Chapter-I

CHAPTER I
INTRODUCTION

China and India are the world’s most populated economies that together account for
about 36.32 percent of the world population. Being the oldest civilizations in the world,
they share long world history, culture and a colonial past. Both become independent
around at the same time: China in 1949 and India in 1947. The liberalization of foreign
trade has been a landmark for both the countries. In the beginning, for instance,
both had ‘inward looking policy’ but later, in 1978, China adopted “open door policy”
and India initiated an import liberalization policy in 1991. But now they follow a
different trend based on outward-looking and market oriented policies. India has been a
founder member of WTO whereas China became its member in the year 2001.

As we know China and India are moving ahead as world’s super economic powers. The
two economies share many commonalities such as large population, high growth rate,
abundance of cheap labour, geographical boundaries etc. though there has been a huge
difference in their export performance in world trade.

China and India are among the fastest growing economies of the world. The importance
of both the economies is growing in the world over time, especially from the
perspective of their position in global trade. Both these countries shared many common
features in the beginning of their integration to the world market. They followed import
substitution and heavy industrialization in the beginning and later in late
1980s, they started moving towards trade liberalization but in subsequent years their
respective experiences have been drastically different. China has a very large trade
surplus which is roughly equal to India’s large trade deficit. The former is an industrial
dominated economy whereas the latter remains service oriented and, China is
remarkably integrated, both multilaterally and regionally, whereas India is not (Bussière
and Mehl, 2008).

Export plays an important role in economic development of a country through

providing external market for domestically produced goods, employment generation,
earning foreign exchange and increase in GDP because of which both saving and
investment increases. For any developing country, improvement in export performance

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 Chapter-I

is a key objective. India and China being developing countries, export growth occupies
a place of strategic importance in the context of economic development which has led
to various remarkable changes in the foreign trade policy of these countries.

Many investigations have been made about these countries’ economic and geopolitical
relations, territorial issues and security challenges, regional and sub-regional dynamics,
economic and trade linkage, multilateral and regional order and the cultural factors.
Meanwhile the proliferated research is due to their ‘key-players’ status in the global
system, the present study is an attempt to focus on various aspects of exports of the two
countries vis-à-vis rest of the world. The following section will bring about the
background of structure of their economy (section 1.1). The trade reforms of China and
India are discussed in section 1.2, which is followed by a brief note on the expansion of
exports in China and India (section 1.3). The scope and objectives of the study are listed
in next section (section 1.4) whereas the chapter schemes constitute the last (section -
1.5).

1.1. Structure of Chinese and Indian Economy

The Chinese economy is world’s most populated economy with around 1.37 billion
population in 2016. Labor force participation rate in China is around 0.8 billion which
constitutes about 59% of the total population. China is among the fastest growing
economies of the world with annual GDP growth rate of around 14% in 1992 and 6.7%
in 2016. Growth rate has experienced downward trend overtime, especially since 2008
i.e. after global financial crises. The structure of the Chinese economy has been
dominated by industry which formed 43% of GDP in 1992 followed by services with
35% and agriculture with 24% share of GDP. Over the time, the structure of the
Chinese economy has changed, in 2016 service sector has the highest share i.e. 52%,
followed by industry with 40% and agriculture with 8% share in GDP. China has
increasingly opened its external sector which is evident from the fact that China’s trade
to GDP ratio which was around 31% in 1992 has increased to its peak i.e. 66% in 2006
but later on it gradually decreased to 37% in 2016. Looking at the sectoral composition
of the employment in China, around 39% of employees were involved in service sector,
followed by agriculture with around 31 percent share and industry with 30% share in
2013. Merchandise exports accounted for around 20% of GDP in 1992 and 19% of
GDP in 2016.

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 Chapter-I

India is the second most populous country of the world with around 1.32 billion
population in 2016. It has a workforce of around 0.51 billion which consists of about
39% of population. Workforce participation rate is less in India than in China. India is
also counted among the fastest growing economies of the world with annual GDP
growth rate of around 5.48% in 1992 and 7.11% in 2016. In 2016, India’s growth rate
exceeded the growth rate of China. Indian economy is dominated by service sector
which is evident from the fact that share of services in GDP was around 39% in 1992
and it has increased to 54% in 2016. It is followed by industrial sector with around 31%
share in GDP in 1992 and 29% in 2016. Agriculture sector has the least share in GDP of
India, contributing 30% to GDP in 1992 and 17% in 2016. Over the time, trade share to
GDP which is an indicator of openness of the economy has increased from 40% in 1992
to 56% in 2012 and further downward trend has been observed to around 40% in 2016.
Looking at sectoral composition of employment, agriculture sector is most important
sector from the perspective of employment generation with 50% contribution in total
employment of India, followed by service sector with 29% contribution and industry
with 21% contribution in 2013.

The share of agriculture has declined in both the countries whereas share of industry has
increased but at faster rate in China than in India. The share of services however, has
increased in both the countries but the rate of increment, for India, seems much higher
than China. Though the share of service sector has increased in India, it has not been
accompanied by any parallel improvement in employment share. Hence, most of
contribution by service sector in GDP is due to productivity growth.

1.2. Trade Reforms in China and India

In 1978, China adopted “open door policy” prior to that commodity trade was
determined almost entirely by economic planning. Since economic reform of 1978,
china has turned out to be a major trading nation and foreign trade began to influence
domestic economy greatly. China’s reforms were gradual in nature but on whole they
were remarkably successful. Reforms have greatly improved the performance of
Chinese economy. It can be seen through the facts that China’s real per capita GNP
grew at the rate of 7.2 % on an average between 1978 and 1990, export grew at the rate
of more than 10 percent per year in real terms between 1978 and 1990, exports to GNP
ratio had risen to 17 per cent by 1990 (McMillan and Naughton, 1992).
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Chinese reform enhanced the role of china in the world economy which is evident from
its participation in international economic organizations such as World Bank and
International Monetary Fund, becoming member of Asian Development Bank and
initiating the process of becoming contracting party of GATT. China was world’s thirty
second ranked exporting country on the eve of reform and by 1989 it turned out to be
world’s thirteenth largest trading nation. In 1990 China’s trade turnover exceeded 110
billion dollars. China’s imports mainly consist of industrial goods which started to
contribute significantly in increasing technological sophistication and production
capacity of its key domestic industries, on the export part international market became
growing source of demand for Chinese goods (Lardy, 1993).

By the mid-1990s “China had become one of the world's largest trading nations, the
recipient of more foreign direct investment than any other country in the world, the
largest borrower from the World Bank, the largest recipient of official development
assistance in the form of low-interest, long-term concessionary loans from
industrialized countries” (Lardy, 1995).

After fifteen years of continues effort, China formally become member of WTO in
2001, Chinese government claim it to be the second most important policy change after
the reform of 1978 (Lin, et al. 2003). China’s accession to WTO is regarded as a
milestone in its economic development as it resulted in China’s deep integration with
world economy. Chinese economy experienced a period of high and stable economic
growth between 2002 and 2007, as being labour abundant country its surplus labours
got transferred from low productivity agriculture sector to high productivity industrial
and service sector as well as level of investment in China increased. Apart from this
high external demand resulted in fast growth of exports which further resulted in
economic growth, net exports as a share of GDP increased from 2.6 percent in 2002 to
7.7 percent in 2007 (Chen, 2009). In 2007 China became the fourth largest economy
after US, Japan and Germany. WTO accession resulted in structural change in the
economy, share of industry and service sector increased while that of agriculture
decreased. With this rapid growth, in 2010, China overtook Germany as the world’s top
exporter with exports worth about 1.5 trillion US dollars.

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 Chapter-I

China’s growth faced a slowdown with the global financial crisis. “Chinese economy is
in midst of an extensive structural transformation from export-led and investment-led
growth to domestic demand-led and consumption-led growth” (Lee, et al 2017).

Till mid-seventies India followed the policy of import substitution and development of
domestic industries. India initiated the process of liberalization in 1976 with widening
of Open General Licensing (OGL) list and providing exemption on wide range of
goods. The government further introduced several export incentives after 1985; above
all was effective nominal exchange rate was depreciated by 45 percent which lead to a
real depreciation of the rupee by 30 percent.

In 1991, because of Balance of Payment crisis, India adopted New Economy Policy
which had favorable impact on India’s trade. Trade policy, exchange rate policy,
financial sector policy, industrial policy were the priority areas towards the beginning of
the reform. State monopoly and licensing raj have been abolished. Commendable
reduction has been observed in tariff and non-tariff barriers. Quantity controls were
completely removed and managed float was adopted. A rising trend has been observed
in share of India’s exports in world’s exports which has increased from .5 percent in
1991 to .62 percent in 2009-10 (Kaur, 2012). Economic reforms also resulted in
increase in inflows of FDI and FII into the economy.

The impact of liberalization can be seen through the growth rate of GDP, which has
increased from 3.5 percent per annum for twenty years prior to 1980 to 5 percent
between 1980 and 1989 and further to 6.6 percent between 1990 and 2010 (Kotwal et al
2011). India is now counted among the world’s fastest growing economies.

1.3. Expansion of Exports in China and India

China is the largest exporter and second largest trader of the world (Das et al., 2013).
There has been a tremendous growth in China’s exports over the time, China overtook
Japan as the world’s third largest exporter in 2004, next to Germany and USA (Amiti
and Freund, 2010). China’s export structure has also greatly improved with larger
proportion of sophisticated goods in it; it has also got highly diversified as it includes
goods from low tech textiles to high tech electronics and computers. Schott (2008) finds

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 Chapter-I

that there has been overlap between China’s export bundle with world’s most
developed economies and this overlap cannot be justified on ground of factor
endowment. The Chinese government, to stimulate exports, is promoting processed
trade since the 1980s (Dai et al., 2016).

China’s growing exports is backed by cheap and productive labour, technical

manpower, huge and diversified industrial base, huge inward FDI, sound industrial
policy and freer access to world markets under WTO (Lall and Albaladejo, 2004). With
the speed and depth China has emerged, is an exceptional phenomenon.

In India, exports were discouraged because of high level of protection and overvalued
currency. Incidents like oil shocks and end of Bretton woods system led to the growth
of India’s exports through high import cost pressure and depreciation of overvalued
Indian rupee respectively. In 1991, because of Balance of Payment crisis, India adopted
New Economy Policy which had favorable impact on India’s trade. Since then export
sector has contributed in high growth rate of India’s GDP. The liberalization of the
Indian economy had favorable impact on India’s trade as it has led to steep increase in
share of India’s exports in the world’s exports. India’s export performance has not
followed a perfect trend, it got affected negatively by East-Asian crisis of 1997, it faced
another set-back in 2001-02 due to semi-recession faced by United States which is
India’s largest export market and next major set-back was the global financial crisis of
2008.

In terms of exports, China outperform India, between 1993 and 2013, China’s exports
has grown at an average growth rate of 17.6% while India’s exports has grown at an
average annual rate of 14.9 % (Paul and Mas, 2016). China’s exports growth has been
much faster compared to India (Khanna, 2009). China’s rapid economic growth has
been mainly driven by exports of labour-intensive exports (Rodrik, 2006).

Figure 1.1 reveals that there has been a huge difference between India’s share and
china’s share in the world merchandise exports and this difference is increasing over
time, China’s share in the world exports has been increasing at fast rate whereas growth
of India’s share has been stagnant.

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 Chapter-I

Figure 1.1: Share of China and India in the world merchandise exports (at current prices)

Share of India and China in Merchandise Exports of

World (At Current Prices)

15.86
18.00

14.89
13.36
16.00

12.50
11.98
14.00

11.03
10.99
10.25
12.00

9.48
9.34
8.49
7.83
10.00

6.87
China

6.16
8.00

5.32
India

4.58
0.70 4.13
6.00
0.69 3.68
0.65 3.61
0.68 3.57
0.68 3.20
0.68 3.12

0.68 3.06
0.65 2.69
0.602.47

1.97
1.91
1.81
1.75

1.73
1.69
4.00

1.54
1.51
1.20
1.12
1.06
1.03
0.88
0.83
0.82
2.00 0.76

0.00
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Authors calculation using WITS database

1.4. Statement of Problem

In the present scenario where India is emphasizing on the development of Industries;

India’s share in world exports of goods play an important role. In this case, India is
competing not only with the developed countries, but also recently emerging powers in
Asia. India failed to exploit the economic opportunities that a strong manufacturing
sector can offer. Our neighboring country China is one such example where despite
having similar problems like huge population, unemployment, inflation and lack of
sophisticated technology, it has emerged as the largest exporter and second largest
trader of the world (Das et al., 2013). There is a huge gap between share of China and
India in the world merchandise exports. A comparison between the two becomes
mandatory not only to learn from the experience of China, but also to understand the
drawbacks of Indian economic policy.

Various studies have been undertaken focusing on the export structure of China and
India separately, bilaterally and vis-à-vis rest of the world but no comprehensive studies
are available covering all the major aspects of goods exports especially from the
perspective of ascertaining the factors behind differences in performance of exports of

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two countries for the time period of 1992 to 2016. Taking into consideration the
problem of the study we restrict our analysis to goods exports only.

1.5. Objectives

1. To study India’s and China’s export related policies and critically comparing it.
2. To analyze the structure of China and India’s merchandise exports vis-à-vis rest of
the world in terms of composition and direction.
3. To examine the pattern of exports of China and India in terms of comparative
advantage, extent of Intra-Industry trade, diversification and specialization.
4. To assess the complementarities in China and India’s exports vis-à-vis rest of the
world.
5. To analyze the performance of manufacturing exports of China and India in terms
of change in share in world exports.
6. To assess the factors behind differences in export performance of two countries.

1.6. Organization of the Study

The study comprises eight chapters. After the introduction, the second chapter gives a
brief review of literature. A detailed discussion on data sources and research
methodology used for the analysis is followed in chapter-III. Chapter four provides an
analysis of export related policy of China and India where chapter-V is an overview of
their merchandise exports in terms of composition and direction. An analysis of global
performance and structure of exports is provided in Sixth chapter. The evaluation of the
performance of exports using Constant Market Share analysis (Chapter-VII) precedes
the conclusion chapter (Chapter VIII) in which basic inferences about and policy
recommendations for both countries being dealt.