How Politics, Economic Reforms and Strategies influenced the development of India and China during the last century

Seminar Paper, 2006

30 Pages, Grade: 2




India and China prior to 1950
India's way to independence in 1947
Foreign Ruled Colonial India under the British
Economic changes
China before 1949
Foreign Ruled China under the Manchus
The Republic of China

The emergence of two countries with a differing political system

The 1962 border war

Economic Reforms and Opening up
High taxes result in low foreign investment
India's SOE
Economic Crises of 1990 to 1991
Economic Reforms of 1991
State Owned Enterprises struggle after reforms

Deregulation measurements in India and China

SEZ in China and EPZ in India
SEZ (Special Economic Zones)
EPZ (Export Processing Zones)
Selected Economic Indicators

Trade between India and China
Bilateral trade in the goods sector
Bilateral trade in the service sector
Bilateral Investments
Works Cited


China and India, are among the biggest economies in Asia and both strive to emerge as Asian hegemonial powers. Yet their economic performances differ. This paper takes a look at the history of both countries and guides the reader through a journey of the once foreignly occupied powers to their present performance.


China and India, two countries that 50 years ago were at about the same stage of economic development, are now both at very different levels, with China being far ahead of India. To better understand the reforms and development in both countries, a brief overview of the history of the two countries is given first. Then a critical incident, that should disturb the relationship of both countries for many years to follow and that also had economical consequences, namely the 1962 border war, is covered. The journey is then continued in the mid 70s, when China started its reforms, later on India did so as well. Neither does this paper want to go into too much detail nor cover the whole series of events taking place in each of the countries, but rather focus on the crucial moments of both countries͛ history that are of relevance to their performance nowadays.

India and China prior to 1950

India ǯ s way to independence in 1947

A brief history of the colonial rule of England in India shall be given, as (and we will see this later), the present day democracy in India and its political institutions are based on the system originally implied upon by the British.

Foreign Ruled Colonial India under the British

India was a target colony for many European nations, starting with the Dutch and ending with the Carnatic wars over India between France and England. England succeeded in 1700, and emerged as the primary power in India. The British slowly expanded their empire. This didn͛t seem too difficult since the Mughal Empire was declining, and thus there was no central power that held the small princedoms together.

In the beginning the British crown gave the English East India Company the responsibility to rule. That worked fine until the Sepoy Rebellion, which started out by Indian soldiers and spread quickly. The British eventually stopped the revolt with the help of Sikh soldiers, and then placed all of India under the rule of the British crown, making Queen Victoria the ͞Empress of India͟. As the direct rule in India began, administrative changes were made. In 1861 Indians were allowed to participate in the Executive council, and later also in the local and regional level of governance.

Formally Indians could thus participate in the rule of their country, in reality they had to run through a complete classical European education, and the few that made it through those obstacles, often faced discrimination afterwards. In 1885 the Indian National Congress was formed as a means to increase Indian governmental participation. During the World War I, India was a critical support factor of the British Empire with some 750.000 Indian troops stationed in Europe, the Middle East and Africa. In 1917 the secretary of state to India (Edwin Montague) announced a policy of gradually strengthening Indian governance by Indians which lead to the 1919 Governance of India Act. At the same time the Rowlatt Acts were passed, which made restrictions, that had been imposed during the war, permanent. Ghandi and other Indian leaders called for nationwide civil disobedience. Unfortunately that day happened to be a Hindu festival in Amritsar, and thousands of people gathered peacefully to celebrate. The British troops opened fire on them without warning, 400 people were killed. The successful civil disobedience and the Amritsar incident made the public even more aware of the national movement and increased their support for Ghandi. In 1920 Ghandi started a new non cooperation movement, and reorganized the congress. While Ghandi was put in prison the English formed a committee to further think about what steps could be taken next to lead India into a democracy. In 1929 the Congress demanded complete independence. In 1931 a newly constructed capital city with the name of New Delhi was inaugurated. In 1935 the government of India Act provided the basis for a legislative body and established a federacy which incorporated the small princedoms. In 1937 the first nationwide elections were held. 10 years later, England͛s new labor parliament decided it was time to end their colonial reign and release India into independence. (Encarta Encyclopedia - India, 2003)

Economic changes

The British lead India from a country with a developed and working industry into an undeveloped country. During the 17th century and the 18th ĐĞŶƚƵƌLJ ƚŚĞ ĂƐƚ /ŶĚŝĂ ŽŵƉĂŶLJ͛Ɛ ŝĚĞŽůŽŐLJ ǁĂƐ ƚŽ let Indian workmen work for them, the cheaper Indian products were then exported to Great Britain. As the industrial revolution advanced in Great Britain, it became vital to find new selling markets for British products in India. Thus the competition by Indian businesses had to be eliminated. Great Britain achieved this goal through protectionist measurements such as huge tariffs on Indian products (up to 400% tariff on Indian products, while none or a very low tariff was put on British products). Sometimes they even went as far as using the military, and thus British products were sold in Indian villages on pain of penalties, under the supervision of the military.

As a result the exports of British cottage industries raised from 156pound per year in 1794 to 400.000 in 1834. The Indian cottage exports in contrast declined from 1,3 million pound in 1814 to 100.000 pound per year in 1831. Not only was the Indian cottage industry thus destroyed, but in a similar manner the shipbuilding, glas, metall, and paper business. In a very short time the industrial sector of the Indian economy had been totally eliminated, and India was reverted into a preindustrial agrarian state. Indias had no choice but to buy products manufactured by the British. Millions of workmen were unemployed now and tried to find work in the agricultural sector.

After 1858, also positive interferences took place, such as the building of a railway system, and the building of industrial businesses by the British. While serving the Indians once they gained independence, the purpose of building up this infrastructure was to profit the British, as they could reach new selling markets in India quicker, but also Indian grown raw material could be exported faster. That again helped the integration of India into the world market. On the agricultural sector one now concentrated on the cultivation of cash crops. Various regions set their very own focus: Wheat in Punjab, jute in East Bengalen, cotton in Khandes, Gujurat and Berar. During the second part of the 19th century plantations became popular. They included tea, coffe, indigo, rubber and sugar cane and were mostly foreign owned. The production was adjusted to the world market.

The process of industrialization only took effect in a limited number of sectors such as the already mentioned plantations, mining (coal, iron, petroleum, mica and gold), and the textile industry (jute and cottage). The necessary machines and technology almost always came from Great Britain. (Lanier, 1991: p.11ff)

China before 1949

Foreign Ruled China under the Manchus

Different military forces of the Manchus were united under Nurhachi, and started to conquer parts of Chinese territory to the north and northeast of the Chinese Great Wall. At the same time Li Zicheng started revolts within the country by leading an army of farmers. The last Ming emperor finally committed suicide. Through the conspiracy of the Ming general Wu Songai, who joined the Qing army w]ith his troups, in May 1644 the Manchus invaded Beijing and started a new dynasty. China was thus once again under foreign rule.

During the rule of Shengzu, the treaty of Nertschinsk(1689), which settled the border between China and Russia and was the first treaty with a European country, was negotiated. Also the annexion of Tibet was finished. During the reign of emperor Gaozong, Birma(1788) and Annam(1789) became tributory. It was also at that time that the empire had reached its biggest expansion in its history.

Ever since the 30s of the 19th century, the western imperial powers increased their military presence in China. After China͛s defeat during the Opium War(1839-42) in 1842 the first of the unequal treaties with Great Britain was negotiated in Nanjing. China had to surrender Hong Kong and open five of its ports (among them the one in Shanghai). In 1858(Tianjin) and 1860(Beijing), China was forced to allow further concessions, such as the opening of further ports, and free trade for British businessmen. France, Russia and the USA had similar claims. China lost the area north of Amur and east of Ussuri. Ever since the middle of the 19th century, the empire experienced inner political riots. Hong Xiuquan lead the Taiping rebellion(1851-64) and ravaged big parts of southern China, ruined public finances, and could only be stopped with the help of foreign troups. China then lost the first Sino- Japanese war in 1894/95 and had to acknowledge Korea͛s independence as well as cede the island of Formosa(now Taiwan) and Pescadores as part of the peace treaty of Shimonseki(1895).

In 1898 Kong Youwei started a campaign to modernize the society according to the model of Japan, but then failed because of the resistance of dowager empress Cixi and the intervention of

commander Yuan Shikai. When in 1899 the Boxer rebellion broke out, which endangered the interests of the foreign powers, Beijing was occupied by the western powers and Japan. Finally at the beginning of the 20th century, reforms (such as the abolishment of the confucian state exams and plans for the creation of a parliament modelling the ones that existed in Europe) were to be carried out, but Sun Yat-sen forestalled this revolutionary movement. Revolts and the establishment of a temporary government in Nanjing lead to the abdication of the Qing Dynasty and to the formation of a republic.

The Republic of China

Sun Yat-sen found the Guomindang(the national party) in 1912, but could not compete with the military regime of Yuan Shikai. After Yuan ShiŬĂŝ͛s futile attempt to establish a new dynasty in 1915, civil war between the local warlords broke out, and lasted until 1927. Ever since the middle of the 1920s, the armed hostilities between the communist party (founded on July 20, 1921 in Shanghai) and the Guomindang, now lead by Chiang Kai-Shek (Jiang Jieshi), intensified. Chiang Kai-shek͛s campaigns against communist bases in Jiangxi forced the red army to the long march, which lasted from October 1934 to October 1935. It was at that time that Mao Zedong became the leader of the communist party. The communists established their central base in Yan͛an(Shaangxi province).

In 1931 Japan occupied Manchuria, and in 1932 they founded the state of ͞Mandschukuo͟ (as protectorate of Japan). In 1934 they proclaimed Mandschukuo as an empire under the last Qing emperor Pu Yi.

During the second Sino-Japanese war(1937), that merged in 1939 with the events of the second world war, both parties united to fight the Japanese. After Japan surrendered in August 1945, the cooperation of the communists and the Guomindang broke up and only one year later both parties were engaged in civil war once more. The communists finally seized all of China͛s mainland in 1949, and Chiang Kai-shek had to flee to Taiwan, where, under the protection of the US army, he proclaimed the republic of China only slightly after Mao͛s proclamation of the the

people͛s republic of China. (Brockhaus - China, 2005; K.S.Latourette, 1963; Schmidt-Glintzer, 1999) The emergence of two countries with a differing political system Looking back at the history of the past 300 years, one can see, that there are parallels in both countries. India as well as China were both ruled by a foreign power, India by Great Britain, and China by the Manchus. Both countries were not happy with the foreign dominion, and rebelled. In India that was shown very early in form of the unsucessfull Sepoy Rebellion, in China there were many small revolts that weakened the central government.

India was ruled by the British, thus they were also protected by them against foreign powers. China in constrast was attacked by western powers, and slowly had to make concessions.

Once released into independence both countries practised a policy of isolation. After the proclamation of the PRC, China concentrated on the goal of self-reliance. On the one hand China was traditionally seeing itself as the hegemonial power in Asia, and under the Qing dynasty tried to totally close up, on the other hand the new communist government was also closing up the country under the premise of the cold war. India too had the goal of self reliance. After having been exploited by the British for many years, now that they finally enjoyed the freedom to rule their country by themselves, they wanted to exclude foreign interference and were opposed to any foreign involvement.

In the 1950s both countries were at about the same economic level. They had roughly the same per capita income and the majority of the population in both countries were working in the agricultural sector. India had a slight advantage over China, they had more arable land per capita, a more diverse industrial base and a better developed transport and communication infrastructure. China in contrast had a more productive agriculture and higher crop yields per hectare of land. Both countries followed the development strategy of industrialization directed by the state, and both isolated their economies from the world economy. (Srinivasan, 2002: p.42)

The 1962 border war

Only two years after the PRC was founded, China started to annex Tibet in 1951. This caused uneasy feelings in India and disapproval. In 1954 the Nehru-Chou convention was pleading for peace and harmony between the two nations who were both striving for dominace in Asia. Since June 1954 a series of border disputes had tensened relations. In 1959 Beijing used armed forces against rebellious Tibetans causing the Sino-Indian relationship to further worsen.

In India there were strong political lobbies that opposed China͛s annexion of Tibet. On the Chinese side, Beijing suspected conservative Indians as manipulators for the Tibetan revolts. Neither was Beijing amused by the hospitality given to the Dalai Lama who had fled to India and found a Tibetan government in exile. In June 1959 the Indian communist government in Kerala was brought down by New Delhi, causing further suspicion. In October that same year it came to a serious two-hour military border clash. In the wake, India issued a white book on the dispute but in doing so actually limited itself, since they got under the pressure of conservatives to stand firm and demonstrate their power.

In 1960 Chinese premier Chou En-lai came to Delhi in an attempt to ease tensions, but this proved unsucessfull. By the end of that year Nehru demanded more military to be stationed at the border(thus increasing military spending). On October 23, 1962 Chinese troups crossed the border in Ladakh and in the North East Frontier Agency (now a days: Arunachal Pradesh). This attack was carefully planned, and took place just when the Cuba crisis had reached its peak and thus the UdSSR could not pay too much attention to India and China. The Indian army proved powerless. Nehru asked the USA for military aid, yet even with this granted help they were not able to stop the advancement of the Chinese troups. By the end of november 35.000km2 of Indian territoy were occupied. Then on November 21st, China surprisingly declared ceasefire and by February 1963 they had their troups totally withdrawn. While China was at that time in a pretty isolated situation, as it was seen as the agressor, and thus certainly would not have received much foreign aid, India was seen as the peaceful neighbor. The likely reason why they withdrew their troups though is, that the border incidence should only serve as a demonstration of China͛s power.

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How Politics, Economic Reforms and Strategies influenced the development of India and China during the last century
University of Vienna  (Sinologie)
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India, Indien, China, struggle for hegemony, Politics, Economic Reforms, Strategy, development, history, Geschichte, Strategie, Entwicklung
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Theophil Kroller (Author), 2006, How Politics, Economic Reforms and Strategies influenced the development of India and China during the last century, Munich, GRIN Verlag,


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