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India vs. China

By | Feb. 2007
Page 1 of 17
INTRODUCTION

With a combined population of close to two-and-a-half billion people , China and India- neighbors across the Himalayas- control a significant portion of world demand. Add to this the high GDP growth rates shown by the two economies in the past five years and you get what is now well recognized as the CHINDIA effect. But what if the two countries are pitted against each other rather than in collaboration? Which of these then emerges as a more favorable investment destination and why?

On one hand there is People's Republic of China, a totalitarian state, with Mr Hu Jintao as President and the Communist Party of China (CCP) dominating the government. On the other, there is India, a democracy, historically under the control of Indian National Congress but having a trend of coalition governments in power for some time now.

In terms of the economic situation China contributed 13% of the world GDP in Purchasing Power Parity (PPP) terms in 2004 . In the same year, contribution by India amounted to 6% of the total world GDP. In case of China the focus area has been Industry that increased its share in GDP from 42% in 1990 to 53% in 2003 . In India, a similar role is played by the Service sector that increased its share from 46% of GDP in 1990 to 56% of GDP in 2003. It must be noted, however, that despite service sector being the largest contributor to the GDP, it is agriculture that still employs the largest number of people in India. Thus, though its contribution to GDP is only 22%, agriculture still employs about 58% of the population .

From an investment perspective, the top sources for FDI in China and India are Hong Kong and Mauritius respectively . This aspect is crucial since later it will be shown that China's FDI figures are actually overstated because of what is known as round-tripping of capital through Hong-Kong.

Looking at the various economic data, a priori China does seem to have an advantage over India because of its sheer...

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