INDEX

INTRODUCTION 2
INDIAN ECONOMY 3
CHINESE ECONOMY 4
India & China - Major global economic players by 2025 5
CURRENT SCENARIO 9
INDIAN AND CHINESE ECONOMY – Sectoral comparison 12
Agriculture Sector 12
Information and Technology Sector 12
Telecom Sector 13
CONCLUSION 14
INTRODUCTION

Economics experts and various studies conducted across the globe envisage India and
China to rule the world in the 21st century. For over a century the United States has
been the largest economy in the world but major developments have taken place in the
world economy since then, leading to the shift of focus from the US and the rich
countries of Europe to the two Asian giants- India and China.

The rich countries of Europe have seen the greatest decline in global GDP share by 4.9
percentage points, followed by the US and Japan with a decline of about 1 percentage
point each. Within Asia, the rising share of China and India has more than made up the
declining global share of Japan since 1990. During the seventies and the eighties,
ASEAN countries and during the eighties South Korea, along with China and India,
contributed to the rising share of Asia in world GDP.

According to some experts, the share of the US in world GDP is expected to fall (from 21
per cent to 18 per cent) and that of India to rise (from 6 per cent to 11 per cent in 2025),
and hence the latter will emerge as the third pole in the global economy after the US
and China.

By 2025 the Indian economy is projected to be about 60 per cent the size of the US
economy. The transformation into a tri-polar economy will be complete by 2035, with the
Indian economy only a little smaller than the US economy but larger than that of Western
Europe. By 2035, India is likely to be a larger growth driver than the six largest countries
in the EU, though its impact will be a little over half that of the US.

India, which is now the fourth largest economy in terms of purchasing power parity, will
overtake Japan and become third major economic power within 10 years.

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INDIAN ECONOMY

The economy of India is the third largest in the world as measured by purchasing power
parity (PPP). When measured in USD exchange-rate terms, it is the tenth largest in the
world, with a GDP of US $1.0 trillion (2007). India is the second fastest growing major
economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007.
However, India's huge population results in a per capita income of $4,031 at PPP and
$885 at nominal (2007 estimate). The World Bank classifies India as a low-income
economy.

India's economy is diverse and encompasses agriculture, handicrafts, textile,

manufacturing, and a multitude of services. Although two-thirds of the Indian workforce
still earn their livelihood directly or indirectly through agriculture, services are a growing
sector and are playing an increasingly important role of India's economy. The advent of
the digital age, and the large number of young and educated populace fluent in English,
is gradually transforming India as an important 'back office' destination for global
companies for the outsourcing of their customer services and technical support. India is
a major exporter of highly-skilled workers in software and financial services, and
software engineering. Other sectors like manufacturing, Pharmaceutical, biotechnology,
nanotechnology, telecommunication, shipbuilding and aviation are showing strong
potential with higher growth rates.

India followed a socialist-inspired approach for most of its independent history, with strict
government control over private sector participation, foreign trade, and foreign direct
investment. However, since the early 1990s, India has gradually opened up its markets
through economic reforms by reducing government controls on foreign trade and
investment. The privatisation of publicly owned industries and the opening up of certain
sectors to private and foreign interests has proceeded slowly amid political debate.

India faces a burgeoning population and the challenge of reducing economic and social
inequality. Poverty remains a serious problem, although it has declined significantly
since independence, mainly due to the green revolution and economic reforms.

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CHINESE ECONOMY

China's economy expanded 11.5 percent in the first half of this year, up 0.5 percentage
points from a year earlier, known from the National Bureau of Statistics (NBS) The
economic growth of the second quarter of 2007 was 0.8 percentage points higher than
the blistering 11.1 percent of the three months to March. The country's gross domestic
product (GDP) totalled 10,678.8 billion yuan (US$1,405 billion) in the first six months of
this year. The primary, secondary and tertiary sectors reported 947 billion, 5.55 trillion
and 4.18 trillion yuan in added value in the first half, with the secondary sector, including
manufacturing, mining and construction, growing at the fastest year-on-year rate of 13.6
percent. The primary sector posted a growth rate of 4.0 percent and the tertiary sector,
including transport, telecommunications, catering, tourism, banking and insurance,
recorded an increase of 10.6 percent

The boom was driven by rising levels of foreign investment and import and export
industry, and also by increasing domestic consumption. "In the first half of 2007, the
central government adopted a series of macro-control policies aimed at the outstanding
contradictions and problems existing in economic performance, resulting in a steady and
fast economic growth". This is featured as rapid economic growth, improved efficiency,
harmonized structure and more substantial benefits to the masses. China's consumer
price index (CPI) rose 4.4 percent in June compared with a year ago and that for the first
half of this year increased 3.2 percent year on year. Fixed-asset investment in urban
areas soared 26.7 percent in the first half from a year earlier, up from 24.5 percent
growth in the whole of last year, indicated the bureau statistics.

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India & China - Major global economic players by 2025

Foreign Investments in India & China

Last year China attracted more than $50 billion in foreign direct investments — the
second-biggest FDI destination in the world after the United States. Hong Kong-based
Goldman Sachs economist Fred Hu Qiliu forecasts that by 2005 the inflow of capital for
China's industries could double; so would its foreign trade, to $600 billion.

The middle class, though less than 2% of the population, already totals 20 million people
earning an average of $12,000 or more a year. Those numbers are just a little less than
Taiwan's entire population and per-capita income.

Foreign Investors in India’s Information Technology

1. Bharti Telecom & Singapore Telecom - $ 650 million

Singapore Telecom, as one of the best Telecom carriers in Asia, has invested $ 650
million in Bharti, which is one of the largest private Telecom carrier in India with 1 million
mobile subscribers. The project involves setting up the broadband infrastructure
between India and Singapore. The venture, called the Network i2i [ $ 170 million] , is a
sub-sea fiber- optic cable from Singapore to Chennai [ 3,200 km] and from Singapore to
Bombay around Sri Lanka [5,600 km]. The first part is already completed and the second
to Bombay will be completed in mid-2002. This allows SingTel to get access to Bharti’s
own Indian fiber network [ 10,00 km in 23 cities in Maharashtra] and 35,000 km
connecting 25 cities in Andhra Pradesh, and Karnataka.

2. INTEL Capital - $10 million in 2000 , $ 100 million.

The fund has invested in 15 companies in the last 18 months. Among the companies
Intel invested in the last year in India were Rediff, Network Solutions, Eastern Software,
Ritechoice, Bharati, Indus Software and Silicon Automation Systems.

It has sold its 5 % Rediff.com stake to Warburg Pincus for $ 3.5 million. It is also selling
its 15 % Bharti Telespatiale [ ISP] and 10% Bharti Telesoft since SingTel invested $ 650
million in Bharti.

Intel will expand its India Development Center in Bangalore from the present 50 to over
500 in the next three years. Intel’s recent acquisition of Bangalore-based Thinkit
technologies would supplement design capability sourcing from India; Pramati
Technologies in Hyderabad also got investment from Intel in the Java
technologies area.

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3. CISCO- $ 200 million:

Since 1996 Cisco has invested $ 75 million in India and plans to increase its investment
by another $ 150 million and its staff strength from 500 experts to about 1500 in the next
two years.Cisco has some 700 partner employees who are dedicated to the R & D work
with Infosys , Wipro, and HCL at Bangalore and Chennai[ Madras] .

4. IBM - 2001 $ 25 million , $ 100 million more by 2004.

IBM has a joint venture with Tata Consultancy Services . At Bangalore it runs a SEI-
CMM level 5 accreditation Software Testing center . Thomas Abrahams is the India IBM
CEO . IBM has a Hindi version of Lotus Notes Domino, and a Hindi version of the Data
Base DB2 and the WebSphere Application Server is available. It has about 400
professionals. At Pune there will be 500 developers supporting WebSphere Application
Server on Linux , NT, AIX, Solaris, HP-UX.

Information Technology statistics on China & India

According to a Gartner group research study in 2001, China’s hardware industry alone
is eight times larger than India’s in 2000. China recorded hardware sales worth $ 16
billion while India barely managed a sales figure of $2.2 billion. In 2000, China’s
hardware market grew by 18 % compared to India’s 6 percent.

Personal Computer [PC] sales in India in 2000 were 1.7 million units and in China PC
sales were 7.2 million against a world total of 140 million units. Computer penetration per
1000 people in India is 6.2 as compared to 13.2 units in China. IT spending as a
percentage of GDP in China is 1.1 percent while in India it is 0.8 percent.

In IT Services India leads with a total gross figure of $ 5.9 billion in 2000 . China had a
figure of $ 3.42 billion.

In domestic Software market sales, China at $ 4.2 billion outpaces India at $ 1 billion.

China’s Telecom market is $ 111 billion - about five times larger than India’s at $ 23
billion. India has 2.5 million Internet users China has 22.5 million Internet users ; it is for
this reason that Charles Schwab, the retail stock broker in USA, when launching their
Internet stock trading web site in 1997, simultaneously launched a similar Chinese
language web site. Among world cultures the Argentineans, West Indians, Pakistanis,
Indians and the Chinese are known for their cultural bias towards trading.

In Mobile phones China, with 130 million and over 160 million fixed line phones has
overtaken the USA. Growth rates in Chinese mobile phones are 30 million per year and
fixed line phones are growing at 20 million per year.

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In India the mobile phones total as of October 2001 was at about 5 million. Fixed line
phones in India are at about 35 million.

Telecom Policies in China versus India / Pakistan.

Local Equipment production in China ensures that about 80 % of the Telecom

equipment is locally produced with foreign technology transfer. China has allowed Voice
over Internet Protocol [ VOIP] - a technology that has still not been allowed in India and
Pakistan . Pakistan PTCL has recently awarded a contract to a US company to enter this
area.

In India the Department of Telecom [DOT] strongly resisted the creation by Sam Pitroda
of Center for Development of Telematics C-DOT, which manufactured the first Indian
made local exchanges [see details on December The-South-Asian issue on Sam
Pitroda].

Currently DOT is resisting the Indian made wireless in Local Loop technology by the
University of Madras called cor-DECT.

The Chinese government dissolved the MPT because it was obstructing deregulation.
The equivalent body is the DOT in India. In India and Pakistan the regulatory bodies
TRAI and the PTA are full of old retired officers from the DOT and the PTCL. These
officers have no mind set with which to deregulate the old monopolies. The DOT and the
PTCL burden the new telecommunication companies and Internet Service Providers
[ISPs] with entrance and license fees, revenue shares, etc. Small private IT
entrepreneurs who, despite poor finances, introduced Email , Radio Paging, and Cellular
phone networks and took revenue streams away from the National Carriers are thus
paralyzed. In China it is the opposite policy.

In India the DOT which owns the BSNL [ local long distance ] , VSNL [ international long
distance and MTNL is also the policy making body. The boss of these Public Sector
Telecoms companies is the Minister of Communications [ Mr. Sukh Ram]

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Forecast of Future economic growth in India & China

According to Shahid Javed Burki, former World Bank economist, India and China will
become major players in the world economic arena in the next 25 years, surging ahead
of the industrial US and European powers. At present growth rates, China will overtake
the United States in the global output, with India becoming the third largest economy in
the world ahead of Japan and Germany.

In 2025, "China’s and India’s share in global output will be about equal to the present
share of US and Europe. The main significance of this development is that these two
Asian economies would have climbed to the top of the league, displacing a number of
European countries," he said.

"The size of the Indian economy at 12 trillion dollars will be nearly forty per cent larger
than that of the US economy in 2000. Japan and Germany will fourth and fifth place
while Brazil and Mexico would have overtaken France and UK to be in sixth and seventh
places," speaking at the United Nations.

Also, at the 2000 prices, the value of global output would have increased from forty
trillion dollars to ninety-five trillion dollars by 2025.

By then China, with output of 25 trillion dollars, which would be three times the current
US economy will account for 26 per cent of global product while share of America will
remain at the same level of 21 per cent. India, presently with less than six per cent of the
global product, would see its share more than double to 13 per cent, he said.

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CURRENT SCENARIO

INDO-CHINESE RELATIONSHIP

Service sector in India is booming. Experts say that in the of shoring world, India could
be the hub and other Asian nations, the spokes. But, china is now catching up with the
Indian of shoring industry… at the same time, its manufacturing sector in full fledge.
China seems to have realized that any sector, no matter how profitable will slump into
recession once it reaches the peak. However, in India, the service sector is still being
milked dry, while we actually need to shift our focus toward the manufacturing sectors.

The point however, to be considered, is that china need not be a replacement market
for Indian talent but a complementary market for growing business in Japan and
servicing the local Chinese businesses. But setting up a development centre in china is
not that simple. Now, the exit options at the moment are not clear. Even though the cost
of a Chinese programmer may be less than that of an Indian programmer, there are
other overhead costs which bring the cost of development in china almost on par or
above India.

20000
15000
10000
5000
0
INDIA CHINA SOUTH AFRICA

On comparision of all the above costs, India is the best alternative. The Indian firms will
have to look at these centres as strategic resources to de-risk.

As far as the English speaking talent is concerned, India will continue to be the base. At
the moment, the Indian talent supply looks sufficient. So much so, that there has been
no increase of salaries at the entry level for the last 2-3 years. This is probably an
indicator of the soon-to-come recession in the service sector.

An attempt has been made in this project to identify the various needs as to why India
has to concentrate on industrial development and propel the manufacturing sector that is
not being exploited to its fullest potential.

INDIA V/s CHINA - SERVICE SECTOR

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The growth of the service sector in both the developed and developing world has been
phenomenal. As economies become progressively service driven, greater wealth and
employment is being generated in this sector. Before we begin, what exactly are the
different types of services?

Services can be classified into four categories on the basis of the service customization
and customer contact, and we would look at the categories as follow.

First of all would be the Service Factory, with such examples as airlines, hotels/resorts
and trucking. This is the type where there is low customer contact and low degree of
customization. The services offered need to be warm and exciting, and attention must be
paid to ambience and physical surroundings.

Secondly, the Service Shops, where there is high degree of customization. The
management must deal with skilled labour and the key challenges would be keeping
cost down and quality up. Examples are hospital and auto repair.

The third type of service would be the Mass Service, where there is high level of
customer contact and low level of customization. Managing and controlling the workforce
would be the key and examples are retailing, wholesale trade and school.

Lastly, the Professional Service Firms, with a high degree of customer contact and
customization. The key to this type of services is the managing and controlling of people,
management's ability to deal with skilled workforce as well as keeping cost down and
quality up. Some examples are doctors, lawyers, consulting firms and so on. Due to the
growing importance of the service sector, academics and consultants worldwide have
make efforts towards improving the management of service businesses.

Similarly, in India, the service sector has been growing rapidly over the last decade or so
and the trend is likely to continue. If one describes an economy based on its major
economic sector, then India made the transition from an agricultural economy to a
service economy in 1979. In 1985, the service sector accounted for 47 per cent of GDP,
having expanded at an average annual growth rate of 7 per cent between 1980 and
1985 The share of services sector in the real GDP in India has surpassed that of
agriculture and industry at a relatively faster pace as compared to other industrialized
nations.

Service sector has become the main contributor to the GDP not merely in developed
economies like U.S.A.(71%), Japan(60%) & U.K.(67%) but also in developing
economies like China(33%), Indonesia(41%), Pakistan(50%) & Brazil(56%).

The service sector's share has grown from 43.69 per cent in 1990-91to 51.16 per cent in
1998-99. In contrast, the industrial sector's share in GDP has declined from 25.38 per
cent to 22.01 per cent in 1990-91 and 1998-99 respectively. The agricultural sector's
share has fallen from 30.93 per cent to 26.83 per cent in the respective years. It is true
that the industrial sector too has grown, 1990s (except in 1998-99). But the service
sector has grown at a higher rate than industry.

Some economists caution that if the service sector bypasses the industrial sector,
economic growth can be distorted. Service sector growth must be supported by

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proportionate growth of the industrial sector; otherwise the service sector grown will not
be sustainable. This project is a comprehensive study of the two important sectors,
namely manufacturing and service of China and India.

PRODUCT SPECIFIC EXAMPLES

1. China produces more than 25% of the world's televisions and easily surpasses India
in both domestic sales and exports.

2. China is planning to increase its textile exports to $ 50 billion in 2006. It is already

preparing for the global textile market opening up totally. And in India we tax polyester
fibre and other raw materials at the highest possible rate.

3. China produces eight times more ceiling fans than India and half the price advantage
is because of India's high indirect taxes that affect domestic and export sales.

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INDIAN AND CHINESE ECONOMY – Sectoral comparison

Agriculture Sector

The agriculture sector in India, which constitutes a larger share in total employment,
grew at an annual rate of 3.9 percent for the year 2005-06 in comparison to 0.7 percent
in 2004-05. The growth rate for the year 2005-06 was mainly due to good monsoon.

The total food grain stocks in the country experienced a slight declining trend. As on 1st
August 2005 the total stock of food grains was at 20.97 million tonnes, which declined to
17.21 millions tonnes as on 1st August 2006.

The growth rate of agriculture sector for this year is expected to remain optimistic. Good
monsoon in this year is expected to boast the agricultural production.

The agriculture business sector in India is considered to be one among the key area for
overall economic development. The Government has already emphasized for the
promotion of agriculture business sector in the country. Presently India is the third
largest agriculture producer in the world.

Over the years, China has become gradually more industrialized. Like other modernizing
countries, for instance, the contribution of China's agricultural sector to its GDP has kept
decreasing, from 37.9 percent in 1965 to 28.4 percent in 1985 and then to 18.4 percent
in 1998— a net decrease of 19.5 percent in the 3-decade period.

Non-agricultural industries' value amounts to the main body of the national economy, but
the proportion of employees in the agricultural sector dominates the workforce at present
and will do so in the future. The conflict of a dual economic structure is still obvious. It is
reflected in the enlarged income gap between industry and agriculture, rising from 2.12
in 1991 to 5.25 in 1995, and its estimated value will reach 5.62 in 2005. Obviously, the
changes of the industrial structure and employment structures are not consistent with
other developing countries. The Chinese government and scholars have noticed this
phenomenon, and many efforts have been made to reshape the structure more properly.

Information and Technology Sector

The Information and Technology sector is considered to be an important area for its
contribution to Indian Economy. As to statistics, the software industry in India stands at
US $ 29.5 Billions, which is around 20% of country’s exports.

The IT and ITES services sector has become the most emerging sector in India today by
creating huge employment opportunities in the country.

In the Union Budget 2006-07, 8% of excise duty was being imposed on packaged
software. The incidence increase may be due to more compliance cost and more
administration cost. Presently India has become the top destination for IT and IT related
services.

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The hardware industry in the country is also experiencing a growing trend. Ongoing
domestic taxes and levies have imposed some fiscal pressures.

The China economy is poised to grow in 2005, with a real GDP growth rate in the range
3.0 percent to 3.5 per cent. The growth prospects are expected to be broad-based with
business investments and net exports expected to be the main sources for this growth.
As the largest producer and consumer of information and communications technology
(ICT) products and services, the country's IT industry is the key driver for growth of the
global IT industry. Ranked first in the network readiness index of the World Economic
Forum in 2004, China is a highly competitive market for all segments of the industry,
attracting both domestic and international participants and is the hotbed for innovation in
technology. This study presents political, policy and economic trends in China, along
with trends and forecasts for the IT industry.

Telecom Sector

Though the telecom sector in India has experienced a faster rate of growth, still it suffers
from the problem of complex tax structure. Presently the sector suffers from the problem
of 12% service tax, 6-10% license fee, 2-6 % spectrum charges, 1.5% asset deficit
charges, and 2% education cess. Such types of tax system adversely affects to the
country’s telecom sector.

A single tax system should be introduced for making the tax system investor friendly. For
implementing this, the following steps should be undertaken:

• Reducing custom duties on some capital goods.

• Reducing excise duty on telecom products.
• Abolishment of CST of 4% for the telecom related equipment.

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CONCLUSION

The achievements of China's two decades of reforms are regarded as an economic

miracle. Its reforms have made it the fastest growing economy in the world. What is
remarkable is the rapidity with which it all happened. China’s success story shows how a
war-ravaged, communist country with scarce resources could make a miracle happen.
The transformation was possible because china rightly employed its major resource ie
the human resource in the productive, manufacturing sector. The Chinese experience
clearly demonstrates that the competitiveness does not emanate from mere availability
of resources. It emanates when they are put to their best use.

For quality of life to improve, even India we needs to put the emphasis on
manufacturing.for agriculture and services to grow, we need more manufacturing. If the
domestic industry stops spending, the service industry will find itself in throes of massive
overcapacity. Our efforts to help the service sector are laudable but the manufacturing
sector should not be ignored China did have a head start compared to India in reforming
its economy but they went about it with great deal of planning. They invested heavily in
the manufacturing sector and created impressive capacities in almost every sector of the
economy. True, they had a huge domestic market. But so do we. They were looking at
the global market when they created these capacities. They also took their time to get
into WTO so that they could practice some amount of protectionism in the intermediate
period.

It is more difficult for Indian domestic private firms to grow because they have missed
the window of opportunity in the last 15 years. And now they have to compete with Multi
National Companies. That India would have to now develop its manufacturing sector is
certain. However, the issue now is whether domestic firms can compete with foreign
firms.

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