CESifo Economic Studies Conference on Understanding the Chinese Economy

10 11 June 2005 CESifo Conference Centre, Munich

India China: Diverging to Converge Surjit S. Bhalla

India - China: Diverging to Converge

CESifo Economic Studies Conference on Understanding the Chinese Economy: ifo Institute, Munich, Germany June 10-11, 2005

Surjit S. Bhalla*

*O[x]us Research & Investments, New Delhi Email: ssbhalla@gmail.com

India - China: Diverging to Converge

CESifo Economic Studies Conference on Understanding the Chinese Economy: ifo Institute, Munich, Germany June 10-11, 2005

Surjit S. Bhalla*

*O[x]us Research & Investments, New Delhi Email: ssbhalla@gmail.com

India - China: Diverging to Converge

CESifo Economic Studies Conference on Understanding the Chinese Economy: ifo Institute, Munich, Germany June 10-11, 2005

Surjit S. Bhalla*

*O[x]us Research & Investments, New Delhi Email: ssbhalla@gmail.com

Objectives
Compare China and India performance on a variety of indicators past, present, and future

Growth PerformanceIndia, China

GDP Growth
5 Yr Avg, 1962-02

10

China

India

-5
1962

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

Growth and Undervaluation

100
2000

GDP Growth and Undervaluation

10

Undervaluation

-5

1950

1960

1970

1980 year...

1990 GDP - China UV - China

GDP - India UV - India

20
7

40

60

80

TFPGIndia, China
Productivity Growth
5 Yr Avg, 1962-02

6.0

2.0

4.0

China

India

-4.0 -2.0
1962

0.0

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

Investment/GDPIndia, China
Investment-GDP Ratio
5 Yr Avg, 1962-02

35

40

China

25 % 30

India

15
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year
Source: WDI 2004

20

Industrial ProductionIndia, China

Industrial Production
5 Yr Avg, 1962-02

15

10

China

India

-10
1962

-5

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

10

Interest RatesIndia, China

Real Lending Rate
5 Yr Avg, 1972-02

10

India

China

-5
1977

1982

1987 Year

1992

1997

2002

Source: WDI 2004

11

InflationIndia, China
Inflation, CPI (1993)
1962-2002

20

30

India

10

China

-10
1962

1967

1972

1977

1982 1987 Year

1992

1997

2002

Source: WDI 2004

12

SavingIndia, China
Savings Rate
5 Yr Avg, 1962-02

40

China

% of GDP

25

30

35

15

20

India

1962

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

13

Governance IndicatorsIndia, China

Governance Indicator Values, India and China
China
1997 Voice Rule of Law Govt. Efficiency Political Stability Regulation Corruption -1.37 -0.32 0.14 0.26 -0.09 -0.11 2002 -1.43 -0.34 0.18 0.14 -0.35 -0.42

India
1997 0.26 0.10 -0.14 -0.44 -0.11 -0.23 2002 0.36 0.07 -0.07 -0.67 -0.36 -0.26

Change
China -0.1 0.0 0.0 -0.1 -0.3 -0.3 India 0.1 0.0 0.1 -0.2 -0.3 0.0

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Governance IndicatorsIndia, China

Governance Indicator Rank, India and China
China
1997 2002

India
1997 2002

Change
China India

Voice
Rule of Law Govt. Efficiency Political Stability Regulation Corruption

83
44 21 25 52 28

85
36 20 30 56 45

18
27 34 61 53 36

14
23 28 60 57 32

-2.0
8.0 1.0 -5.0 - 4.0 -17.0

4.0
4.0 6.0 1.0 - 4.0 4.0

15

Governance IndicatorsIndia, China

Comparative Performances, 1997-2002
China and India
Rank in 1997
20 40 60 80 20 40 60 80 Rank Rank

Rank in 2002

CO

GE

PS China

RL

RQ

VA India

0
CO

GE

PS China

RL

RQ

VA India

Change in Rank, 1997-2002

Rank 0 -20 -10
CO

10

GE

PS China

RL

RQ

VA India

16

Corporate Tax RatesIndia, China

Corporate Tax Rates
1991-2004

20

China

% 10

15

India

0
1990

1992

1994

1996 1998 Year

2000

2002

2004

Source: Datastream

17

Foreign Direct InvestmentIndia, China

Share of FDI in GDP
5 Yr Avg, 1967-02

China

% 1 2

India

0
1972

1977

1982

1987 Year

1992

1997

2002

Source: WDI 2004

18

Foreign Direct InvestmentIndia, China

Share of FDI in Investment
5 Yr Avg, 1967-02

15

China

% 5

10

India

0
1972

1977

1982

1987 Year

1992

1997

2002

Source: WDI 2004

19

Undervaluation of Currencies
Undervaluation is defined as the ratio of per capita GDP in current US dollars to per capita GDP in current international PPP dollars.

20

Undervaluation of Currencies
Undervaluation w.r.t USD
100
5 Yr Avg, 1962-02
Yuan

40

60

80

Re

20
1962

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

21

Undervaluation of Currencies
Undervaluation w.r.t USD
5 Yr Avg, 1962-02

10

Yuan

Re

-10
1962

-5

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

22

Undervaluation of Currencies
Undervaluation w.r.t US$
150 40 60 80
1950 1960 1970 1980 Year 1990 2000 Japan 1950

50

100

100120

1960

1970 Korea

1980 Year

1990

2000

Germany United Kingdom

Malaysia

Singapore

100

1950

1960

1970 Chile

1980 Year

1990 Brazil

2000

25 30 35 40 45 50
1950

40

60

80

1960

1970 Poland Russia

1980 Year

1990 Hungary

2000

Mexico

Note: Undervaluation value of 100 means fair valuation. Undervaluation of 20 means that the productivity level is 5 times the cost.

23

Growth ModelIndia and China

The growth model uses the following variables for the period 1980 2003; data arranged in five-year periods. Log Initial Per Capita Income, Log Initial Years of Education, Latitude (proxy for Geography), Log Change in Undervaluation, and Share of Investment in GDP are the independent variables.

24

Living StandardsIndia, China

Poverty Levels Infant Mortality Fertility Rate Dependency Ratio Education Attainment, All Education Attainment, Females

25

Poverty LevelsIndia, China

Share of Population Living Below $1/Day
100
5 Yr Avg, 1962-02

60

80

20

40

China

India 1962 1967 1972 1977 1982 Year 1987 1992 1997 2002

Source: XX

26

Poverty LevelsIndia, China

Share of Population Living Below $2/Day
100
5 Yr Avg, 1962-02

60

80

India

40

China

20
1962

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: XX

27

Poverty LevelsIndia, China

Headcount ratio, different estimates of growth
Household Survey
50.0 60.0
1980 1985 1990 1995 Year 2000 2005

Household Survey, World Bank

HCR 30.0

10.0

20.0
1980

HCR 40.0

1985

1990 Year

1995

2000

0.0

HCR 20.040.060.0

Survey, 1987 S/NA Ratio

1980

1985

1990 1995 Year India

2000

2005

China

28

Poverty LevelsIndia, China

Poverty levels in India and China in the year 2003 are the same.

29

Infant Mortality LevelsIndia, China

Infant Mortality Levels
5 Yr Avg, 1952-02

200

China

Levels

100

150

India

50
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year
Source: WDI 2004

30

Infant Mortality DeclineIndia, China

Infant Mortality Decline
5 Yr Avg, 1952-02

-1

India

-4 -6 -5

-3
China 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year
Source: WDI 2004

-2

31

Fertility RatesIndia, China

Fertility Rate Decline
5 Yr Avg, 1962-02

India

China 1962 1967 1972 1977 1982 Year 1987 1992 1997 2002

Source: WDI 2004

32

Dependency RatioIndia, China

Age Dependency Ratio
5 Yr Avg, 1962-02

70

China

65

55

60

India

1962

1967

1972

1977

1982 Year

1987

1992

1997

2002

Source: WDI 2004

33

Education AttainmentIndia, China

Education Attainment
5 Yr Avg, 1962-02
China

India

1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year
Source: WDI 2004

34

Education Attainment FemaleIndia, China

Education Attainment, Female
5 Yr Avg, 1962-02
China

India

1
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 Year
Source: WDI 2004

35

Conclusion
Undervaluation of exchange rate is a very important theoretical and empirical contributor to the Chinese growth performance. Each 10 percent appreciation of the yuan would lower Chinas growth rate by 1.4 percent per annum. India growth rate is expected to be higher than China by 2010. Poverty levels ($ a day poverty line) are the same in India and China (circa 2003).

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