Front Matter

Front Matter

Author(s):
Wanda Tseng, and David Cowen
Published Date:
May 2007
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    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.

    p. cm.

    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–

    HC435.3.153 2005

    338.951’009’045—dc22

    2005047037

    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

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    Contents

    List of Tables

    List of Figures

    List of Abbreviations

    ADR

    American Depository Receipt

    AMP

    Asiatic Mode of Production

    ARC

    asset reconstruction company

    ARCIL

    Asset Reconstruction Company of India Limited

    AREAER

    Annual Report on Exchange Arrangements and Exchange Restrictions

    BIFR

    Board for Industrial and Financial Reconstruction

    BJP

    Bharatiya Janata Party

    CAC

    Capital account convertibility

    CCP

    Chinese Communist Party

    CDR

    corporate debt restructuring

    CMIE

    Centre for Monitoring Indian Economy

    CRAR

    capital to risk-weighted assets ratio

    CRR

    cash reserve requirement

    CSO

    Central Statistical Organization

    CVC

    Central Vigilance Commission

    DART

    Debt Recovery Appellate Tribunal

    DCA

    Department of Company Affairs

    DICGC

    Deposit Insurance and Credit Guarantee Corporation

    DRT

    Debt Recovery Tribunal

    ECB

    external commercial borrowing

    EPF

    Employees’ Provident Fund

    EPFO

    Employees’ Provident Fund Organisation

    ERM

    exchange rate mechanism

    FDI

    foreign direct investment

    FIs

    financial institutions

    FIIs

    foreign institutional investors

    FIPB

    Foreign Investment Promotion Board

    FPI

    foreign portfolio investment

    FSA

    Financial Services Authority

    GDP

    gross domestic product

    GNP

    gross national product

    HDFC

    Housing Development Finance Corporation

    HDI

    Human Development Index

    HDR

    Human Development Report

    HPI

    Human Poverty Index

    IDBI

    Industrial Development Bank of India

    IDBs

    India development bonds

    IFR

    investment fluctuation reserve

    IIP

    Index of industrial production

    IMF

    International Monetary Fund

    IRDA

    Insurance Regulatory and Development Authority

    IT

    information technology

    JVs

    joint ventures

    LFI

    Less financially integrated

    LIC

    Life Insurance Corporation of India

    MFI

    more financially integrated

    MOF

    Ministry of Finance

    MRTP

    Monopolies and Restrictive Trade Practices

    MSCI

    Morgan Stanley Capital International Inc.

    NBFC

    Nonbanking financial companies

    NBS

    National Bureau of Statistics

    NCAER

    National Council of Applied Economic Research

    NCLT

    National Company Law Tribunal

    NDP

    net domestic product

    NDTL

    net demand and time liabilities

    NPAs

    nonperforming assets

    NRI

    non-resident Indian

    NRNRD

    nonrepatriable rupee denominated

    OGL

    Open General Licensing

    OTS

    one-time settlements

    PCA

    prompt corrective action

    PLR

    prime lending rate

    PPP

    purchasing power parity

    PSB

    public sector bank

    PSU

    public sector undertaking

    RBI

    Reserve Bank of India

    REER

    real effective exchange rate

    RIBs

    Resurgent India Bonds

    S&P

    Standard and Poor’s

    SAR

    Special Administrative Region

    SARFAESI

    Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest

    SBI

    State Bank of India

    SCB

    Scheduled commercial banks

    SCRA

    Securities Contracts (Regulation) Act

    SEB

    State Electricity Board

    SEBI

    Securities and Exchange Board of India

    SEZs

    Special Economics Zones

    SLR

    statutory liquidity ratio

    SSI

    small scale industry

    TFP

    total factor productivity

    TOT

    terms of trade

    UPSC

    Union Public Service Commission

    UTI

    Unit Trust of India

    WDIs

    World Development Indicators

    WTO

    World Trade Organization

    Acknowledgments

    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.

    Preface

    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.

    Suman Bery

    Director-General

    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).

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