Economic Reforms in India and China: Emerging Issues and Challenges

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Edited by: B. Sudhakara Reddy

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    Dedication

    Dedicated to Prof. Amulya K.N. Reddy, father of appropriate technology in India, who opened the vistas of energy and development issues, with passion, wit and a twinkle in his eye

    List of Tables

    • I.1 Rate of return on capital employed in public sector: 1991–92 to 2003–04 6
    • I.2 Selected indicators for India 9
    • I.3 Literacy rate 10
    • I.4 Trends in indices of various infrastructure industries (1980–81 = 100) 12
    • I.5 Growth of the transport system 13
    • I.6 Incidence of poverty (official estimates: 1973–2000) 14
    • I.7 Movement of employment in millions (1983–2001) 14
    • I.8 Employment and unemployment levels (Current Daily Status [CDS] basis) (million person years) 15
    • I.9 Average annual growth rate ofexpenditure (per pupil) in education 16
    • I.10 Foreign direct investment inflows (in billion, US$) 19
    • I.11 Poverty measures using international poverty line of $1 a day 2
    • 1.1 Growing importance of regional parties in the central parliament 45
    • 1.2 Lok Sabha (lower house of parliament) seats of national parties 47
    • 1.3 Seats and votes (%) won by categories of parties in the lower house of parliament in the 1996, 1998, 1999 and 2004 elections 49
    • 2.1 Measures of institutional quality 67
    • 2.2 Growth regressions: The interaction between institutions and trade 78
    • 4.1 Survey data set for China and India 103
    • 4.2 Mean daily income of the poor for two international poverty lines 1981–2001 (1993 PPP $) 104
    • 4.3 Poverty head count index for China in per cent for old and new methods (1981–2001) 104
    • 4.4 Poverty gap indices (%) for two international poverty lines (1981–2001) 105
    • 4.5 Rural and urban poverty in India 1991–2001 (%) 105
    • 4.6 Rural and urban poverty in China 1991–2001 (%) 106
    • 4.7 Rates of change in the head count index for $1 a day poverty line (percentage points per year) 107
    • 5.1 Financial intermediaries in China (as at end-December 2003) 118
    • 5.2 Size of the banking system in relation to GDP (as at end-August 2004) 118
    • 5.3 Selected indicators of performance of Chinese banks 123
    • 5.4 NPLs of major commercial banks 123
    • 5.5 Stock market indicators—China 124
    • 5.6 Assets of the Indian financial system 125
    • 5.7 Select performance indicators—Indian commercial banks 127
    • 5.8 Select indicators of the Indian stock market 128
    • 5.9 Financial system in India and China: A comparative position 130
    • 6.1 Multilateral TFP in registered manufacturingsectors across Indian states (1980–81 to 1999–2000) 142
    • 6.2 Multilateral TFP across industries and states 145
    • 6.3 Effects of investment climate on TFP (multilateral TFP index is the dependent variable, pooled OLS regression results, 1992–93 to 1997–98) 150
    • 6.4 Effects of investment climate on TFP(ratio of realgross value added to labour is the dependent variable, pooled OLS regression results, 1992–93 to 1997–98) 152
    • 6.5 TFP and output lost on account of adverse IC in various states 158
    • 8.1 Distribution of firms by size 193
    • 8.2 Legal organization of firms 194
    • 9.1 Foreign investment inflows in to India (million US$) since 1991–92 213
    • 9.2 FDI inflows and outflows of India 214
    • 9.3 Foreign investment inflows in to China (million US$) since 1991 215
    • 9.4 FDI flows into India and China: A comparison 217
    • 9.5 FDI inflows and exports in India and China in relation to developing countries and the world in the year 2001 218
    • 9.6 Sectors attracting the highest FDI approvals in India with inflows from August 1991 to October 2002 220
    • 9.7 Sectors attracting the highest approvals in technology transfer in India from August 1991 to October 2002 221
    • 9.8 China: Sector-wise FDI inflows (contractual data): 1979–98 222
    • 10.1 Key indicators of China's economy 232
    • 10.2 China's financial services industry, 2001 234
    • 11.1 Volume of investment 254
    • 11.2 Exports and imports by type of enterprise 255
    • 11.3 Exports and imports of foreign invested enterprises 255
    • 11.4 FDI in India & China—Measured and adjusted (2000) 258
    • 12.1 FDI inflows into China and India 266
    • 12.2 Export-oriented FDI projects of India and China 267
    • 13.1 FDI in China in the last two decades 290
    • 13.2 FDI in China from some countries/areas in 2002 291
    • 13.3 FDI in Wuxi from some countries/areas in 2002 292
    • 14.1 Rural labour (million persons) 299
    • 14.2 China's tariff rates for agricultural products (%) 305
    • 14.3 Tariff rates for crops and oilseed products 307
    • 14.4 Tariff rates for livestock and dairy commodities 308
    • 14.5 Tariff rates and quota levels for TRQ commodities 310
    • 14.6 Chronology of China's WTO accession 316
    • 14.7 Some features of agriculture 316
    • 14.8 Basic economic indicators: India and China 317
    • 14.9 Basic trade indicators: India and China 318
    • 14.10 Chinese economy's growth rates, 1979–2000 (% per year) 321
    • 14.11 Changing structure of Chinese economy, 1970–2000 322
    • 15.1 Trends export diversification 329
    • 15.2 Trends in the degree of product diversification in Chinese exports (in percentages) 330
    • 15.3 Compositional changes in major agricultural imports to India (in percentages) 333
    • 15.4 Compositional changes in major Chinese agricultural imports (in percentages) 334
    • 15.5 Trends in direction of exports from India (in percentages) 336
    • 15.6 Trends in direction of agricultural exports (in percentages) 337
    • 15.7 Degree of diversification in exportdestinations of China (in percentages) 338
    • 17.1 Socio-economic indicators in China and India—A comparative picture (as of 2002) 360
    • 18.1 Average expenditure per illness episode (in Rs) 377
    • 18.2 Wholesale price indices (93–94 = 100) 378
    • 18.3 Facilities under ISM as on April 1, 1999 379
    • 18.4 Sales figures of top Ayurvedic companies in 2003 379
    • 18.5 Export of ISM products (Rs millions) 379
    • 18.6 State-wise distribution of non-hospitalization illness episodes by systems 380
    • 18.7 Results of the regression equations 381
    • 18.8 Effectiveness of treatment by system of medicine 383
    • 18.9 The price changes of somecommonly used herbs (Rs/kg) 384
    • 18.10 Patents on Indian herbs 385
    • 18.11 Sales of traditional medicine in China 386
    • 18.12 Number of hospitals offering TCM treatment 387

    List of Figures

    • I.1 Sectors attracting highest FDI approval in India:Cumulative inflows during August 1991–January 2006 21
    • 2.1 Tariff index 68
    • 2.2 Measure of openness (X + M)/GDP 69
    • 2.3 Share of exports ranked by PSI, China and India (1985) 74
    • 2.4 Share of exports ranked by PSI, China and India (2001) 75
    • 4.1 Measuring poverty gap 98
    • 4.2 Effect of a shorter reporting period on a nutritional poverty line 102
    • 4.3 A framework of industrial growth in coastal China 109
    • 6.1 Investment climate and TFP (output function) 144
    • 7.1 Conceptualizing east Asian, Laissez Faire and import-substitution trade strategies 167
    • 7.2 Deviations of exchange rate GDP/PPP GDP from structurally determined values 172
    • 7.3 Money growth (M1) in EA, China and India 176
    • 7.4 M1 growth in India, Argentina, Brazil and Chile 176
    • 7.5 Nominal lending and real interest rates (India and China) 177
    • 7.6 M3 and domestic credit provided by banks as percentage of GDP (India and China) 178
    • 7.7 Portfolio investments/exports of India, China, Korea and Thailand 178
    • 7.8 Net FDI inflows/GCF (%) 180
    • 7.9 Inflation (GDP defl. based) (percentage per annum) India, China, Korea and Thailand 181
    • 7.10 Ratio of export to imports (mfg.) (India, China, Korea and Thailand) 183
    • 7.11 Ratio of exports/imports (mfg.) (India, Chile, Argentina, and Indonesia) 184
    • 7.12 Trade gaps to trade volumes ratios (India and China) 184
    • 7.13 Ratio of export to import (goods, services) (India and China) 185
    • 7.14 Trade and C/A balances (India and China) 185
    • 7.15 Openness ratio (goods and services/GNI) (India, China, Korea and Thailand) 186
    • 7.16 Workers remittances/GNI (India, China, Korea and Pakistan) 188
    • 8.1 Leading economic constraints faced by enterprises 196
    • 8.2 Economic constraints—Foreign vs domestic firms 197
    • 8.3 Infrastructure as a constraint to business 197
    • 8.4 Finance as a constraint to business 198
    • 8.5 Leading political constraints to business operations and growth 199
    • 8.6 Political constraints—Foreign versus domestic firms 200
    • 8.7 Financial constraints faced by Chinese firms 201
    • 8.8 Financial constraints faced by Indian firms 202
    • 8.9 Regulations as a constraint to business operations and growth 203
    • 8.10 Predictability of changes in laws and policies 204
    • 8.11 Ease of obtaining and interpreting laws and rules 205
    • 8.12 Constraints imposed by the courts 206
    • 8.13 Quality of infrastructure 206
    • 8.14 Quality of human services 207
    • 8.15 Government and the voices of firms 208
    • 9.1 FDI flows into India and China in recent years 218
    • 12.2 India: Status of FDI approved and inflows 268
    • 12.3 a & 12.3b The governance diamond—India and China 273
    • 12.4 Comparison of economic performance ratings 274
    • 12.5 Comparison of government efficiency 275
    • 12.6 Comparison of business efficiency 275
    • 12.7 Comparison of infrastructure ratings 276
    • 15.1 Trends in degree of diversification in agricultural exports in the post reform period 332
    • 17.1 Population growth rate: 1950–2050 356
    • 17.2 Fertility rate: 1950–2050 356
    • 17.3 Old age dependency ratio: 1950–2050 357
    • 17.4 Population by age groups (China and India) 358
    • 19.1 Energy consumption in selected Asian countries 1980–2001 393
    • 19.2 India's fuel share of energy consumption, 2001 (BTU) 395
    • 19.3 Per capita energy consumption of selected countries 396
    • 19.4 Carbon emissions—India and other countries 398
    • 19.5 Energy intensity of selected countries (2001) 401

    Foreword

    China and India have followed different patterns of development. Yet there are many similarities in their approaches. China has had a 13-year head start over India in consolidating economic gains after the reforms in 1978. As part of the economic reforms, both the countries adopted outward-looking policies, liberalized prices and dismantled regulations, fostered the development of the private sector, strengthened their financial systems and opened their economies to trade and investment. It is important to look back at the reform process that is in place for over two decades and to see what China's capitalism with Chinese characteristics and India's welfare state with capitalistic ideas can learn from each other, and what lessons their experiences offer to other countries.

    This volume brings together some of the most influential scholars in development economics from India and China. They address issues that include globalization—both its governance and a historical perspective; poverty, inequality of income and the potential for conflict, agriculture, WTO and trade; the natures and characteristics of institutions and markets. The articles explore ways to improve the well-being of the poor, how to design effective structures and institutions for poverty reduction and how the reforms, in their economic, political and social dimensions tackle these issues.

    The insights also help us understand the entire process of reform and the mechanisms behind successful socio-economic development. This can in turn help to increase the capability to undertake research, related to, reform in other developing and transition economies. The complex interactions of variables ultimately determine the success or failure of a given reform. The success or failure of implementation of reforms is determined by the national institutional context. First, it is important to identify and respond to shocks, manage distributional conflicts and maintain a transparent and efficient bureaucracy. Second, the ultimate results depend on the ability of society to learn from previous mistakes; and third, there are significant differences in various nations' ability to solve collective action problems and to undertake political transactions.

    Many of the findings and implications have been revisited in detail in the papers. The ultimate emphasis in transition should be placed on the betterment of social and human development indicators, and not on liberalization for its own sake. Ultimately, the continuing debate about the sequence and rapidity of reforms serves to confirm the importance of the domestic context, as shock therapy in one case may prove counterproductive while in another the socioeconomic conjunctures may be conducive for the successful implementation of a rapid reform package.

    All in all, the articles emphasise that neo-liberal economic reform programmes do not simply promote market-oriented policies, but significantly recast how economic governance should be managed and coordinated. The challenge is to shift the institutional framework within which economic transactions occur and the nexus within which the framework emerges and functions. The book Economic Reforms in India and China—Emerging Issues and Challenges, edited by B. Sudhakara Reddy provides a set of studies which would be of interest not only to the specialists but also to anyone curious to know how India and China are doing.

    (Kirit S.Parikh), Member, Planning Commission

    Acknowledgements

    This volume is the outcome of a conference conducted at the Indira Gandhi Institute of Development Research (IGIDR), Mumbai, in February 2005. We thank several well wishers, agencies and institutions that facilitated the success of the conference, which helped to bring out this volume. In large part, the success was due to the efforts of Prof. R. Radhakrishna, the then Director of IGIDR, and Prof. D. Nachane, the present Director, IGIDR, and Prof. Li Luoli, President, China Development Institute (CDI), who have guided the preparations. Dr Manoranjan Mohanty, Institute for Chinese Studies, New Delhi, Prof. Nirmal Chandra (now retired), Indian Institute of Management, Kolkata, Prof. D.N. Reddy (now retired), University of Hyderabad, Hyderabad, Dr Alakh N. Sharma, Director, Institute for Human Development, New Delhi, Dr P. Balachandra, Indian Institute of Science, Bangalore and Mr M.V. Rayudu, Director, Chirra Electronics Pvt. Ltd., Bangalore, were kind enough to serve as members of various committees and also helped skillfully in the preparations. Special thanks are also due to Dr Kirit S. Parikh, Member, Planning Commission and the founding Director of IGIDR, who had kindly written the Foreword. I thank the authors and the reviewers, who unselfishly took time from their busy professional and personal schedules to prepare and refine the chapters contained herein. In particular, Mr K. Sreenivasa Rao, Assistant Editor, Journal of the Indian Institute of Science, Bangalore, read several chapters and a portion of the index and made useful comments. We wish to take a moment to thank all those who have supported this work all along the way. It's gladdening to see articles of young researchers along with those of the established ones.

    Finally, we are deeply indebted to the faculty, students and staff of IGIDR, and in particular to Dr R. Venkatamuni Reddy and Mr K.V. Janardhana Rao, Mr Mahesh Mohan and Ms Ananthi for their patience and skill in meeting the needs of participants. We are especially grateful to Mr T.V. Subramaniyan, Registrar, IGIDR, for his guidance in various aspects of administration. Lastly, we thank Ms Payal Kumar, Ms Elina Majumdar, Ms Jyotsna Mehta and others at SAGE Publications, New Delhi, for efficient handling of this publication and for leadership in publications promoting academic excellence.

  • About the Editor and Contributors

    The Editor

    B. Sudhakara Reddy is a Professor at Indira Gandhi Institute of Development Research, Mumbai. He has an experience of 24 years. He has been actively involved in a number of projects and has been member of prestigious bodies such as Research Advisory Committee, Institute for Global Environmental Change; Indo-China Economic Forum; Planning Board, Government of Maharashtra (1997–98); Expert Committee, Andhra Pradesh State Higher Education; Expert Group, National Hydrogen Energy Board, Ministry of Power; World Renewable Energy Congress, and so on. He has worked as consultant in United Nations Development Programme, United Nations Environment Programme, Ministry of Power, Government of India, Maharashtra State Electricity Board, Canadian International Development Agency, Swidish International Development Agency, United States Agency for Industrial Development, and so on.

    Professor Reddy's authored works include Urban Energy Systems (1998), Barriers to the Diffusion of Renewable Energy Technologies (2002). He has co-edited Planning for Demand Side Management in the Electricity Sector (1994), Sustainable Regeneration of Degraded Lands (1997), Energy, Environment and Development: A Technological Perspective (2005), Ecology and Human Well Being (2006).

    The Contributors

    T.A. Bhavani is Professor in Economics at the Insitute of Economic Growth, Delhi University.

    Brigitte Desroches, International Department, Bank of Canada.

    Arijita Dutta is a Reader at the Department of Economics, University of Calcutta.

    Michael Francis, International Department of Bank of Canada.

    Bishwanath Goldar is a Professor at the Institute of Economic Growth, Delhi University Enclave, New Delhi.

    Kumudini Hajra is the Director of the Division of State and Local Finances, Department of Economic Analysis and Policy, Reserve Bank of India.

    Narendra Jadhav is the Vice-Chancellor of the University of Pune.

    Cai Jianying is the Chief Secretary of the International Office of Jiangnan University, Wuxi.

    Rajalaxmi Kamath is an Assistant Professor at the Indian Institute of Management, Bangalore.

    D. Krishnamoorthy is Associate Professor at the Department of Econometrics, S.V. University, Tirupati.

    Anjali Kulkarni is a Professor in the Department of Economics, Nagpur University.

    Tulsi Lingareddy is the Deputy Manager of the Cleaning Corporation of India Limited, Mumbai.

    K. Lokanadhan is a Professor at the Agriculture and Rural Management, Tamil Nadu Agricultural University, Coimbatore.

    Ashir Mehta is a Reader at the Department of Economics, Faculty of Arts, The Maharaja Sayajrao University of Baroda.

    Sebastian Morris is a Professor at the Indian Institute of Management, Ahmedabad.

    François Painchaud, Economic Policy and Debt Department, Poverty Reduction and Economic Management, The World Bank Group.

    Janak Raj is an Adviser at the Department of Economic Analysis and Policy, Reserve Bank of India.

    C. Ramaswamy is the Vice-Chancellor of Tamil Nadu Agricultural University.

    N.J. Rao is the Chairman of the Department of Management Studies, Indian Institute of Science, Bangalore.

    Rajesh Sagar is the Indian Attorney and Doctoral Associate of Queen Mary Intellectual Property Research Institute, University of London.

    Jatinder Bir Singh is the Principal of SGGS College of Commerce, University of Delhi.

    Surjit Singh is the Director of the Institute of Development Studies, Jaipur.

    Dolly Sunny is a Reader at the Department of Economics, University of Mumbai.

    Suresh D. Tendulkar is retired professor of Delhi School of Economics and currently Chairman, Economic Advisory Council to the Prime Minister and Chairman, National Statistical Commission at the Centre for Development Economics, University of Delhi.

    C. Veeramani is an Associate Professor at Indira Gandhi Institute of Development Research.

    K.G. Viswanadhan is a Research Scholar at the Department of Management Studies, Indian Institute of Science, Bangalore.

    Fu Xianzhi is the Dean of Southern Yangtze University, Wuxi.


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