Comparative Analysis of Investment and Trade Performance between China and India - Case Study Example

Institution : xxxxxxxxxxx Title : xxxxxxxxxxx Tutor : xxxxxxxxxxx Course : xxxxxxxxxxx @2016 А Cоmраrаtivе Analysis of Investment and Trade Pеrfоrmаnсе bеtwееn China and India Introduction Pao and Tsai (2011) aver that China and India exist among the current largest global economies. The two countries have attained a remarkable growth regarding trade and investment in the recent years. However, there are evident differences and disparities in the tremendous economic development of the two countries despite both having a considerable room for growth. Today India has transformed into an influential trading superpower as well as a tremendously increasing magnet for the foreign development investors. The incumbent’s vital role in the international economy to this level has been pronounced than the rise as well as the dominance of China (Hausmann, Hwang, & Rodrik, 2007). India is, however, appreciated for the many opportunities it is creating for its people, employees, and domestic as well as foreign firms (Jayanthakumaran, Verma & Liu, 2012)China’s commodities trade has not only increased promptly but also undertaken substantial restructuring and upgrading. Active involvement of foreign invested companies and businesses coupled with liberal trade policies account for the main factors that promote the growth of trade and investment in China. Most of the foreign-invested enterprises that stimulate Chinas economic growth come from the neighboring Asian countries especially those in both East and Southeast Asia. Dicken (2007) add that China has evolved into a critical link in an escalating regional production network. Contrary, trade expansion in India has not resulted in considerable structural transformations as the national commodity exports have steadily remained weak. However, trade in services continues to play an imperative role in the economic development of India. According to Hausmann et al. (2007), typical challenges facing the proliferation of trade in India entail the lack of export-oriented foreign investment causing a lesser integration effect regarding Asian economies. In fact, India does not appear as a major trading superpower or a place where foreign investors can consider citing their manufacturing company. This paper lays a great focus on different theories and critically analyses investment and trade performance of both China and India while describing issues and challenges facing the development of investment and trade in the two global influential economies. Analysis of Investment and Trade in China and India Jayanthakumaran, Verma and Liu (2012) hypothesize that both China and India continue to record substantial and notable performances regarding global investments as well as trade. China has outsmarted the entire world regarding economic development often by a large margin. India’s trade and economic growth has similarly been remarkable since 2003. Rapid business expansion and burgeoning foreign investment are the most common features accounting for these successful achievements. Since 2006, China’s total nominal trade when measured in US Dollar consistently recorded an annual percentage growth of approximately 17.5%. The country’s both export and import real increased continued to grow in the last decade as more inventions were sustained (Pao & Tsai, 2011). Nonetheless, China experienced an ostensible acceleration in trade after joining the World Trade Organisation in 2001. Since then, the national average annual growth reached 26.5% and 26.8% respectively for import and export between 2001 and 2006. This outcome was a tremendous improvement when compared to the 15.2 percent and 6 percent the years preceding 2001 (Vijayakumar, Sridharan, & Rao, 2010; Hausmann et al., 2007). China’s general trade grew by another 16.9% to a record of US$ 956 billion for import and US$1,218 billion for export in 2007. Likewise, India’s trade performance in the last decade has been almost similarly outstanding. The country recorded remarkable improvements in both nominal imports and export from 2001 to 2005 at 11.7% and 11.3% annually, respectively (Dicken, 2007). Similarly to the Chinas trade performance, India’s imports and exports of both goods and services reached a respective US$188 billion and US$164billion in 2005. These figures were equivalent to 20% to 25% of China’s numbers in both export and import, respectively (Cline, 2010). On an annual basis, India’s trade also continued to improve since 2001 to a level that they could outpace those of China. India’s nominal export and import growth respectively stood at 28% and 30.2% from 2001 to 2005 as compared to the 9.1% and 8.3% for the preceding years before 2001 (Broadman, 2006). Considering the measure of trade to GDP ratio, China and India have become considerably more open with the business expansion and trade liberalization decades. According to Cline (2010) India and China trade to GDP ratio for was estimated to be about 14%, as opposed to approximately 34% world estimates in 1978. China’s trade to GDP ratio continued to grow considerably reaching 43% in 2001 and extended to 70% in 2006. China’s 2006 projections significantly outpaced the world average. Comparatively, India’s trade to GDP ratio remained consistently throughout the 1980s despite its substantial improvement in the late 1980s. The country’s GDP ratio doubled between 1987 and 2001, rising from 13% to 26%. Consequently, the rate continued to increase tremendously reaching 44% in 2005(Broadman, 2006; Cline, 2010). Despite this ratio remaining lower than the global average which was estimated at 52% in 2004, India’s proportion was sizably higher than that for many developed economies such as the United States, Brazil, and Japan. Today, India exists as the world’s 7th largest economy based on 2015 nominal GDP. The country’s nominal GDP for 2015 stood at approximately US$ 2.1 trillion. However, India is the world’s third-largest economy based on GDP determined regarding PPP in 2015 (Valli, 2015). The national GDP regarding PPP was estimated at US$ 8.0 trillion. The 2016 GDP is projected at 7.4 percent. India has a favorable demographic profile with 66 percent of the total population being in the working age group of 15 to 64 years. Additionally, India’s consumption demand which is determined by basic use remained stable in 2015 as the Sovereign rating placed it at Baa3/Positive(Moody’s), BBB-/Stable(S&P), and BBB-/Stable (Fitch) (Valli, 2015). Consequently, the national terms of trade this corresponds to the ratio of Price of exportable goods to the Price of importable goods declined to 57.90 Index Points in 2015 from 60.20 Index Points in 2014. India’s Terms of Trade in averaged 79.94 Index Points from 2000 until 2015, marking an all-time high of 100 Index Points in 2000 and a record low of 57.90 Index Points in 2015. The Reserve Bank of India has the responsibility of reporting the national Terms of Trade in India (Valli, 2015; (Garg, 2012). Contrary, China has evolved into an influential player in world trade. The incumbent rated as the world’s third-largest trading nation after the United States and Germany in 2006. From 1983 to 2006, China’s total commodities export share in the world rose considerably from 1.2% to 8.2% (Broadman, 2006; Cline, 2010). Similarly, its imports share increased from 1.1% to 6.5% during the same period. During the same years, India also managed to achieve a considerable amount of trade regarding trade though to a minor extent when compared to China. In 2006, India was reported as the world’s 28th largest exporting nation and the 17th largest importing nation with total trade ranking at number 18 (ANISHA, 2015). Stronger and enhanced business developments account for the increased performance of China and India in the global trade market. Nevertheless, it is essential to distinguish that business expansion in the two countries exhibits many substantial differences. One of the most leading primary disparities entails the direction of trade imbalances. In the case of China, although the total trade had been largely in balance towards the mid-1990s, it continuously evolved and accumulated the significant and increasing amount of trade surplus from 1994. China’s trade surplus reached US$125 billion in 2005 despite the surplus ratio to total trade almost scoring lower than 5 percent (Broadman, 2006). Conversely, India’s experienced a constant, persistent deficit from 1978. India’s overall trade deficit had suffered from rapid increase recorded in the late 1990s and since 2001, reaching US$24 billion in 2005. The ratio of India’s trade deficit to total trade stood at 6.8% in 2005 (Broadman, 2006; Cline, 2010). The depicted deviating trade balances pattern demonstrates the different underlying business structures with their respective transformations. Issues and challenges for investment and trade development in India and China Typical common challenges are facing both investment and business activities in India and China. Sustainable growth remains a challenge due to the failure of the two countries to regularly produce without negative impact on both the environment and the future generation(ANISHA, 2015). Industrial activities such as manufacturing and processing of raw materials into finished products account for the highest level of pollution which has adverse effects the generations. Emission of toxic gasses and materials into large water bodies, the soil and air accounts for the increased cases of diseases (Jayanthakumaran et al., 2012). Inclusive growth is yet another issue. China and India have a responsibility to ensure that they employ a diverse workforce in regards to race, color, origin, and gender. Pao and Tsai (2011) add that most of the companies face the challenge of racism resulting from employing a given type of people as opposed to ensuring that job opportunities are provided by professionalism and competence. Moreover, the need to achieve demographic dividend compels India whose wider population entails the youth to face the challenge of effective management of demand and supply of skills and labor. Constant inflation results in hiking of consumer prices at an average annual level of 10 percent in the past five years. Inflation discourages investors and inhibits trade (Engardio, 2007). According to Garg (2012), rapid urbanization which sees tremendous growth among Indian cities leads to overcrowding of individuals in the urban. India’s urban population is anticipated to rise to 590 million people by 2030. Rapid urbanization has the effect of driving economic growth. Despite the generation of employment opportunities projected by these cities, the Indian government must establish better policies to meet urban infrastructure needs by using sustainable. The government also has the challenge of addressing and managing the growing levels of urban poverty and inequality (Luo & Tung, 2007). Despite the Indian-China trade being highly expected, one country will end up suffering the challenges and consequences of the trading since consumers from one country will purchase goods from the other. India stands a high chance of suffering from these issues due to its lower production ratio when compared to China (Buckley et al., 2007). The government has to address the above trade deficit by improving its export competitiveness and devising more goods, services, and policies to enhance balanced trade with China. Gereffi and Frederick (2010) avow that most of the investors cite problems involving chaotic traffic on the Indian roads, the poor state of infrastructure, the existence of trade development hindering democratic process coupled with rampant bureaucracy and endemic corruption. Indian roads are usually overcrowded as compared to those in China. The same case applies to the ports where ships in Bombay, India consume up to three days while turning as compared to those in Shanghai, China who take only a maximum of eight hours to turn. According to Buckley et al. (2007), India’s trade policies need substantial reformations and amendments Moreover, most of the manufacturers must acknowledge the fact that the relationship between India and China are formal but not warm; also neither of the two countries trusts the other. The lack of trust limits the two locations from serving each other for exports. Despite these challenges, India can never be neglected as it is mutually transforming into businessperson’s radar. Further Growth Opportunities Gereffi and Frederick (2010) indicate that China and India experienced remarkable expansion in both trade and investment in the recent years that have played a critical responsibility in the sustenance of remarkable economic development. Conversely, a critical examination of the essential attributes of the two incumbents’ growth in trade, particularly when laying emphasis on their structural transformations exposes many significant disparities. China has attained much better improvements in business development and critical changes that contribute to its better economic performance as opposed to India (Luo & Tung, 2007). Primarily, China is substantially more open to trade, as depicted with its ratio of trade to GDP; therefore, the incumbent contributes more significantly to trade at a global viewpoint (Gereffi & Frederick, 2010). Additionally, active trading in goods accounts for China’s domination in business expansion as compared to trading in services which has played a much more vital role in trade development. More significantly, direct foreign direct investment has been essential to China’s growth, expansion and business transformation. On the other hand, China’s rising trade surpluses is an outcome of its export-oriented foreign invested enterprises. Conversely, business activities entailing foreign invested enterprises have enabled the integration of China’s trade with the current region coupled with its structural upgrading. According to Engardio (2007), India continues to record a trade deficit despite the considerable increment in total trade. This challenge has a close association with limited restructuring in the India’s trade commodities caused by inadequate foreign investment. Additionally, India has never been integrated with the escalating regional production network that accounts for China’s rapid expansion in trade. There is, nonetheless, a great opportunity for India to catch not only with China but other leading global economies such as Canada, United States of America and Canada. Gereffi and Frederick (2010) add that improvement in India’s trade will entail both transformations in the form of domestic economic as well as the liberation of trade at national and global level. Catching up with the global leading trading countries will be critical for India to sustain its recent economic development and growth. More significantly, Indian continued and sustained economic growth coupled with similar developing countries such as China, is critical to the global economy putting in mind that the current financial crisis is fast spreading to cover all the corners of the world (ANISHA, 2015). Conclusion China and India rank among the best global players regarding investment and trade. China has trade favoring policies that account for the attraction foreign investors all over the world. The country conducts regular amendments in the constitution regarding trade and investment to ensure that it sustainably remains among the leading players in the sector all over the world. China and India continue to experience remarkable challenges despite the endless efforts to evolve into the global leading players regarding trade and investment activities. However, problems experienced in India are more prominent and highly spelled out compared to China. Corruption stiffened bureaucracies and poor infrastructure account for the main challenges facing India. There are additional issues such as trade restriction entailing tariffs and bans that deter the investors from taking an active role in the investment arena. It is, therefore, essential for the government to partner and collaborate with both private and Non-Governmental organizations to transform the nature in which trade is conducted so as to not only improve the entire sector but also attract more foreign investors. 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