Crouching Tiger Hidden Dragon

8/8/2019 Crouching Tiger Hidden Dragon

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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 corporations, 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, government 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 substantial 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, urban 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

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