Rise and Economic Amalgamation of India and China - Literature review Example

Globalization Introduction One of the most important and defining event of the 21st century is the growth of India and China. While India has demonstrated swift and excellent development in its “offshore IT outsourcing and other service sectors” (Duanmu and Guney, 2009, p. 1) with institutional and language advantages, China has been successful in capturing the world’s attention by impressive growth in GDP and phenomenal inflow of FDI. Some more impacts are yet to be seen owing to the rapid growth in the economy and size of the two countries. The deregulation of the FDI abroad, that has taken place in these two countries have lead to the accumulation of more capital and confidence to the companies who have gained them. Now these companies are taking opportunity of the situation by spreading their wings and investing overseas (Duanmu and Guney, 2009).One cannot deny the fact that globalization is here to stay and today new markets can be tapped owning to the advancement of the world economy through peaceful and careful economic efforts (Klein, 2005). Globalization can neither be called good nor bad. It is only a step towards efficiency in the long run and painful cultural and social adjustment in the short run (Mundell, 2000). Rise and Economic amalgamation of India and China China and India have become the most preferred destinations for international business, which has been confirmed by some of the major studies carried out by Ernst & Young (2008), KPMG (2008) and PriceWaterhouseCoopers (2008). Zheng et al. (2006) has found out the factors for such an interest. They found that market growth, liberalist policies, lower labour cost and the amount of goods imported from both the countries by the countries of origin of the FDI are factors of interest to them. However specifically they pointed the bigger size of Chinese market, strategic location in terms of logistic and geography, export volume and greater borrowing cost of China makes it more attractive for the FDIs. On the other hand in case of India though geographical distances discourage FDI, closure distance in culture encourages it. In the year 1980 both India and China accounted for a trivial 2% of global output, which increased to 7% in the year 2005 (Das, 2010). It is expected that both the economies will achieve an excellent bit of convergence with the fully grown industrial economies in the near future. Though they have recorded a rapid growth but their per capita incomes are seen to be significantly low. According to the data published by World Bank (2008a), the per capita income of China in 2007 was $2360, whereas that of India was $950, which were much lower when compared to the per capita income of UK, USA, Japan and Germany. The average per capita income recorded by the Euro zone economies in the year 2007 was $36,329. On one hand the industrial economy and on the other the income disparity between India and China provides an opportunity for larger gains from trade with both India and China. The large gap in the wage level can help them to earn huge benefits by adjusting the productivity. Both the economies have started utilizing from the trade gains. In the year 2007, the GDP of China at the market exchange rates was $3280 billion, making it the fourth largest economy in the world. At the same time the GDP of India was at $1170 billion, making it the twelfth largest economy in the world (World Bank, 2008b). When economies of these huge sizes are seen to amalgamate globally, massive impacts are bound to occur that would affect the global trade, financial flows and pace of globalization. This signifies that the role of these two economies is going to be significant in the global economy. The projection made by Maddison (2005) suggests that by measuring in terms of purchasing power parity (PPP), the GDP of China will be seen to record few more than 18% by 2030. This means that it will overtake US. The GDP of India has been projected to be half of that of China. This fast growing economy has attracted the attention of many of the investors. The economies of both the countries are the leading players in the export of ICT services and goods. While India is leading in software, China is seen to take a lead in hardware. A strong growth in this sector has done a significant contribution towards the economic expansion of both the economies. In export of high technology and ICT goods China has surpassed USA in the year 2004. India has become the largest exporter of ICT enables service and ICT services. India is also one of the major suppliers of business process outsourcing. Due to the offshore outsourcing by the advanced economy of the world, Both India and China has experienced a growth in their economy. Both the countries are under the process of transferring their labour intensive economic structure to knowledge and technology intensive structure dealing in services and goods. The two are now predicted to contribute heavily to the global shift of ICT trade, production and employment by becoming producers and innovators of new technology and knowledge (UNCTAD, 2007). Apart from this the cultural differences also forms a key to negotiation. The ethnic origin and language, social structure and religious influences play an important role in making them a growing economy. The executives of the foreign companies who are interested in doing business with the Indian and Chinese counterparts considers the cultural characteristics, since they are present in the business world and contributes towards a series of customs and practices. The flourishing middle class consumers are also one of the most attractive features of India (Quer, Claver and Rienda, 2010). Business Prospect An extensive urbanization process is taking place in China, which demands hiring of foreign engineers and architects. Residential construction is also experiencing a major growth in India due to which the habit of the people and society are changing at a faster pace. An increase in the purchasing power of the middle class Indian has been observed due to the rising demand of housing. This can be translated into increasing the access to the consumer goods, thus making automobile industry as one of the booming sectors (Quer, Claver and Rienda, 2010). The increasing foreign investment and the economic growth have led to a change in the industrial segment and making it number one in factories. As a result industrial goods are offering a huge potential. Setting up of production centres by Renault, Volkswagen and General Motors in Shanghai has increased the demand for vehicle components. Other potential sectors include “machinery and capital goods, farming equipment, railways, airports, urban infrastructure and construction materials” (Quer, Claver and Rienda, 2010, p. 161). Driven by innovation, telecommunication sector has undergone restructuring that has opened ways for new projects. India is renowned for its growth in ICT sector that contributes to 5% of the GDP (Quer, Claver and Rienda, 2010). A growth in the design, infrastructure, management and administration is seen to evolve owning to the large scale infrastructure projects in China. China has serious problem of power shortage due to which there are frequent power cuts in some areas. This makes it over dependent on oil and poor quality coal, thus creating a huge potential in the field of renewable energy. The consumer goods like lighting devices, cosmetics, furniture, footwear and clothing are also of more relevant to China. In India retail distribution is difficult due to the restriction of 51% on the foreign investment on a single brand. However in terms of access and cost of raw material, India is a centre of attraction for investment in footwear, clothing and textile (Quer, Claver and Rienda, 2010). Banking sector also has a ground to flourish in both the countries. Due to the entry of China in WTO in 2006, they have allowed the foreign banks to operate in their country using the local currency; several foreign banks have already positioned themselves. However there are restrictions in this sector in India but established foreign banks are experiencing rise. Tourism sector is another budding sector in both the countries. China has a huge appeal and potential in terms of tourist destination, but due to lack of resources and experience it could not develop well. The signing of an agreement between Europe and China in order to streamline the procedures of tourist visas to Europe has increased the chances of Europe to attract high earning Chinese tourists. However it is forecasted that by 2020, China will become the leading tourist destination by attracting 100 million tourists from all over the world. India has also doubled its number of tourists since 2000 and the numbers are expected to rise more (Quer, Claver and Rienda, 2010). Challenges Ahead Both the countries are recognized to have huge economic potentials. Where India is seen to be favoured by multinational corporations, China is seen to be most popular destination for the international investors (Turcq, 1995). US government has discovered huge potentialities in both the economies and has included them in the market list as “big emerging” (Garten, 1996). Though flow of investment and access to international market provides an economic growth in the initial period but sustainability becomes much more difficult in long run. It is not just the macroeconomic factors that matters but the well being of the entire population is equally important. Both India and China have encountered challenges in distributing the economic benefits. Sen (2005) has led stress on the 3R’s namely Range, Reach and Reason. By this he recommends that for achieving national economic growth it is important that the process of growth does not ignores any people especially those who are at the bottom of the pyramid. The two countries are suffering from the problem of high population. Though the population of China is much higher than that of India but the concentration is higher in India (Basu, 2007). The overburdened infrastructure and insufficient natural resources are under pressure due to the concentrated population in India. Moreover, while China can implement “one child” policy in its unique political-economic system, such policy could not be implemented in India (Basu, 1998). Both the economies are rural. According to IFPRI (2002) the government of both the countries have done enough investment in education, infrastructure and research and development of agriculture. Both the countries have benefitted from the investment in R&D, however India has benefitted from investment in infrastructure and Chine has benefitted from investment in education. But Thapa (2004) has pointed out that an increase in the urban-oriented growth is widening the economic gap between urban and rural areas. Rising economic growth has prompted the demand in infrastructure development. In order to keep pace with the economic growth the demand for the resources are seen to rise. As per the Energy Department of USA, the oil demand in India is 2.2 million barrels per day and that of China is 7.4 million barrels per day (China Daily, 2005). The rising personal and regional income inequality is also a problem for both the countries. In China the spatial income inequality has shown a downward trend in the initial years of reform but now it is showing an upward trend. On the other hand India has displayed a continuous rising trend in income inequality (Kanbur, Venables and Wan, 2005). In case of China though the first phase has shown rapid increase in rural income and production but the second phase has shown a greater focus on the increase in the urban areas. This resulted into depriving the rural population from the benefits (Sen, 2005). Anwar and Basu (2004) have pointed that basic infrastructure such as roads, electricity and sanitation and availability of drinking water are still in a dreadful state in India. Last but not the least Corruption is a major problem in both the economies. According to Waller, Verdier and Gardner (2002) bottom up structure of corruption in India is different from that of top down structure in China, but both are equally harmful. Conclusion Until early of 1980, both India and China were considered to be one amongst the most impecunious economies of the world. Swift growth in the recent years and the global amalgamation of China at first and India in second has marked a positive impact on both the economies. Large, populous and rapidly growing economy has made these two countries distinctly different from other emerging and developing markets or economy in the world. Their swift growth has made them the prime catch up candidates and therefore is frequently referred to as “mega emergers”. Thus their augmentation has become an important factor for global growth and has started marking its presence in the global economy (Das, 2006). 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