China and India (ChIndia) --- An Engagement, the World looks at

Since the reform and opening up of Chinese economy in 1978, China has grown at a steady rate of 9.4% annually. Their growth relies heavily on manufacturing while services industry is relatively underdeveloped. Due to this there was over consumption of energy and raw materials, excess capacity and associated excessive competition in investment goods, induced export, external account imbalance, and rapid built up of foreign exchange reserves.
Now there is an importance being attached to equality in income distribution and take measures to lower the domestic savings rate and increase consumption by boosting domestic demand. Unlike other countries China cannot depend on Short term investments to raise domestic demand. Rather, they need to encourage household consumption. According to statistics, household consumption accounts only for 40% of China’s GDP which means there is large potential for further expansion. However due to limited land and energy resources, adjustment of consumption structure will have to rely on service sector growth.

A simple comparison of India and China:

China has an extremely flexible labour market because a large number of farmers look for jobs in cities and coastal areas, which is similar to India where there is a large influx happening today in the cities from rural areas; however we still have a colossal population depending on agriculture in our villages.

China and India have an advantage of huge population. However China has a population which is aging fast. Its “One Child” policy while putting break on population growth, has given rise to a unique “1+6” problem. With the increase in average life span, old folks are living longer resulting which an average young man/ woman in China has to produce enough to support two parents, and four grandparents.
On the other hand, India is aging slower and would continue to have younger population for the next 50 years at least. However the actual problem in India is the high illiteracy rate which needs to be countered.

China is driven by government and supported by people hence has a government which is more effective than Indian government, whereas Indian economy is driven by the motivated individuals and supported by government.

China has started allowing foreign investors to buy stakes in domestic financial institutions and become participants in the domestic financial market, thereby liberalizing its financial sector.
Commercial banks are developing soundly in India with low NPA ratios, proper order, and a good legal environment. In terms of Capital market development, India also has relatively advanced stock and equity markets. Despite the fact that China has a high saving rate and the Chinese financial sector maintains a comparatively high liability ratio, there exists a great potential for growth of financial industry.
Financial ecosystem” comprises not only environment at the macro level such as the legal, supervisory, regulatory, and government intervention policies, but also micro conditions related to efficiencies of the financial institutions’ business operation.
The banking sector performance in India has improved greatly, however further reforms are needed, including improvements in the financial services infrastructure, reductions in the cost of intermediation, and scaling up of banking services to provide broader access to financial services mainly in rural areas.


Where are these Economies heading?
The two Asian giants want to regain their economic supremacy. Indian economy is driven by services while the Chinese is manufacturing. With India’s leadership in IT and Chinese strengths in hardware and manufacturing the economies are complementary.
The two economies are beginning to understand and re-engage each other. Trade between them which has grown from practically nothing is expected to grow to $20 billion by 2010.
India’s service industry makes more than 50% of GDP whereas China has it around 40%, thereby making it evident that China has huge potential to expand its services industry.

No wonder, India and China would account for 50% of the world’s GDP in just a few decades time.