DYNAMICS OF GROWTH: INDIA AND CHINA

1. DYNAMICS OF GROWTH: INDIA AND CHINA Dr. Jayanta Roy Sr. Advisor, ID ( Research) CII

2. The Development Challenge The two Asian giants need to…. • Pull 403 million people out of poverty (number of people living below US$1 per day). • Provide access to basic amenities (potable water, basic health and education) to around 385 million people who are still deprived of such fundamental rights.   • Face the specter of retraining and reemploying a large section of their skilled work force that will be left jobless after PSU restructuring.   • Deal with environment, AIDS, water scarcity, soil erosion and threats to national security and ensure that they do not derail the development process.

3. The Development Challenge To do all this the Asian giants need to…. • KEEP GROWING!!! • China has been a fast growth economy for sometime. India has finally started showing the kind of growth dynamism required to pull itself into the major league of economic powers.   • For both India and China, a large part of this growth will come through an outward oriented strategy, i.e. integration into the world economy.

4. Economic growth and global integration The Four Noble Truths of the new Millennium. • Goods (Intra-Industry trade and Value added agriculture) • Services and Knowledge Industries (IT, ITES, Professional services, Biotech, Tourism)  • Foreign Direct Investment:   • Technology: Moving up the value chain in the global production process.

5. Options for India and China: Short-term Concentrate on the North: • Goods: Strive to be a part of the global supply chain in manufacturing and agriculture.  • Services and Knowledge Industry: Main markets will be in the US and EU.   • Foreign Direct Investment: Main source of FDI will be high-income OECD countries, especially the G-7 countries.   • Technology: Cutting edge will be in US and some extent from EU and Japan. Need to build synergies with US and EU to leverage vast pool of human resources in cutting edge research.

6. Options for India and China: medium and long-term • The Asian giants will need newer markets, and greater economic integration. • ASEAN market is increasingly saturated. • Rapidly growing India and China are windows of opportunity for each other. • Need to focus on India-China bilateral trade. Huge potential, linking 1/3 of humanity.

7. India-China bilateral trade: Current status • Abysmally small, given market size, diversity and growth dynamics.   • Indian exports of goods account just about 1% of China’s total imports, while Chinese exports of goods account for just about 5% of India’s total imports.  • India-China bilateral trade is focused on a very narrow range of goods. Both economies have comparative advantage in similar sectors, i.e. chemicals, processed metals and alloys, machinery and machine tools and textiles.

8. India-China bilateral trade: Future strategy • A pragmatic, yet proactive target will be to achieve 20 billion USD in bilateral trade of goods by 2009, bilateral trade growing at 20% annual average. • A target of USD 5 billion in bilateral trade in services and knowledge industries is possible, given the rapid development and complimentarity between India and China in this segment.

9. India-China bilateral trade: Future strategy Goods • Existing commodities in the trade: penetrate regions in China; Continental sized economies need regional market strategies. • New commodities: Intra-industry trade, business-to-business relations need to be built. Feed into each other’s supply chains.

10. India-China bilateral trade: Future strategy Services and Knowledge Industries • Holds great prospects for both countries: • India and China share complimentarity in many areas of services like IT Enabled Services, IT, Biotech.   • India can be the lowest cost producer to China in several areas like education, professional services and financial services.   • Chinese location, culture and human resources can provide India a springboard to enter the Japanese and Korean market for services

11. India-China bilateral trade: Future strategy Investment • Invest in China to access the huge domestic market.   • Invest in China to access third country markets. Leverage Indian technology and management in conjunction with Chinese low cost labor and excellent infrastructure.   • Use China as a platform for services exports into Japan and Korea  • Invest in JV’s to built globally competitive Indo-Chinese integrated supply chains.

12. India-China bilateral trade: Future strategy THE FIRST VITAL STEP FACILITATE!!! • Hassle free and quick flow of goods, services, capital, people and ideas across borders is essential to building a successful bilateral economic relation.

13. Trade Facilitation • Reduce shipping and container costs.  • Streamlining customs procedures, and moving towards Electronic Data Interface (EDI) in customs administration.  • Having bilateral Pre-Shipment Inspection (PSI) agencies (and agreements) to reduce time and cost of trading.  • MUTUAL RECOGNITION AGREEMENTS (MRA) ON STANDARDS: For any meaningful bilateral trade relationship to flourish, Non-Tariff Barriers (NTB’s) need to be removed.  • Bilateral Agreement on Investment with investor protection and profit repatriation. Use MIGA best practices. Important to note than both India and China are members of MIGA.

14. India AND China: Engines of global growth • 1/3 rd of humanity: Demanding goods and services from the world  • 1/4 th of high-skilled manpower: Providing goods and services to the world  • In 2025, the combined GDP of India and China will be roughly equal to that of G-7 minus US (i.e. Japan, Germany, France, UK, Canada and Italy). India and China cannot afford to ignore each other.

15. Thank You! Comments and Observations are most welcome. • Email: jayanta.roy@ciionline.org • Phone: 24629536