty in Chi na and

    southeast Asia is currently about half the Indian level. The government has

    announced that average tariffs will be reduced to around 15 percent by 2004, but

    even if this is implemented, tariffs in India will be much higher than in China which

    has committed to reduce weighted average duties to about 9 percent by 2005 as a

    condition for admission to the World Trade Organization.

    Foreig Dire I ves me

    Liberalizing foreign direct investment was another important part of Indias reforms,

    driven by the belief that this would increase the total volume of investment in the

    economy, improve production technology, and increase access to world markets.

    The policy now allows 100 percent foreign ownership in a large number of industries

    and majority ownership in all except banks, insurance companies,

    telecommunications and airlines. Procedures for obtaining permission were greatly

    simplified by listing industries that are eligible for automatic approval up to specified

    levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign

    investors investing within these limits only need to register with the Reserve Bank of

    India. For investments in other industries, or for a higher share of equity than is

    automatically permitted in listed industr ies, applications are considered by a Foreign

    Investment Promotion Board that has established a track record of speedy

    decisions. In 1993, foreign institutional investors were allowed to purchase shares of

    listed Indian companies in the stock market, opening a window for portfolio

    investment in existing companies.

    These reforms have created a very different competitive environment for Indias

    industry than existed in 1991, which has led to significant changes. Indian

    companies have upgraded their technology and expanded to more efficient scales

    of production. They have also restructured through mergers and acquisitions and

    refocused their activities to concentrate on areas of competence. New dynamic

    firms have displaced older and less dynamic ones: of the top 100 companies

    ranked by market capitalization in 1991, about half are no longer in this group.Foreign investment inflows increased from virtually nothing in 1991 to about 0.5

    percent of GDP. Although this figure remains much below the levels of foreig n

    direct investment in many emerging market countries (not to mention 4 percent of

    GDP in China), the change from the pre-reform situation is impressive. The

    presence of foreign-owned firms and their products in the domestic market is

    evident and has added greatly to the pressure to improve quality.

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    One reason why export performance has been modest is the slow progress in

    lowering import duties that make India a high cost producer and therefore less

    attractive as a base for export production. Exporters have long been able to import

    inputs needed for exports at zero duty, but the complex procedure for obtaining the

    necessary duty-free import licenses typically involves high transactions cost and

    delays. High levels of protection compared with other countries also explains why

    foreign direct investment in India has been much more oriented to the protected

    domestic market, rather than using India as a base for exports. However, high tariffs

    are only part of the explanation for poor export performance. The reser vation of

    many potentially exportable items for production in the small scale sector (which has

    only recently been relaxed) was also a relevant factor. The poor quality of Indias

    infrastructure compared with infrastructure in east and southeast Asia, whic h is

    discussed later in this paper, is yet another.

    Inflexibility of the labor market is a major factor reducing Indias competitiveness inexports and also reducing industrial productivity generally (Planning Commission,

    2001). Any firm wishing to close down a plant, or to retrench labor in any unit

    employing more than 100 workers, can only do so with the permission of the state

    government, and this permission is rarely granted. These provisions discourage

    employment and are especially onerous for labor -intensive sectors. The increased

    competition in the goods market has made labor more willing to take reasonable

    positions, because lack of flexibility only leads to firms losing market share.

    However, the legal provisions clearly remain much more onerous tha n in other

    countries. This is important area of reform that has yet to be addressed. The lack ofany system of unemployment insurance makes it difficult to push for major changes

    in labor flexibility unless a suitable contributory system that is financiall y viable can

    be put in place. The government has recently announced its intention to amend the

    law and raise the level of employment above which firms have to seek permission for

    retrenchment from 100 workers at present to 1000 while simultaneously increas ing

    the scale of retrenchment compensation. However, the amendment has yet to be

    enacted.

    These gaps in the reforms provide a possible explanation for the slowdown in

    industrial growth in the second half of the 1990s. It can be argued that the initial

    relaxation of controls led to an investment boom, but this could have been sustained

    only if industrial investment had been oriented to tapping export markets, as was the

    case in east Asia. As it happened, Indias industrial and trade reforms were not

    strong enough, nor adequately supported by infrastructure and labor market reforms

    to generate such a thrust. The one area which has shown robust growth through the

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    1990s with a strong export orientation is software development and various new

    types of services enabled by information technology like medical transcription,

    backup accounting, and customer related services. Export earnings in this area have

    grown from $100 million in 1990 -91 to over $6 billion in 2000-01 and are expected to

    continue to grow at 20 to 30 percent per year. Indias success in this area is one of

    the most visible achievements of trade policy reforms which allow access to imports

    and technology at exceptionally low rates of duty, and also of the fact that exports in

    this area depend primarily on telecommunications infrastructure, which has improved

    considerably in the post-reforms period.

    I fras ructure Developme t

    Rapid growth in a globalized environment requires a well -functioning infrastructure

    including especially electric power, road and rail connectivity, telecommunications,

    air transport, and efficient ports. India lags behind east and southeast Asia in these

    areas. These services were traditionally provided by public sector monopolies but

    since the investment needed to expand capacity and improve quality could not be

    mobilized by the public sector, these sectors were opened to private investment,

    including foreign investment. However, the difficulty in creating an environment

    which would make it possible for private investors to enter on terms that would

    appear reasonable to consumers, while providing an adequate risk - return profile to

    investors, was greatly underestimated. Many false starts and disappointments have

    resulted.

    The greatest disappointment has been in the electric power sector, which was the

    first area opened for private investment. Private investors were expected to produce

    electricity for sale to the State Electricity Boards, which would control of transmission

    and distribution. However, the State Electricity Boards were financially very weak,

    partly because electricity tariffs for many categories of consumers were too low and

    also because very large amounts of power were lost in transmission and distribution.

    This loss, which should be between 10 to 15 percent on technical grounds

    (depending on the extent of the rural network), varies from 35 to 50 percent. The

    difference reflects theft of electricity, usually with the connivance of the distribution

    staff. Private investors, fearing nonpayment by the State Electricity Boards insistedon arrangements which guaranteed purchase of electricity by state governments

    backed by additional guarantees fro m the central government. These arrangements

    attracted criticism because of controversies about the reasonableness of the tariffs

    demanded by private sector power producers. Although a large number of proposals

    for private sector projects amounting to about 80 percent of existing generation

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    capacity were initiated, very few reached financial closure and some of those which

    were implemented ran into trouble subsequently.

    The flaws in the policy have now been recognized and a more comprehensive

    reform is being attempted by several state governments. Independent statutory

    regulators have been established to set tariffs in a manner that would be perceivedto be fair to both consumers and producers. Several states are trying to privatize

    distribution in the hope that this will overcome the corruption which leads to the

    enormous distribution losses. However, these reforms are not easy to implement.

    Rationalization of power tariffs is likely to be resisted by consumers long used to

    subsidized power, even though th e quality of the power provided in the pre -reform

    situation was very poor. The establishment of regulatory authorities that are

    competent and credible takes time. Private investors may not be able to enforce

    collection of amounts due or to disconnect suppl y for non-payment without adequate

    backing by the police. For all these reasons, private investors perceive high risks inthe early stages and therefore demand terms that imply very high rates of return.

    Finally, labor unions are opposed to privatization o f distribution.

    These problems are formidable and many state governments now realize that a

    great deal of preliminary work is needed before privatization can be successfully

    implemented. i Some of the initial steps, like tariff rationalization and enforci ng

    penalties for non-payment of dues and for theft of power, are perhaps best

    implemented within the existing public sector framework so that these features,

    which are essential for viability of the power sector, are not attributed solely to

    privatization. If the efforts now being made in half a dozen states succeed, it could

    lead to a visible improvement within a few years.

    The results in telecommunications have been much better and this is an important

    factor underlying Indias success in information tec hnology. There was a false start

    initially because private investors offered excessively high license fees in bidding for

    licenses which they could not sustain, which led to a protracted and controversial

    renegotiation of terms. Since then, the policy appe ars to be working satisfactorily.

    Several private sector service providers of both fixed line and cellular services, many

    in partnership with foreign investors, are now operating and competing with the pre -existing public sector supplier. Teledensity, whi ch had doubled from 0.3 lines per 100

    population in 1981 to 0.6 in 1991, increased sevenfold in the next ten years to reach

    4.4 in 2002. Waiting periods for telephone connections have shrunk dramatically.

    Telephone rates were heavily distorted earlier with very high long distance charges

    cross-subsidizing local calls and covering inefficiencies in operation. They have now

    been rebalanced by the regulatory authority, leading to a reduction of 30 percent in

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    long distance charges. Interestingly, the erstwhile public sector monopoly supplier

    has aggressively reduced prices in a bid to retain market share.

    Civil aviation and ports are two other areas where reforms appear to be succeeding,

    though much remains to be done. Two private sector domestic airlines, whic h began

    operations after the reforms, now have more than half the market for domestic airtravel. However, proposals to attract private investment to upgrade the major airports

    at Mumbai and Delhi have yet to make visible progress. In the case of ports, 17

    private sector projects involving port handling capacity of 60 million tons, about 20

    percent of the total capacity at present, are being implemented. Some of the new

    private sector port facilities have set high standards of productivity.

    The railways are a potentially important means of freight transportation but this area

    is untouched by reforms as yet. The sector suffers from severe financial constraints,

    partly due to a politically determined fare structure in which freight rates have been

    set excessively high to subsidize passenger fares, and partly because government

    ownership has led to wasteful operating practices. Excess staff is currently estimated

    at around 25 percent. Resources are typically spread thinly to respond to political

    demands for new passenger trains at the cost of investments that would strengthen

    the capacity of the railways as a freight carrier. The Expert Group on Indian Railways

    (2002) recently submitted a comprehensive program of reform converting the

    railways from a departmentally run government enterprise to a corporation, with a

    regulatory authority fixing the fares in a rational manner. No decisions have been

    announced as yet on these recommendations.

    Fi a cial SectorReform

    Indias reform program included wide-ranging reforms in the banking system and the

    capital markets relatively early in the process with reforms in insurance introduced at

    a later stage.

    Banking sector reforms included: (a) measures for liberalization, like dismantling the

    complex system of interest rate controls, eliminating prior approval of the Reserve

    Bank of India for large loans, and reducing the statutory requirements to invest in

    government securities; (b) measures designed to increase financial sou ndness, likeintroducing capital adequacy requirements and other prudential norms for banks and

    strengthening banking supervision; (c) measures for increasing competition like more

    liberal licensing of private banks and freer expansion by foreign banks. Th ese steps

    have produced some positive outcomes. There has been a sharp reduction in the

    share of non-performing assets in the portfolio and more than 90 percent of the

    banks now meet the new capital adequacy standards. However, these figures may

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    overstate the improvement because domestic standards for classifying assets as

    non-performing are less stringent than international standards.

    Indias banking reforms differ from those in other developing countries in one

    important respect and that is the policy towards public sector banks which dominate

    the banking system. The government has announced its intention to reduce its equityshare to 33-1/3 percent, but this is to be done while retaining government control.

    Improvements in the efficiency of the banking system will therefore depend on the

    ability to increase the efficiency of public sector banks.

    Skeptics doubt whether government control can be made consistent with efficient

    commercial banking because bank managers are bound to respond to political

    directions if their career advancement depends upon the government. Even if the

    government does not interfere directly in credit decisions, government ownership

    means managers of public sector banks are held to standards of accountability akin

    to civil servants, which tend to emphasize compliance with rules and procedures and

    therefore discourage innovative decision making. Regulatory control is also difficult

    to exercise. The unstated presumption that public sector banks cannot be shut down

    means that public sector banks that perform poorly are regularly recapitalized rather

    than weeded out. This obviously weakens market discipline, since more efficient

    banks are not able to expand market share.

    If privatization is not politically feasible, it is at least neces sary to consider

    intermediate steps which could increase efficiency within a public sector framework.

    These include shifting effective control from the government to the boards of the

    banks including especially the power to appoint the Chairman and Executi ve

    Directors which is at present with the government; removing civil servants and

    representatives of the Reserve Bank of India from these board; implementing a

    prompt corrective action framework which would automatically trigger regulatory

    action limiting a banks expansion capability if certain trigger points of financial

    soundness are breeched; and finally acceptance of closure of insolvent public sector

    banks (with appropriate protection for small depositors). Unless some initiatives

    along these lines are taken, it is highly unlikely that public sector banks can rise to

    the levels of efficiency needed to support rapid growth.

    Reforms in the stock market were accelerated by a stock market scam in 1992 that

    revealed serious weaknesses in the regulatory mechanism. Reforms implemented

    include establishment of a statutory regulator; promulgation of rules and regulations

    governing various types of participants in the capital market and also activities like

    insider trading and takeover bids; introduction of elec tronic trading to improve

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    transparency in establishing prices; and dematerialization of shares to eliminate the

    need for physical movement and storage of paper securities. Effective regulation of

    stock markets requires the development of institutional expe rtise, which necessarily

    requires time, but a good start has been made and Indias stock market is much

    better regulated today than in the past. This is to some extent reflected in the fact

    that foreign institutional investors have invested a cumulative $2 1 billion in Indian

    stocks since 1993, when this avenue for investment was opened.

    An important recent reform is the withdrawal of the special privileges enjoyed by the

    Unit Trust of India, a public sector mutual fund which was the dominant mutual fund

    investment vehicle when the reforms began. Although the Unit Trust did not enjoy a

    government guarantee, it was widely perceived as having one because its top

    management was appointed by the government. The Trust had to be bailed out once

    in 1998, when its net asset value fell below the declared redemption price of the

    units, and again in 2001 when the problem recurred. It has now been decided that infuture investors in the Unit Trust of India will bear the full risk of any loss in capital

    value. This removes a major distortion in the capital market, in which one of the

    investment schemes was seen as having a preferred position.

    The insurance sector (including pension schemes), was a public sector monopoly at

    the start of the reforms. The need to open the sec tor to private insurance companies

    was recommended by an expert committee (the Malhotra Committee) in 1994, but

    there was strong political resistance. It was only in 2000 that the law was finally

    amended to allow private sector insurance companies, with f oreign equity allowed up

    to 26 percent, to enter the field. An independent Insurance Development and

    Regulatory Authority has now been established and ten new life insurance

    companies and six general insurance companies, many with well -known

    international insurance companies as partners, have started operations. The

    development of an active insurance and pensions industry offering attractive

    products tailored to different types of requirements could stimulate long term savings

    and add depth to the capital markets. However, these benefits will only become

    evident over time.

    Social SectorDevelopme t i Health a E ucation

    Indias social indicators at the start of the reforms in 1991 lagged behind the levels

    achieved in southeast Asia 20 years earlier, when t hose countries started to grow

    rapidly .For example, Indias adult literacy rate in 1991 was 52 percent, compared

    with 57 percent in Indonesia and 79 percent in Thailand in 1971. The gap in social

    development needed to be closed, not only to improve the we lfare of the poor and

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    increase their income earning capacity, but also to create the preconditions for rapid

    economic growth. While the logic of economic reforms required a withdrawal of the

    state from areas in which the private sector could do the job jus t as well, if not better,

    it also required an expansion of public sector support for social sector development.

    Much of the debate in this area has focused on what has happened to expenditureon social sector development in the post -reform period. Central government

    expenditure on towards social services and rural development increased from 7.6

    percent of total expenditure in 1990 -91 to 10.2 percent in 2000-01. As a percentage

    of GDP, these expenditures show a dip in the first two years of the reforms, when

    fiscal stabilization compulsions were dominant, but there is a modest increase

    thereafter. However, expenditure trends in the states, which account for 80 percent

    of total expenditures in this area, show a definite decline as a percentage of GDP in

    the post-reforms period. Taking central and state expenditures together, social

    sector expenditure has remained more or less constant as a percentage of GDP.

    China

    After three decades of reform, China's economy experienced one of the world's

    biggest booms. Agriculture and light industry have largely been privatized, while the

    state still retains control over some heavy industries. Despite the dominance of state

    ownership in finance, telecommunications, petroleum and other important sectors of

    the economy, private entrepreneurs continue to expand into sectors formerly

    reserved for public enterprise. Prices have also been liberalized

    Industry

    In the pre-reform period, industry was largely stagnant and the socialist system

    presented few incentives for improvements in quality and productivity. With the

    introduction of the dual price system and greater autonomy for enterprise managers,

    productivity increased greatly in the early 1980s. Foreign enterprises and newly

    formed Township and Village Enterprises, owned by local government and often de

    facto private firms, competed successfully with state-owned enterprises. By the

    1990s, large-scale privatizations reduced the market share of both the Township and

    Village Enterprises and state-owned enterprises and increased the private sector's

    market share. The state sector's share of industrial output dropped from 81 percent

    in 1980 to 15 percent in 2005. Foreign capital controls much of Chinese indust ry and

    plays an important role.

    From virtually an industrial backwater in 1978, China is now the world's biggest

    producer of concrete, steel, ships and textiles, and has the world's largest

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    automobile market. Chinese steel output quadrupled between 1980 and 2000, and

    from 2000 to 2006 rose from 128.5 million tons to 418.8 million tons, one -third of

    global production. Labor productivity at some Chinese steel firms exceeds Western

    productivity. From 1975 to 1992, China's automobile production rose from 139,800 to

    1.1 million, rising to 9.35 million in 2008.Light industries such as textiles saw an evengreater increase, due to reduced government interference. Chinese textile exports

    increased from 4.6% of world exports in 1980 to 24.1% in 2005. Textile output

    increased 18-fold over the same period.

    This increase in production is largely the result of the removal of barriers to entry and

    increased competition; the number of industrial firms rose from 377,300 in 1980 to

    nearly 8 million in 1990 and 1996; the 2