Introduction:

What China is to the world for manufacturing, India is for services. The accelerated economic growth of both India and China in recent years has been a focus of significant policy discussion and analysis. On one hand, this growth is led by the IT industry in India, and on the other, it is the manufacturing industry based in China.  This article details how we have come to this conclusion following 2 years of extensive research by the experts of Vantage Agora Inc.,

A comparison of the economic structure in China and India demonstrates that the role of the service sector (or the tertiary sector as it is known in China) in the two economies is very different. Referring to Figure 1,on the one hand, the service sector has become the dominant contributor to the Indian economy, accounting for 54.2 per cent of GDP (Gross Domestic Product) in 2004.The success in this sector is regarded as “India’s services revolution” (Gordon and Gupta 2004). On the other hand, China’s service sector has lagged well behind the manufacturing sector (or the secondary sector according to Chinese terminology), and its role in the economy improved slightly in the last fifteen years when the Chinese economy achieved its best performance in recent history.

Figure1: Comparison of Various Indian & Chinese Industry Sectors through the decades. (Sources: National Bureau of Statistics (various issues) and Reserve Bank of India (2005). Chinese data from 1993 onwards are revised according to China’s recently released economic survey results (www.stats.gov.cn, Zhu 2005)

The Indian Services Sector

The service sector is playing an increasingly important role in the Indian economy.  Services, which made up only 29% of GDP in 1951-52, grew to 57% of GDP by 2009-10. A variety of factors have contributed to this growth namely economic and financial reforms, privatization, trade, reform, Information Technology Enabled Services (ITES), and an overall opening up of Indian society and economy to the world. The export of ITES services, which includes software and Business Process Outsourcing (BPO) from India, has also helped to ensure consistent economic growth as the demand for these services as a cost saving measure in the west remains high. The service industry in India is well diversified due to which overall growth in the sector has been resilient even through economic troughs.  From tourism, airlines and hotels, to finance, insurance and banking, the sector has shown very strong growth for decades so that it now occupies a dominant position in the Indian economy.

The outlook for services in 2011 is good to the extent that the Indian financial system is nowhere nearly as exposed to the risks facing many western financial institutions.  The Information Technology Enabled Services (ITES) industry is arguably one of the most visible of all Indian service Industries.  It is also the one most influenced by overseas economic events.  ITES exports declined slightly in the immediate aftermath of the financial crisis. Inspite of the major external shocks like a financial crisis in Europe and United States, the Indian service sector has grown by about 6-8% in 2011.

Figure 2: Growth of Indian Service Sector (Source: Calculated from Reserve Bank of India Data)

The Chinese Services Sector

China committed to a dramatic opening of its services sector when it acceded to the World Trade Organization in 2001.  The sector has grown strongly, but even after last year's recalculation of the services sector's share of GDP, the services sector in China is still smaller than it should be for an economy at China's stage of economic development. Unlocking the enormous potential of the services sector is needed to strengthen the business sector in terms of soft skills which will take a longer time to establish. One of the drawbacks of the Chinese service sector growth is the constant threat of intellectual property rights violation. There is rampant piracy which is constantly contributing to the smaller and weaker size of China’s software firms.  Despite the differences in the Indian and Chinese service sectors, most of India’s lessons can be applied to ensure the success of the Chinese service sector. Both India and China have earmarked two different development paths. Each has leveraged its strengths to develop its own industries. While India has been hugely successful in its service sector, it has fallen short of the manufacturing sector. As a result, China looks towards India for lessons learned and vice versa.  To develop its services sector, China would need to improve their working skills, continue development of human capital and provide some preferential treatment to increase FDI and foster specific industry development.

Figure 3: Growth of Chinese Service Sector (Source:www.dfat.gov.au/publications/china/unlocking_china_services)

Comparing Services Industry in the two countries

Table 1: India vs. China in offshore outsourcing (Source:  http://www.cio.com/article/640363)

This bird’s eye view of industrial capabilities in China and India lead us to the following observations. The service sector as part of the national economy in China and India has achieved substantial growth in recent decade. However, in international perspective, China and India are outliers, i.e., India’s service sector over-performed while China is a better fit for the manufacturing outsourcing. This has been proven by the sheer number of companies that have done their homework and have IT and BPO centers in India and not in China. Whereas a majority of the world’s manufacturing needs come from China. The fact that India has more number of IT and BPO than anywhere else in the world and China has more manufacturing revenue than any other country in the world is testimonial to this conclusion.

An added note on China and India is that there are many internal drifts and a movement in both countries. China is having trouble opening up to the rest of the world. The Chinese internet is one such example (Source: http://news.cnet.com/China-creates-own-Internet-domains). India has its limitations in the fact that it is the world’s largest democracy and with it comes latency in the system to work.

In conclusion, India is still the first choice for IT and BPO service across the world while China remains the destination of choice of most manufacturing outsourcing work.

About Vantage Agora

Vantage Agora (VA) is a global provider of back-office solutions, custom IT services and consulting services for companies in the insurance, finance, and healthcare sectors. As a SAS70 Type II audited company, Vantage Agora utilizes advanced data processing and quality control systems on a secured network to ensure efficient, comprehensive management of back-office functions such as payroll, accounting, financial and administrative tasks. Founded in 2004, Vantage Agora has offices in Cleveland and Dallas.

For more information on Vantage Agora’s capabilities visit  http://www.vantageagora.com