- Wanda Tseng, and David Cowen
- Published Date:
- May 2007
Also by Wanda Tseng
CHINA: Competing in the Global Economy (co-editor M. Rodlauer)
© International Monetary Fund 2005
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First published in hardcover 2005
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Library of Congress Cataloging-in-Publication Data
India’s and China’s recent experience with reform and growth / edited by Wanda Tseng and David Cowen.
Includes bibliographical references and index.
ISBN 1–4039–4351–6 (cloth) ISBN 0–230–54281–6 (paper)
1. India—Economic policy. 2. India—Economic conditions. 3. China—Economic policy. 4. China—Economic conditions. I. Tseng, Wanda. II. Cowen, David, 1960–
10 9 8 7 6 5 4 3 2 1
16 15 14 13 12 11 10 09 08 07
Printed and bound in Great Britain by
Antony Rowe Ltd, Chippenham and Eastbourne
Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei, and M. Ayhan Kose
List of Tables
List of Figures
List of Boxes
List of AbbreviationsADR
American Depository ReceiptAMP
Asiatic Mode of ProductionARC
asset reconstruction companyARCIL
Asset Reconstruction Company of India LimitedAREAER
Annual Report on Exchange Arrangements and Exchange RestrictionsBIFR
Board for Industrial and Financial ReconstructionBJP
Bharatiya Janata PartyCAC
Capital account convertibilityCCP
Chinese Communist PartyCDR
corporate debt restructuringCMIE
Centre for Monitoring Indian EconomyCRAR
capital to risk-weighted assets ratioCRR
cash reserve requirementCSO
Central Statistical OrganizationCVC
Central Vigilance CommissionDART
Debt Recovery Appellate TribunalDCA
Department of Company AffairsDICGC
Deposit Insurance and Credit Guarantee CorporationDRT
Debt Recovery TribunalECB
external commercial borrowingEPF
Employees’ Provident FundEPFO
Employees’ Provident Fund OrganisationERM
exchange rate mechanismFDI
foreign direct investmentFIs
foreign institutional investorsFIPB
Foreign Investment Promotion BoardFPI
foreign portfolio investmentFSA
Financial Services AuthorityGDP
gross domestic productGNP
gross national productHDFC
Housing Development Finance CorporationHDI
Human Development IndexHDR
Human Development ReportHPI
Human Poverty IndexIDBI
Industrial Development Bank of IndiaIDBs
India development bondsIFR
investment fluctuation reserveIIP
Index of industrial productionIMF
International Monetary FundIRDA
Insurance Regulatory and Development AuthorityIT
Less financially integratedLIC
Life Insurance Corporation of IndiaMFI
more financially integratedMOF
Ministry of FinanceMRTP
Monopolies and Restrictive Trade PracticesMSCI
Morgan Stanley Capital International Inc.NBFC
Nonbanking financial companiesNBS
National Bureau of StatisticsNCAER
National Council of Applied Economic ResearchNCLT
National Company Law TribunalNDP
net domestic productNDTL
net demand and time liabilitiesNPAs
nonrepatriable rupee denominatedOGL
Open General LicensingOTS
prompt corrective actionPLR
prime lending ratePPP
purchasing power parityPSB
public sector bankPSU
public sector undertakingRBI
Reserve Bank of IndiaREER
real effective exchange rateRIBs
Resurgent India BondsS&P
Standard and Poor’sSAR
Special Administrative RegionSARFAESI
Securitization and Reconstruction of Financial Assets and Enforcement of Security InterestSBI
State Bank of IndiaSCB
Scheduled commercial banksSCRA
Securities Contracts (Regulation) ActSEB
State Electricity BoardSEBI
Securities and Exchange Board of IndiaSEZs
Special Economics ZonesSLR
statutory liquidity ratioSSI
small scale industryTFP
total factor productivityTOT
terms of tradeUPSC
Union Public Service CommissionUTI
Unit Trust of IndiaWDIs
World Development IndicatorsWTO
World Trade Organization
The editors acknowledge each author’s contribution to this volume, as well as his or her participation at the November 2003 conference A Tale of Two Giants: India’s and China’s Experience with Reforms and Growth in New Delhi. The conference was co-sponsored by the International Monetary Fund (IMF) and India’s National Council of Applied Economic Research (NCAER).
We would like to recognize the special efforts of several people in the IMF’s Asia and Pacific Department who provided support to the production of this volume and the associated conference. We are most indebted to Nong Jotikasthira for her excellent editorial work and for her untiring and efficient assistance in organizing and running the conference. We also thank Pihuan Cormier for her assistance in the early phase of the conference’s organization, and Fritz Pierre-Louis and Corinne Danklou for their work on the volume.
We would like to give special thanks to Kalpana Kochhar in the IMF’s Research Department, who played a key role in bringing the conference together, and Hiroyuki Hino of the IMF’s Regional Office for Asia and the Pacific (OAP), whose support for the conference and volume was essential. From the same office, we are further grateful to Belinda Ruch for working with the conference organizers and to Kumiko Tanaka for assisting with finalizing this volume.
We would also like to recognize Suman Bery of the NCAER, whose organization made a very significant contribution as a conference partner. He and his colleague Kanhaiya Singh are also authors of one of the papers in this volume, for which we are grateful. We would further thank Michael Wattleworth (and his predecessor Jim Gordon), Sudip Mohapatra, and, especially, Alex Jaini of the IMF Resident Representative Office in India for their vital support in organizing the conference. They were assisted by Brig. Narinder Sapra, Balwant Singh, and their colleagues at the NCAER.
Finally, the editors would like to acknowledge the work done by Sean Culhane in the IMF’s External Relations Department in advising and arranging publication. The patience and advice of Amanda Hamilton at Palgrave also are very much appreciated.
India and China have each been growing rapidly for at least the last twenty years; China has on average grown considerably faster than India. Indian scholars such as Amartya Sen and T.N. Srinivasan have been studying the Chinese experience in areas such as agriculture, international trade, and human development for many years, and drawing implications for India’s policies and performance. But interest in comparing the two countries has spread to the financial press, investment banks, and investor conferences only relatively recently.
It is interesting to speculate on what lies behind this enhanced interest in the two countries. Since China’s torrid growth has been an accepted fact for some time, what may be new is a reassessment of India’s performance and potential. Such a reassessment at this particular moment is, in some ways, surprising, since the first years of the new century were not particularly stellar for Indian growth, and India’s coalition politics have, if anything, become even more messy and confused. What seems to have changed India’s image is its success as an offshore provider to the industrial countries of such skill-based services as software development, industrial research, and business services.
This success has created visibility and a political uproar in some host countries, particularly the United States. This is despite the small scale of the phenomenon relative to both the host and home countries’ economies, and the view of most analysts that this form of trade is no different from trade in goods, and should be just as welfare-enhancing and growth-promoting. Instead, as with the North American Free Trade Agreement (NAFTA) in the 1990s, politicians and the media have once again raised the specter of a ‘giant sucking sound’ of jobs fleeing the United States, only this time it is the American middle class that is fearful.
Lord Desai’s essay in this volume reminds us of how fickle and volatile such international perceptions can be. As recently as the 1960s, India and China were the poster children of world poverty, unable to feed themselves, and certainly no threat to the confident North which was then in the high noon of its own post-war recovery. Long-term projections made at that time would inevitably have been Malthusian in their gloom. Mechanical projections made of the prospects of Australia and Argentina (or even Brazil and Russia) at the beginning of the twentieth century would have been equally wide of the mark.
Such precedents should provoke some skepticism toward the breathless tone of recent growth projections for the two countries over the next half century. While such projections usefully describe the limits of what might be, they should not deflect attention from the fact that these are both poor, populous, substantially rural societies attempting to manage the stresses of modernization within political frameworks that are still evolving. The sheer scale of what is needed is unprecedented in human history. The international environment is also hugely different from that of the nineteenth century, in the gap between rich and poor nations, and in the absence of empty lands.
While applauding the distance both societies have come, we should not lose sight of the enormous challenges still ahead. Indeed, the focus on the absolute size of the two economies, measured at purchasing power parity, can be something of a trap: while it is helpful for certain diplomatic goals, it can also be used as a device to demand commitments. An example of this is the pressure on the two countries to make commitments in respect of the Kyoto protocol, despite their low income.
The attention therefore needs to be on the nearer term, on the policy and institutional lessons to be learned from each country’s experience so that the growth momentum can be sustained. The papers in this volume help illuminate the experience of each country. Implicitly, and sometimes explicitly, they draw comparisons between the two; only occasionally do they touch upon their fast-growing economic linkages.
Lord Desai’s essay further draws attention to the fundamentally different historical and political context that shapes economic policy in the two countries. China has historically been unified, with a successful tradition of great public works, so as to command legitimacy, but with, according to him, an abiding distrust of foreigners.
By contrast, India’s identity over the millennia has been more cultural, rather than political or geographic. The challenge facing the Indian state remains one of accommodating regional identities (and economic and sectional interests) within a coherent whole. Even as both countries progress in their efforts at economic development, their models could emerge to become as dissimilar as those of the US and France today.
Within these different political traditions as pointed out by Desai (and detailed for India in the papers by Singh and Bery and by Panagariya, and for China by Lardy), both societies made significant and similar shifts in strategy at the end of the 1970s. Looking to the future they will continue to grapple with similar problems. Here, I would mention only three.
The first is shifting labor out of agriculture into higher productivity activities. Here, China has had much greater success through its export-oriented light manufacturing, and through the institutional innovation of town and village enterprises. However, as the paper by Hu Angang and associates points out, significant challenges remain for China. The Indian picture is more confused, with wages rising but employment apparently stagnant in both agriculture and large-scale manufacturing, and disappointing even in the fast-growing services sector, as pointed out in the paper by Gordon and Gupta.
In both countries the challenge is to put in place the kind of investment climate that fosters the growth of small entrepreneurial firms. In India, the main impediment is overregulation and a dysfunctional bureaucracy, as well as the political power of entrenched monopolistic lobbies in both the public and private sectors. In China it is continued uncertainty on the political implications of a growing domestic private sector. On balance, China may have further to go than India in this area.
A second challenge is integrating with the international economy. The papers by Panagariya and Lardy describe the very different experiences of the two countries in integration on the real side, while those of Prasad and associates, Anderson, and Jadhav describe their approaches to financial integration. There is no question that China has been bolder, and more successful, on the real side, with a cleaner trade policy regime, and greater success in attracting export-oriented foreign direct investment. India is probably further ahead on the financial side, although both countries remain cautious liberalizers.
The third and perhaps most difficult challenge is to improve domestic structures for financial intermediation and risk assessment. Chen Yuan’s paper provides a realistic account of the issues and difficulties faced by China in its transition from budgetary allocation to a greater reliance on banks and securities markets, while Bhattacharya and Patel and Banerjee and associates describe similar challenges facing India.
In neither country are banks ready to take on the job that they are being asked to do; indeed, China’s reliance on foreign direct investment at a time of massive reserve accumulation in part reflects this failure of domestic intermediation. More broadly, China pays too high a price in foregone consumption for the growth it enjoys, partly because of poor intermediation. Indian banks also fail in scouting out promising investment opportunities largely because of the incentives embedded in public ownership. Reform of the financial sector is therefore a crucial challenge facing managers in both economies.
In conclusion, I would like to thank the International Monetary Fund for partnering with the National Council of Applied Economic Research for the conference on India’s and China’s experience with reform and growth from which this publication has emerged, and for according me the opportunity to contribute this preface. The conference marks an excellent use of the Fund’s knowledge of issues and resource persons in key emerging markets, and its capacity to draw them together both in Washington and in locations around the globe. I trust that this initiative will lead to many others like it.
National Council of Applied Economic Research, New Delhi
Notes on Contributors
Jonathan Anderson Chief Economist, Asia, UBS Investment Bank.
Abhijit Banerjee Ford International Professor, Department of Economics, Massachusetts Institute of Technology.
Suman Bery Director General, National Council of Applied Economic Research (NCAER).
Saugata Bhattacharya Hindustan Lever Limited (Unilever India).
Chang Zhixiao Associate Professor, School of Government, Peking University.
Chen Yuan Governor, China Development Bank.
Shawn Cole Department of Economics, Massachusetts Institute of Technology.
Meghnad Desai Emeritus Professor of Economics, London School of Economics; Founder-Director, Centre for the Study of Global Governance; and Member of the House of Lords, The United Kingdom Parliament.
Esther Duflo Professor, Department of Economics, Massachusetts Institute of Technology; Research Associate, National Bureau of Economic Research; and Research Fellow, Center for Economic and Policy Research.
James Gordon Chief of Division 3 in the IMF’s Asia and Pacific Department and was previously IMF Senior Resident Representative for India (at the time this paper was written).
Poonam Gupta Economist in the Macroeconomic Studies Division in the IMF’s Research Department and was previously an Economist in the Resident Representative Office for India (also when this paper was written).
Hu Angang Professor, Director of Center for China Study, Chinese Academy of Science and Tsinghua University.
Hu Linlin PhD student, School of Public Policy and Management, Tsinghua University.
Narendra Jadhav Principal Adviser and Chief Economist, Department of Economic Analysis and Policy, Reserve Bank of India.
M. Ayhan Kose Economist in the Economic Modeling Division in the IMF’s Research Department.
Nicholas R. Lardy Senior Fellow, Institute for International Economics, Washington, DC.
Arvind Panagariya Bhagwati Professor of Indian Political Economy and Professor of Economics, Columbia University.
Urjit R. Patel Infrastructure Development Finance Company Limited (IDFC).
Eswar Prasad currently Chief of the Financial Studies Division in the IMF’s Research Department; previously, he was Chief of the China Division in the IMF’s Asia and Pacific Department.
Kenneth Rogoff Professor at Harvard University and was the Director of the IMF’s Research Department and Economic Counselor.
Shang-Jin Wei Head of the Trade Unit in the IMF’s Research Department.
Kanhaiya Singh Senior Economist, National Council of Applied Economic Research (NCAER).