Role of India and China in the Global Economy

Role of India and China in the Global Economy

By R.Kannan

International Conference on Asia - 14^th March 2014

The Asia’s role in Global Economic Development is becoming significant after the recent economic and banking crisis in the world. The global crisis had an impact on the economic performance of all the economies in the world but the countries from Asia were still able to report growth rates which were higher than the growth rates reported in other parts of the world. Asia contributes to more than 50% of incremental economic growth in the world.

Within Asia, India and China continue to have a major contribution to the economic growth. The sheer size of the population of both countries and the continued demand for products and services in two countries continue to sustain the economic growth today and this will be the trend in future.

India and China were playing a major role in the Global Economy before the rise of UK. After the dominance of UK, USA Started playing a major role in the global economic development. After the World War II, Japan was growing very fast and then we saw the rise of countries from ASEAN. From 1980 onwards, the economic growth in China started gaining momentum and the country is still able to sustain the high growth today. From 2001, we heard the concept of BRIC and terms like VISTA, CIVET, MENA and MINT and how they can contribute to the global growth.

India and China are in the process of regaining their prominence in the world and China is already leading the world in terms of Forex reserves with a forex reserves of more than 3.8 trillion dollars. The road to regaining the competitiveness is strewn with both opportunities and risks. To achieve the potential today, both countries have to carefully calibrate their movements in the Economic, Political, Social, Cultural, Technological, Security and Environmental aspects.

India and China have to work very closely in all these areas to realise the full potential of Asia.

Economy. Indian Economy after reporting a good growth for few years saw the rate of growth decline due to both internal and external factors. The potential for growth is still at 8% and the solutions are available to achieve  8% growth. What is required is the consensus building among the various stake holders in adoption of the policies for achieving the growth. The sectors like manufacturing and agriculture have to be given more importance, going forward. The proposed Industrial corridor projects in India will provide a momentum to the growth and there is an increased interest from various countries in the world to participate in these projects and FDI is likely to come through this route to support these projects. It should be possible to increase the contribution of industry to country’s GDP to 25% from the present level of 15% by increasing the alliances with countries like Japan, US, China, UK, etc in the world.

There were concerns regarding the fiscal deficit and current account deficit and it has been proven in the recent past that by adopting innovative policies it should be possible to bring down the deficit. India is inherently strong due to its large informal sector which was one of the main reasons for India weathering the storm during the crisis. This sector can play a major role in sustaining the growth rate and creating employment opportunities in the Indian Economy.

India has been recognized today as an IT Hub, Pharma Hub, R&D Hub, Automotive Hub, Diamond and Jewellery Hub, Leather Hub and global companies in these areas have increased their interest in India and new units are being set up in these areas. Global sourcing companies also have established their offices in India other than China. These sectors in India will continue to do well  going forward. 

China’s continued Economic growth has helped to gain the global leadership role today and the country has trade balance with many of the countries in the world.  The focus on creating large industries with government and bank financing support enabled Chinese companies to emerge as the largest companies in the world in the sectors , they operate today. So far the economic growth was driven by the strategy of exports as well as inflow of FDI . After the recent crisis and reduced demand for exports, there was a need for rebalancing the economy. The need to focus on creating internal demand had become paramount. In the recent past, there were also concerns about the rising inflation and interest rates.

China has to continue the engagement with other counties in the world and apart from focussing on exports , there is also a need to look at reducing the trade balance with other countries in the world. If Yuan , continues to rise, it will erode the competitiveness of exports. The Yuan level could be maintained only by reducing the trade balance with other countries. To ensure the continued availability of resources, the country already has acquired mines and industrial  production facilities  in many parts of the world. China is the largest foreign investor in US treasury bonds today and because of this reason, there is a need to ensure the stability and strength of the dollar. China’s efforts to make Yuan as one of the major currencies for trading will take shape in a few years and Dollar will continue to have its dominance for many more years to come.

China’s economic growth was mainly driven by focus on Industrial growth and it has emerged as the power house for manufacturing in the world today. Starting from a strategy of producing low cost goods , there is now a movement towards manufacturing of high quality , high value goods in the manufacturing sector. The country has to liberalise FDI and strengthen the Trade and Patent laws to ensure a benign environment for foreign investors. Going forward, there should be an increased focus on developing the domestic market and increasing the purchasing power of workers  in the country.

Society . India is a multicultural society and there is a lot of diversity in Customs, habits and Income levels. In the past few years, the society had gone through a big transformation and the consumers are able to exercise their choice for the products ,they prefer. The liberalisation of economy has created hyper competition in many industries. As per the latest classification, the Indian consumer is categorised into twelve income groups and there is a constant upward movement of people from one level to other level. There is a free movement of labour from one city to another city and there is a lot of internal migration whereby people from rural areas move to urban areas. The mobile technology revolution in the country has helped even Semi urban and rural areas to look at aspects relating to urbanisation and the government’s schemes on providing employment for minimum number of days work in rural areas have created employment opportunities for people. The services as a sector is  also developing well in rural areas . There is a movement away from Joint family system to nuclear family system. These trends create a huge demand for consumer products of various categories at different price points. This has attracted the attention of global marketers to India.

In China, the demand for high end products had seen a big rise in demand over the years. The purchasing power of people in urban areas has gone up significantly.  System of providing work  permits to workers to work in a city has restricted the movement of labour and depressed the wages in the manufacturing sector. Many of the workers at the lower level come to work from far away distances. But the recent trend in increase in wage levels, if it continues,  will create different income segments and create new class of customer segments for the products. This will also result in consumer boom, which would partly offset the reduced demand for products from exports. The government has taken measures to increase the population and now people are allowed to have more than one child in a family.

The trends witnessed above , will help to create new products for the local markets , which could be exported at a later stage. 

Political and Security issues. India being the largest democracy in the world, the decisions at the government level have to be  taken after taking the consensus of various stake holders in the Economy. There are forces which act against the pro economic growth policies because of which the economic momentum slows down. The country has an approach to keep  very cordial relations with others and by itself does not take initiatives which challenges the sovereignty of other nations. India is part of various Economic Alliance forums in the world and considering its contribution , there is an effort to  obtain a permanent  seat in the UN Security Council .

The country helps the adjacent countries in aspects relating to technology and training aspects. In the last few years, there were lot of internal issues relating to terrorism in various pockets of the country which are creating concerns on maintaining a peaceful atmosphere. There is an increased interest from most of the countries in the world to partner with India in all the growth initiatives and there is a foreign business delegation  visiting India every week to identify business  opportunities for doing business. India has moved  ahead in various reforms including passing of RTI act and empowering the Panchayat Institutions in the country. In line with the increase in economic prosperity, the country has also increased the defence budget. Multilateral institutions are also supportive of India’s growth initiatives and after the recent geo political issues in the Asian region, Japan and US had shown increased interest in enhancing the tie up with India. India has joined the nuclear club now and this should help to increase the power generation from this source. China has emerged as the leading partner for India in trade and  runs a huge trade surplus with India today.

The present government in China will last for 10 years and they had already drawn a plan to maintain the economic growth of China. Since China has gained leading economic status in the world today  , in line with the economic status, it is trying to match the political status by increasing its influence on many countries in the world. In terms of  its growth ambitions, it is trying to achieve this by acquiring the natural resources from regions like Africa and has allowed its leading companies to take over the ailing MNC’s from the developed world. Its economic engagement with many countries are helping China to maintain the growth rate. Since its objective is to increase its political influence, it is facing opposition from the entrenched players in the world. The present form of merit based Government system is likely to continue in China which is good to maintain its economic growth. To gain political influence, China is also giving military aid to countries, low interest loans for equipment purchase from China and various other incentives to obtain political support. But the recent moves on Territorial disputes , have created concerns among US and neighbouring countries.

Going forward, both the countries should use the political dispensation to increase the economic engagement with other countries in Asia including Myanmar , Vietnam, Malaysia , Singapore, etc. The disputes with the neighbouring countries  should be brought to an end by announcing ceasefire .  Both countries in alliance with Japan should engage in consultation on the matters to be addressed relating to  multilateral institutions as well as developing the Asia as the Economic Hub of the world. The political influence over other countries should be exercised through increased economic engagement rather than seeking territorial advances. The recent past indicates that as countries grow in economic might, the number of wars saw a decline. Most of the time, the countries take a posture to threaten other countries without intention to go for a war. Instead of this strategy, the best to way to achieve the political influence is through adopting a strategy of win win and identify action plans for mutual cooperation. There should also be consultations on addressing the internal  terrorism issues and sharing the best practices between the countries in addressing this issue.

Technology. The recent developments in communication and mobile technologies had a significant impact on most of the economies and how the business is being done. Both India and China have benefited a lot from the mobile technologies and the social / financial inclusion  could be achieved through adopting more applications of these technologies.

In  other areas, there is still  lot of gap in availability of technologies which is being bridged through creating strategic alliances with the leading players in the world. The leading companies in the world from various sectors are already present in both countries and all of them want to increase their engagement.

India has been  successful in many of the space initiatives and is in the process of developing a robust domestic Defence manufacturing base. China is already advanced in the technologies relating to warfare and it is in the process of manufacturing its own Air craft for  commercial purposes.  Both countries  have their own home grown labour intensive technologies which are in  use across both the countries. There is an increased need felt for creating patents for the local products and systems are being  put in place to create more patents.

The low cost labour intensive  technologies in both countries could be transferred to countries where there is a strategy to promote SME’s.

Environmental issues. There is a pressure on both countries to reduce the pollution levels but on  per capita basis, the levels are still low. Considering the need for further economic growth and increased level of manufacturing , it would be impossible to meet the global standards in the immediate future. Few more years are required for China and India to move towards to the global standards. In the meanwhile, we have to build a consensus on the need for pursuing the manufacturing strategy and this could be done with the help of emerging  environment friendly technologies.

In the coming years, opportunities and Challenges are many for the countries from Asia. India and China are well poised to capitalise on these opportunities. India and China have  to co-operate in all the endeavours as partners in progress and the focus of partnership should be based on economic fundamentals and the influence of political considerations should become secondary, while realising the opportunities. India, China and Japan can take a joint leadership in realising the full potential of Asia’s Economic Growth  and let us hope Economic collaboration will take precedence over all other collaborations between these countries.

Thank you.