Trade and Foreign Investment: Comparing India and China

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The paper offers a comprehensive review of the history of opening of the trade and foreign investment regimes by India and China beginning in the late 1970s.  It also compares the performance of the external sectors of the two countries.  A key conclusion is that the two countries are so far in different leagues in so far as the performance of the external sector is concerned.  Journalists, economists and policy analysts are justifiably impressed with the phenomenal success of the Indian IT sector. But even this performance fades in comparison to several of the leading exports of China.  I show that in terms of policies, India is almost as open as China but the response to its opening up has been far more muted.  I trace this muted response to the domestic policy regime, which has hampered the growth of the unskilled-labor-intensive industry in India.  I conclude that two key reforms--power and labor market flexibility--are essential if India is to become a major force in the world markets.