Thursday, 21 June 2012

AN OVER VIEW OF ECONOMIC REFORMS IN INDIA AND CHINA


            
                                                                                    -Dr. S. Vijay Kumar

           India and China are the two largest countries in the world in terms of population. They are also the fastest growing economies in the world. India and China together are home to the world’s largest pools of skilled human resources, and there is a general consensus that these two countries will continue to be the engines of global economic growth in the 21st century. Both China and India have also consciously deepened their economic relations within Asia, as is clear from their dialogue partnership with ASEAN and signing of framework agreements for closer economic cooperation with it in 2002 and 2003 respectively. Bilateral trade and investment between the two countries have grown rapidly over the past few years indicating the presence of a vast potential for further growth. Substantial complementarities characterize the economic structures of China and India. China is emerging as a significant link in the manufacturing chain of the world, while India’s potential for the knowledge-based services and manufacturing is being noticed. These complementary strengths of the two economies can be further exploited for mutual benefit. Their geographical proximity, similar cultural values, and large size of their economies can facilitate exploitation of these synergies. They can also pool their resources for improving their international competitiveness, and can fruitfully share their development experiences and cooperate in the critical area of energy security. India, China economic cooperation has the potential to benefit nearly two fifths of humanity with spill over effects on the rest of the world. This cooperation could also be instrumental in promoting broader regional economic integration in Asia. Finally, the importance of this cooperation for achieving their developmental objectives in WTO and other international negotiations cannot be overemphasized.   India and China can be a strong voice to make the Doha Round a truly development round. This paper attempts to review the respective economic policy frameworks in two countries and their economic reforms and performance.

Reforms and Economic Development in China:
China initiated economic reforms including the focus on outwardorientation in 1978.  The establishment of the socialist market economy was reiterated as the goal of reform in the early 1990s. As a part of the reforms, the nature of intervention has shifted progressively from microeconomic regulation to macroeconomic management through fiscal and monetary policies. Market forces are assigned an increasing role in allocating resources and in determination of prices of most commodities and services. The ownership structure of Chinese enterprises has been diversified from state and state-holding enterprises to cover joint stock enterprises, foreign investment enterprises and private enterprises. New laws and regulations governing foreign economic relations have been established including the Foreign Trade Law, the Law on Foreign Investment Enterprises, and the Foreign Exchange Management Regulations, etc. Having recently acceded to WTO, and as per its WTO commitments, China has reduced its tariff rates considerably and bound in different lines of merchandise trade and eliminated most non-tariff measures. From January 1st 2004 the average tariff rates have come down to 10.4 per cent, with the average rate for industrial products being 9.5 per cent and for agricultural products at 15.6 per cent respectively. All non-tariff measures are expected to be eliminated by 2005. Export subsidies for farm products have been phased out, and the domestic support is at lower level than for other developing countries. In the area of trade in services, China has fulfilled its WTO accession commitments to a more liberal regime and has opened certain sectors (such as insurance and tourism) for foreign investors or service providers. China has encouraged foreign direct investment. Bilateral investment protection agreements have been signed with 89 countries. Introduction of foreign capital, technology, talents and managerial expertise has not only helped upgrading of China’s industrial structure and development of modern service industry, but also greatly improved economic efficiency and enhanced the international competitiveness of its products.

Since 1st July 1996, foreign enterprises are allowed to settle their foreign exchange transactions at designated banks. Furthermore, with the implementation of the new regulations on foreign exchange management, Chinese currency became convertible in the current account. Therefore, trade related foreign exchange receipts and disbursements are no longer subject to restrictions, the limit on remittances of profit earnings abroad was eliminated, and restriction on the redemption of foreign exchange by citizens for private purpose have been relaxed, though capital account transactions and remittances face some restrictions. Further reforms are underway to improve the determination of RMB exchange rate while maintaining a basic stability. More relaxation of restrictions on capital transactions will also be implemented for achieving the final aim of capital account convertibility in a selective and step-by-step manner to minimize the risks.

Macroeconomic Performance and Future Prospects:
 The Chinese economy, since implementing reforms in the late 1970s has made remarkable progress. The GDP growth rate has averaged 9.4 per cent over the last 20 years.  China now has the distinction of recording the largest GDP in the developing world with a population of 1.3 billion, and is also the fastest growing economy in the world. In 2003, GDP reached US$ 1410 billion, the seventh largest in the world. Per capita GDP has risen from US$ 400 in the early 1990s to more than US$ 1000 in 2003. During 1993 to 2003, foreign trade grew at an annual rate of 15.8 per cent increasing the trade to GDP ratio from 32.6 per cent to 60 per cent and the proportion in global merchandise trade from 2.7 per cent to 5.6 per cent. China’s trade in services amounted to US$ 102 billion in 2003, representing an 18.27 per cent annual growth.  China has consistently been the largest recipient of FDI among developing countries for the past 11 years. Cumulative realized FDI inflows added up to US$ 501.5 billon by the end of  2003. The industrial added-value realized by foreign enterprises accounted for 27 per cent of national industrial added-value in 2003 and FDI accounted for about 8 per cent of the total domestic fixed assets investments in the year or 3.8 per cent of the GDP. Reforms have helped China in improving its balance of payment position. Foreign exchange reserves have risen to US$ 403 billion by the end of 2003. Strict management of foreign debt has kept foreign debt to GDP ratio at a moderate level of 13.7 per cent in 2003. 

The Chinese government has set for itself a target of quadrupling the GDP to US$ 4000 billion, and over US$ 3000 in terms of GDP per capita by 2020. It hopes to build an industrialized economy that is also open with a more vibrant socialist market economic system. In order to improve the sustainability of development, the Chinese Government is emphasizing the need for a balance between urban and rural development, between development of different regions, between economic and social development, between man and nature, and between domestic and external economies. With growing industrialization, the share of industry has gone up to 51 per cent of the Chinese GDP with the primary sector accounting for 15.4 per cent and services accounting for 33.5 per cent. The predominant position of industry is expected to continue while the proportion of services is expected to rise at the cost of the agriculture sector. The recent years have seen a rapid growth of automobile and real estate industries in China which in turn boosted the growth of industries such as the steel, cement, building materials and petrochemical products and accelerated the pace of the industrialization process.

The share of urban population is likely to increase from 39 per cent in 2002 to 55-57 percent by 2020. As a result, there will be a larger number 5 of cities on top of expansion of the existing ones. This is expected to boost investments in public utilities and infrastructure development including electric power, gas, water supply, railways, roads, ports, airports, urban roads, sewage disposal as well as waste disposal. The Chinese Government encourages the entry of foreign enterprises in infrastructure and public utilities giving them similar treatment in terms of investment, financing, taxation, use of land and foreign trade.

Approach to Multilateral Trading System and Regional Economic Integration
As a member of the WTO since 11th Dec. 2001, China is actively participating in multilateral trade negotiations, and is committed to the establishment of a just and fair international economic order. It is aiming to strengthen coordination and cooperation with other countries for a successful completion of the Doha Round. It also stresses the importance of meaningful and effective provisions for special and differential treatment of developing members.

China feels that regional and sub-regional economic cooperation is not only effective in meeting the challenges posed by globalization but also complements the multilateral trade system in promote world trade. To this end, Article Five of the recently amended Foreign Trade Law of the People’s Republic of China includes a clause stating that, in accordance with the principle of equality and reciprocity, the People’s Republic of China shall boost and develop trade relationships with the other countries and regions conclude or participate in regional trade and economic pacts such as customs union agreements and FTA agreements, and join regional economic organizations. The Chinese Government is attempting to expand bilateral trade and economic relationships, as well as to promote bilateral regional economic cooperation  through different channels and in various forms. 

The Closer Economic Partnership Arrangements (CEPA) signed respectively between the Chinese Mainland with Hong Kong SAR and Macao SAR became effective from January 1st 2004. Besides this, the Government has explicitly committed itself to an FTA with ASEAN including an early harvest program, participating actively in the ASEAN+3 cooperative arrangements and promoting economic cooperation between China, Japan and Republic of Korea; and striving to initiate FTA negotiations with South Africa Custom Union (SACU), Chile and Gulf Cooperation Council, as well as carrying out joint studies with Australia and New Zealand on the signing of an FTA agreement; besides continuing to strengthen economic cooperation  with the members  of the Shanghai Cooperation Organization, as well as actively boosting and participating in cooperation in the Asia-Pacific Economic Cooperation (APEC) and the Euro-Asian Conference.

Reforms and Economic Development in India:
India’s development strategy adopted since the early 1950s was based initially on import substitution in the framework of a mixed economy. This had helped establishing a diversified industrial structure and human capital base. However, by the late 1970s there was a growing consensus to switch economic policy away from controls and administered prices. The initial attempts at liberalization in the 1980s combined expansionary fiscal policies with selective reduction in tariff barriers, and a managed floating of the Indian rupee. Since 1991 India has embarked on a far-reaching economic reform program covering trade, investment, monetary and exchange rate policies. Highlights of the economic reforms include, a major liberalization of trade policy covering progressive reduction in the customs tariff rates from peak rates of 150 per cent in 1991/92 to 25 per cent in 2003/04. In January 2004 these were further brought down to 20 per cent for non-agricultural goods. The import licensing system has been dismantled and quantitative restrictions on imports have been phased out two years ahead of the WTO schedule. India has bound over 3298 of the 4701 (i.e. 70 per cent) of her tariff lines (at 6 digit level HS classification). Of these 99 per cent of the bound lines have been bound at rates 40 per cent or lower. The applied rates are much lower than the bound rates for most of the products. The New Industrial Policy of 1991 dismantled the industrial approval or licensing system except when it is required for environmental or security reasons. New sectors such as mining, banking, insurance, telecommunications, construction and management of ports, roads and highways, airlines and defence equipment have been opened to private investment including foreign investment. With a progressive liberalization of FDI policy, foreign ownership of up to 100 per cent is permitted in most of the manufacturing sectors.  A system of automatic approval of FDI proposals fulfilling the conditions laid down has been put into effect. The policy governing outward direct investment (ODI) has also been liberalized during the 1990s. The Guidelines for Indian Joint Ventures and Wholly Owned Subsidiaries Abroad as amended in January 2004 now provide for the automatic approval of ODI proposals up to 100 per cent of the net worth of the investing entity. 

The Indian rupee had already been floating in a basket of currencies. The partial convertibility of rupee in the trade account was announced in the 1992-93 Budget and was subsequently broadened to full convertibility in the current account by August 1994. Progressive liberalization is also being pursued in the capital account now. The Capital Issues Control Act was repealed and the Securities and Exchange Board of India (SEBI) was set up as a watchdog for regulating the functioning of the capital market. SEBI has focused on regulatory reform of the capital market as well as on market modernization. Online trading and dematerialized trading have been introduced. Companies have been allowed to buy back their own shares subject to the regulations laid down by SEBI. In the financial sector, the government announced guidelines in September 1992 for investments by foreign institutional investors (FIIs) in the Indian capital market. FIIs were now allowed to invest in all types of securities traded on the primary and secondary market with full repatriation benefits and without restrictions on either volume of trading or lock-in-period. In January 1993, a package of financial sector reforms was announced that included permission to new private sector banks including foreign joint ventures. The government has also  established a policy regime for functioning of private non-banking finance companies (NBFCs) and agencies for rating their credit worthiness.

Trends in Macroeconomic Performance and Challenges Ahead:
During the past two decades there has been a major structural change in the economy with the share of primary sector declining by almost 14 per cent from 39 per cent in 1980, and that of the service sector increasing by almost 13 per cent to reach nearly 50 per cent in 2002.  Along with structural change, the Indian economy has sustained an average GDP growth of about 6 per cent over the past two decades. With a GDP growth of 8.2 per cent in 2003-04, India has emerged as one of the top three fastest growing economies in the world. Rapid growth in exports of goods has helped in increasing India’s share of world trade by nearly 50 per cent during the 1990s to reach a level of 0.8 per cent at present.  The trade to GDP ratio has nearly doubled from about 15 per cent during the mid-1980s to nearly 30 per cent by 2001. With the healthy growth of exports of goods and services and increasing capital inflows, India has accumulated foreign exchange reserves of about $ 120 billion. Even with underestimation on account of different procedures followed, FDI inflows have recorded more than 15 fold increase. India’s stock market has been vibrant and its currency has appreciated in the last one year by about 8 per cent in relation to the US dollar. With a large pool of trained human resources, the country is emerging as a base for knowledge-based services such  as  IT  software  development, research, design and development (RD&D), business process outsourcing. Software exports now account for nearly 20 per cent of its total exports. Like China, India also has displayed a remarkable resilience to withstand external shocks of the East Asian crisis of 1997. Overall, India is recognized to have the inherent strength and the potential to continue to sustain high economic growth and emerge as a leading economy in the world along with China.

In a recent study, Goldman Sachs has projected that China and India will emerge among the top three economies in the world by 2041. They find that ‘India has the potential to show the fastest growth over the next 30 and 50 years.’ India’s vision for 2020 seeks to quadruple real per capita income to enable India to join the ranks of upper middle-income countries, with poverty eliminated. India will emerge as the fourth largest economy in the world. The Vision places heavy emphasis on human resource development and job creation to ensure employment for all through small and medium enterprises (SMEs), commercial agriculture, agro-industries, IT and IT-enabled services, among other sectors. Moreover, it is envisaged that by 2020 India would evolve into an information society and knowledge economy inter alia by doubling the share of expenditure on education in GDP, increasing the national expenditure on R&D activity, and investments in communication infrastructure. 

India’s Approach towards Regional Economic Cooperation:
India has demonstrated a strong commitment to multilateralism in her trade policy while taking a keen interest in regional economic cooperation mostly in Asia. India is a founding member of the Bangkok Agreement in 1975, one of the first preferential trade arrangements in Asia. India has been a member of the South Asian Association for Regional Cooperation (SAARC) that has adopted a Framework Agreement on South Asian Free Trade Agreement (SAFTA) in January 2004. India is an active participant of BIMST-EC, combining seven South and Southeast Asian nations that have also adopted a Framework Agreement for a Free Trade Arrangement among its members. India has had free trade and transit treaties with Nepal and Bhutan, its landlocked immediate neighbors. India had signed a bilateral free trade agreement with Sri Lanka in 1998 that is being upgraded into a Comprehensive Economic Partnership Agreement. Since 1991, India has pursued a policy of ‘Look East’ in her foreign economic relations. Subsequent to becoming a dialogue partner of ASEAN at the Second ASEAN-India Summit held in Bali in October 2003, a Framework Agreement on Comprehensive Economic Cooperation was signed. The Agreement contemplates an FTA in goods, services and investments and an early harvest programme. An FTA with 5 ASEAN countries (Singapore, Indonesia, Malaysia, Thailand and Vietnam) put in operation in 2011, aspiring with the CLMV countries (Cambodia, Lao People's Democratic Republic, Myanmar and Vietnam) and the Philippines by 2016. In addition, India is negotiating a Comprehensive Economic Cooperation Agreement with Singapore and has signed a framework bilateral FreeTrade Agreement with Thailand. Negotiations involving preferential or free trade arrangements are on with GCC, Mercosur, South Africa. Recently, India is playing a vital role among the BRIC countries.

To conclude, India and China are the fastest emrging economies in the world. Though, due to recent global recesion, economic reforms in India are at slow pace, let us hope that they regain movementum and the fruits will reach the common man.
                                                                         

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