How India Can Rise to the China Challenge

Strategic patience and ﬂexible policies: How India can rise to the China challenge

Gautam Bambawale∗ Former Ambassador of India to China, Pakistan and Bhutan Vijay Kelkar Vice President, Pune International Centre Raghunath Mashelkar President, Pune International Centre Ganesh Natarajan† Chairman, 5F World and Lighthouse Communities Ajit Ranade Chief Economist, Aditya Birla Group Ajay Shah Research Professor of Business, Jindal Global University

March 16, 2021

Abstract

India’s China stance has to irreversibly change, in light of recent developments, both bilateral and global. The earlier strategy is simply not tenable in the light of an increasingly confrontational, if not hostile neighbor. We sketch elements of a strategy which coheres and unifies, rather than compartmentalises economic, diplomatic and geopolitical aspects of the relationship. We recognize the need to build strong coalitions with partners who have aligned objectives. In the longer term, a domestic economy energised by strategic patience and high sustainable growth is we believe the appropriate new framework. Coalitions, calm confrontation, continuous growth is the recommended new China strategy. ecent developments have pro- the website of the Pune International foundly changed the outlook Centre at a later stage. Ron the India-China relationship. Due to Covid-19, India has been in a For many decades, the prevailing period of economic stress and a health framework was one where border and crisis. The unprovoked border aggres- military disputes would be held in sion by China was an unexpected ad- abeyance, while the countries concen- dition to the difficulties of 2020. In trated on economic development and the short term, there was a magnificent increased engagement. It is now clear military response from the Indian side. that this framework must be discarded. But the problems do not start or end What is less clear, however, is the new with battles on the border. There is intellectual framework that must be a need to think about the India-China adopted from the Indian perspective. relationship from a more strategic per- The enumeration of policy choices, the spective and undertake actions that put development of a strategic perspective, India on a sound path. In our pro- and a carefully considered strategic posed approach of strategic patience, framework, is the need of the hour in economics is a key element. India. The Pune International Centre community embarked on this work once I. The rise of the Chinese the events in Ladakh unfolded. What economy we present here is the paper which has been written to stimulate thinking in The relationship between the two giant the Indian policy community and help Asian neighbors is one of the most dy- illuminate the complex trade-offs over namic ones in the twenty first century. long time horizons. China’s economic reforms, which led The reader of this paper is also wel- to its high and sustained growth, began come to read the more detailed docu- in 1978. India’s big push for reforms ment which will be made available on which included delicensing of industrial production and reducing barriers ∗Dr. Ganesh Natarajan was the Con- to cross-border trade and finance be- vener of the research group for this paper. gan in 1991, i.e. with a lag of 13 years. We acknowledge valuable contributions from This lag is an important element of the Ankit Agarwal, Anurag Ray, Arogyaswamy Paulraj, Arun Firodia, Arvind Subramanian, explanation in the imbalance between Harsha Singh, Ipsita Nayak, Prakash Hebalkar, the two countries that is visible today. Shammi Mehta, Sudhir Devare, Vijay Gokhale From about 2010, a significant gap be- and V. Sundaresan. The authors alone are re- tween the two growth rates opened up, sponsible for all the views expressed in the which has cumulated into a large gap article. †Corresponding author, in the size of the two economies. [email protected]. Until 1978, the Chinese Communist

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Party centralised power into one per- the growth rates of 10 per cent vs. 7 son, Mao Zedong. Deng Xiaoping is per cent applied over a period of 40 famed for initiating China’s economic years. reforms. Alongside this, Deng Xiaop- Comparisons between India, China ing initiated a process of dispersion of and the US are best done using pur- power within the Chinese state and the chasing power parity estimates. In- Chinese Communist Party. The power dia’s GDP measured in PPP terms is of any one individual was checked, presently at 8.6 trillion, just about half there was greater dispersion of power of that of the US, and one third of that and there were also greater checks and of China. In purchasing power parity balances. These developments of the terms, the present Chinese economy is political system were integral to the one third bigger than the US. economic reforms and to China’s eco- Over recent decades, India-China nomic success of the 1978-2012 period. trade has grown dramatically. From After 2012, when Xi Jinping took of- the year 2000, when bilateral trade was fice, many of the reforms of the 1978- barely 1 billion dollars, India-China bi- 2012 period have been reversed. The lateral trade grew rapidly at more than new regime has gone closer to the envi- twice the rate of their GDP growth. ronment of Mao Zedong, where power It was approaching a hundred bil- is centralised into one person. Centrali- lion dollars by 2018 and has declined sation of power has gone with inferior somewhat since then. While bilateral decisions on economic policy, a loss of trade balances have little useful inter- confidence by private persons and re- pretation, India’s exports to China are duced investment which meant inferior presently less than one fourth of its im- economic outcomes. As is typical of ports from China. India was ranked authoritarian regimes, faltering perfor- number 19 among China’s export des- mance has been papered over through tinations in 2001, and rose to rank 6 by nationalism, veneration of the military 2015. In the future, given that India is a and political purges disguised as an high growth country compared to the anti-corruption campaign. world economy, India’s importance in In 1980, the size of China’s economy Chinese exports will go up. Similarly, was 305 billion USD and by 2019 it was China’s importance in Indian trade is USD 14 trillion. During the same pe- also likely to rise. riod, India’s GDP rose from 189 bil- China’s long and sustained growth lion to 2.9 trillion. While the two coun- has been characterized by a high in- tries were not that different at the start- vestment rate, with an investment to ing point (i.e. a difference of about 1.5 GDP ratio exceeding 50 percent. By times), there is a large gap at the end contrast, India’s growth was obtained point. This reflects the power of com- at a considerably lower investment rate pounding, of the difference between of about 30 percent of GDP. This means

3 How India can rise to the China challenge • March 2021 that India was faring better on allocat- information and foster global capital ing and using capital; India was get- flows into China/India. ting higher return on capital invested as compared to China. In both countries, diaspora Chi- China was able to attract foreign di- nese/Indians have been important el- rect investment on a large scale, as it de- ements of international economic inte- veloped special economic zones, where gration. China has done better than foreign companies could build produc- India in creating conditions where dition facilities and create jobs for locals aspora Chinese/Indians are welcomed while being largely immune to the dif- for FDI and as information intermedi- ficulties of Chinese state institutions. aries for portfolio flows. Between 1997 and 2019, the cumulative From 1978 to 2017, China added 375 FDI into China was 12.7 trillion USD. million jobs. For six consecutive years By comparison, FDI to India cumulated prior to 2019, the country added a net to a meager 460 billion USD. of 13 million jobs every year. In many For both countries, there has been a ways, the story of employment and hierarchy of complexity in attracting output growth over a long period was investment: consistent with the ‘Lewis model’ of growth enunciated by W. Arthur Lewis • When there is high asymmetric information and when there is low trust in 1954. In this model, the modern, in local institutions, the best path for urban, industrial sector draws upon capital flows for foreigners is FDI by an almost unlimited supply of labour diaspora Chinese/Indians. FDI re- from the traditional, rural, agricultural quires low trust and diaspora Chi- sector. In the model, the rural sector nese/Indians are best able to over- labour at the margin is operating with come asymmetric information. zero productivity, due to its excess sup- • Portfolio flows require high institu- ply or disguised unemployment. tional capabilities on accounting, sta- The unlimited supply of labour kept tistical system, exchange institutions, a lid on wage growth for a very long financial regulation, etc. When asym- time. For the first thirty years of reform metric information is reduced, but if since 1978, the growth in real indus- local institutions are weak, foreign- trial wages was nearly zero, whereas ers are able to join diaspora Chi- the growth in real GDP was 10 per- nese/Indians in doing investment, but FDI is the pathway of choice. cent. Thus, the spoils of growth were • When good institutions develop, cap- split unevenly between labour and capital flows can shift towards portfolio ital. Most of the profit embodied in flows and do not have to be centred high GDP and industrial growth was around FDI. Here also, diaspora Chi- ploughed back as reinvested capital, nese/Indians are key intermediaries i.e. there were consistently high invest- who are able to overcome asymmetric ment to GDP ratios.

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There is an accounting identity in “dirty” industries like metals, mining macroeconomics: The current account and chemicals to modern “clean” sec- surplus is the extent to which domes- tors such as renewables, electric cars tic savings exceed domestic investment. and other green industries. In China, the suppression of domestic • To shift from the present to the future, consumption generated large savings in terms of emphasizing industrializa- and even though the investment rates tion 4.0, artificial intelligence, space, advanced software and semiconduc- were high, savings were even higher, tors. thus generating current account sur- pluses and capital export. Chinese External analysts have noticed the policy decisions on managing the ex- fact that while China has these five sen- change rate led to accumulation of for- sible pathways to build a more sustain- eign exchange of nearly 4 trillion dol- able future, one element of transforma- lars in 2016. There was a relaxation of tion that is not in their thought process exchange controls in 2017 which led to is modernisation of the political system. a rapid flight of nearly 1 trillion dollars, There is no aspiration in stated Chinese after which exchange controls were policy strategy, to reduce the grip of tightened again. The currency was os- one-party rule, to achieve rule of law, tensibly made more market oriented to become a republic. Such dreams from 2005, since China’s trade partners remain the preserve of dissidents and and also the IMF had expressed con- intellectuals. cerns about deliberate undervaluation There is a growing recognition in of its currency. In practice, the RMB China that the pure pursuit of GDP remains a highly managed exchange growth leads to difficulties on sustain- rate, shaped by policy makers and not ability of this growth. Policy mak- the currency market. ers have lowered the target for GDP In the recent years, China has been growth from 7 to the range of 6 to 6.5 consciously trying to rebalance its eco- per cent. There is also conscious re- nomic growth. There are five dimen- balancing of growth toward backward sions to this rebalancing as they see regions like Xinjiang and rural areas. it: China proposes a ‘Community for the Shared Future of Mankind,’ which • To move away from export oriented to appears to be an attempt to build a domestic drivers as engine of growth. • To move away from investment to con- coalition of countries which are disaf- sumption as the bigger component of fected with democracies and the West. economy. Their aspiration is for some such coali- • To move away from industry as a dom- tion to replace the global dominance of inant growth and employment engine the West and create a new global multi- towards services. lateral system that better caters to their • To move away from old economy interests.

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In democracies, the everyday pro- nomic policy thinkers believe that the cesses of freedom of speech, criticism, growth of the future will come from an debate, dispersion of power and the innovation economy, as opposed to the rule of law continuously renew the growth of the past which came from rel- legitimacy of government. In con- atively simple mobilisation of resources trast, authoritarian governments, who into traditional areas. An authoritarian achieve and maintain power through country is, however, a poor host for an force, face difﬁculties in achieving le- innovation economy. gitimacy. When critics are muzzled, positive media coverage loses trustwor- thiness and an aura of failure comes to cloud the authorities. China’s Commu- There are tight connections between nist Party lacks the political legitimacy the foundational objective – to shore that comes through an open democ- up the legitimacy of the CCP through racy, and derives legitimacy from the sustained Chinese growth at the fron- state of the economy. Upholding legit- tiers of technology – and Chinese for- imacy requires delivering consistently eign policy which aims to construct a higher standards of living to its peo- global economic system that is more ple. Every time growth has faltered in conducive to Chinese aims. China has China, this has generated discontent been building a parallel global sys- of the populace. The CCP is hence ex- tem; an alternate trading system (Belt tremely focused on obtaining sustained & Road); a multi-lateral banking sys- growth. tem (AIIB, NDB, Silk road Fund); their In India, there is a ready opportunity own global positioning system (Bei- to double the number of persons who Dou); an alternative global currency are working (from about 400 million to (RMB); alternative digital payment plat- about 800 million) and simultaneously forms (WeChat Pay and Alipay); al- double the capital stock of the econ- ternative computer network standards omy so as to obtain a doubling of GDP: (Huawei / 5G); cutting-edge technolog- This kind of opportunity is not present ical processes in sunrise industries etc. in China as their labour force partic- It is popular to talk of how Trump is de- ipation rate is already at high levels coupling America from China, but it is like 70%, the size of the working pop- in fact Xi who began the de-coupling ulation has started shrinking and the from America in 2013. Chinese diplo- economy is already reasonably capital- mats confront the leadership of each rich. While a great deal of the growth country of the world with this ‘China of the past was based on simple mo- Platform’: offering participation in this bilisation of resources, these methods world at attractive terms, as an alterna- will not continue to work in the fu- tive to participation in the conventional ture. As a consequence, Chinese eco- notions of globalisation.

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II. The challenges of has decided the nature of the future In- diplomacy dia – China relationship: she appears to desire a conflictual, unbalanced and While China often claims that it will tense relationship with India. never seek hegemony, Xi Jinping’s own India cannot but recognize these sig- words (at the Party Congress in Octo- nals and react accordingly. India does ber 2017) were, “a military is built to not desire a conflictual, unbalanced fight.” The Chinese are systematically and tense relationship with China. The undertaking military modernisation in military message that India has sent the context of an aggressive foreign pol- China is that it will not accept this bul- icy. lying and attempts at coercion, lying By moving several Divisions of PLA down. India has shown the spirit of troops to eastern Ladakh in the sum- fighting back. The India – China re- mer of 2020 along with armor and ar- lationship is predicated on peace on tillery and attempting to move their disputed borders. If and only if there ground positions up to what the Chi- is tranquility on the border, then the nese consider their Line of Actual Con- rest of the relationship can potentially trol (LAC) at several different points, move ahead as it has done over the China attempted to define the LAC past three decades. Therefore, India unilaterally. They were also demon- will have to reset its China policy. It strating that they were the pre-eminent cannot be business as usual. This is a power in Asia and they could do as time for a fundamental rethink of the they pleased, particularly as their com- India-China relationship. prehensive national power was several In the work process that led up to times larger. They were exhibiting their this document, a diverse array of alter- contempt and disdain for India both native strategies were considered, from tactically as well as strategically. They the Indian point of view. Completely were saying to India, Asia and the disconnecting the economic relation- world at large, that the 21st Century ship with China, or business as usual, is a Chinese Century. or even accepting a junior position: all By taking military action in 2020, these possibilities were analysed in con- China has clearly indicated that she siderable detail. The main pathway re- does not desire a stable, balanced, for- ported in this document is the consen- ward looking relationship with India sus view, the middle road that is most and that she is willing to use military desirable. coercion to resolve her disputes with There are no easy answers to the Chi- India. All earlier bilateral agreements nese challenge. Considerable attention aimed at maintaining peace and tran- has been paid to a short term and mil- quility in the India – China border ar- itary perspective. However, the India- eas have been violated by China. China China relationship is much more than

7 How India can rise to the China challenge • March 2021 the problem of mobilising troops in III. The demands upon Ladakh in 2021. It is a long-term game. foreign policy for the short It is not just about military affairs; it run is about economics, science, technology, etc. It is a unique situation where diplomacy must come to the fore: there In the short run, India is outmatched. has never been a greater challenge for Even if power flows from the barrel of foreign policy, in the entire history of a gun, these guns grow out of the econ- the country. The main argument of this omy. With Chinese GDP at $15 trillion document is that India can prevail in a year while India is at $3 trillion a this long game by mixing a short term year, there is a gap of five times and it strategy of sophisticated and nimble is hard for India to confront China in foreign policy with a long term strat- terms of raw military capabilities. egy of strategic patience with domestic This is a unique moment in India’s reform which generates high economic history in terms of the challenges faced growth. by diplomacy. In the past, India faced a weaker rival (Pakistan), a comparable rival (China in 1962) or non-state actors. Never before has India faced a In the short run, the hand of cards much-stronger rival that has adopted which India has been dealt is not an aggressive military posture and has favourable. Indian economic and mili- inched into Indian territory. There are tary power cannot be easily changed analogies between India’s position to- in the short run. In the short run, day, and the puzzles of foreign policy containing China will require forming for smaller nations in the great power th coalitions of like-minded countries, a politics of Europe in the 20 century. path that is new for Indian foreign pol- As a consequence, in the short run, icy. Alongside this, a long-run strat- India will fare best through partici- egy must simultaneously be put into pating in coalitions to balance China. motion. In many ways, India is better These coalitions would naturally con- placed to establish a dynamic market sist of countries with shared values and economy located in a liberal democracy, interests. As an example, once an ap- as compared with Xi Jinping’s China propriate deep trade agreement is in which is characterised by concentration place, the natural focus of finance and of power into one person and one polit- trade for Sri Lanka or Bangladesh is ical party. This gives an opportunity for with India and after that, their inter- India to achieve superior GDP growth ests would lie in supporting a strong for 20 years or so, after which Indian and successful India. Three groups of foreign policy will hold a better hand countries are our natural partners in of cards. such coalition building: (a) the major

8 How India can rise to the China challenge • March 2021 democracies of the world, (b) the coun- China problem through coalitions. The tries in the Indian region and (c) coun- essence of such coalition-formation is tries that share a border with China, a flexible approach of give and take, of including major powers such as Rus- binding economies and societies deeply sia, who are our natural partners in together through diverse kinds of re- this venture. Building such coalitions lationships and accommodation in ar- including the Quad and others is the eas that the other considers important. need of the hour. This will require a pragmatic approach It is too easy to slip into the vision of negotiation with 20 key countries, where heads of states play a chess where the international relations com- game of foreign policy and establish munity plays a leadership role in re- treaties with each other. Deep con- shaping Indian domestic policy in a di- nections between democracies, how- verse array of areas based on the prior- ever, flow from deep connections be- ities of our key partners. International tween the people and from shared in- relations need to come to the fore in terests. Deep linkages in a coalition are Indian policy thinking, in a way that not merely matters of treaties signed has never happened before. Not build- by foreign ministers. They must ulti- ing such coalitions will leave us facing mately build on deep linkages in the China alone, which will be to our dis- people, in commercial and cultural con- advantage. nections, cross-border traffic grounded Alongside this, is the need for a long- in education, financial and physical run strategy. The strategy of coalition- investments, trade and cultural links. formation gives us the time to raise our Good partnerships are grounded in game, enhance our economic growth, give and take, where each country re- decrease asymmetry, build resilient shapes its domestic policy in ways that supply chains and rise to the China are favourable to the other. India has challenge. little experience with such conduct of foreign policy and with such deep link- age with other countries, in the post- IV. Matching China in the independence period. long run Fresh thinking in international relations is required at this critical junc- In a gloomy scenario, Indian power – ture. Are we in India too wedded whether economic, cultural, technologi- to the concepts of non-alignment or cal or military – will lag behind that of strategic autonomy? Are we able to China’s for a sustained period. Within pragmatically reshape foreign policy China, most people view India as a in the ways that are required to con- smaller country; this is a bit like the tain China? A clear-eyed appraisal sug- way India today views Pakistan. In this gests that India can only confront the gloomy scenario, India will have to re-

9 How India can rise to the China challenge • March 2021 main on the path of forming deep part- panding adminstrative state and (c) a nerships with numerous countries and growing erosion of the rule of law. engaging in a continuous process of The Indian state is excessively in- give-and-take with these coalition part- volved in the world of business, in de- ners, in a new level of capability in for- termining the firms or sub-industries eign policy, in order to contain China. or technologies that win in the mar- In a more optimistic scenario, India ketplace. An array of laws constitute would get back to high GDP growth an unreasonable interference in the ac- and over a 20 year period, would match tivities of firms and there is the risk the economic – cultural – technologi- that more intrusive laws will come cal -- military power of China. This is about in the future. Every day, the In- not assured destiny, but with modified dian state is prescribing details of prod- policies, this is within reach. ucts/processes/technology and even Traditionally, there has been a strong placing additional activities in public domestic imperative for achieving high sector monopolies. This creates busi- GDP growth. India needs a dynamic ness model risk for private persons and economy that creates jobs and prosper- reduces the incentives for private per- ity, as this is in the best interests of sons to commit resources to compete the people. Development thinkers have in fair ways. always emphasised that India must Legislative functions are increasingly get rich before we get old. With the creeping into the hands of officials Chinese threat, there is now an addi- (e.g. writing of law or writing of a regu- tional powerful external imperative that lation). Judicial functions are creeping pushes in the identical direction. In- into the hands of officials (e.g. an offi- dia needs to find the solutions for the cial choosing what is the punishment growth slowdown and get back to the that an individual must suffer). The high growth environment of 1991-2011. emergence of an administrative state, the India’s growth slowdown is now rea- rule of officials, has created a different sonably well understood. At a concep- nature of concentrated power, when tual level, the institutions did not keep compared with the balance of power pace with the capabilities required in a between legislature, executive and judi- fast growing private-led economy.1 ciary that was envisaged in the Consti- There are three critical challenges tution and characterises all successful which India faces: (a) The increased states. tendency towards government micro- The rule of law problem lies in managing the economy, (b) The ex- the discretion that officials and politicians have, to behave differently to- 1The Indian malaise in the post-2012 period is analysed in In Service of the Republic: The art wards different private persons. An and science of economic policy by Vijay Kelkar array of laws have given officials and and Ajay Shah, Penguin Allen Lane, 2019. politicians draconian powers of inves-

10 How India can rise to the China challenge • March 2021 tigation, prosecution and punishment, In military affairs, China is substan- with high discretion on how each sit- tially ahead of India on the agenda uation should be treated. These prob- of modernising the armed forces, of lems have forced private persons to be- reducing the headcount and increas- come supplicants and created the risk ing the technological intensity behind of expropriation. This reduces the in- each soldier. There is a need to fun- centives for private persons to commit damentally reorient Indian military resources into building organisations spending away from the predominance in India. of wages and pensions towards right Indian policy thinking needs to sized armed forces who have more change course in a fundamental way, modern capabilities, where the share of around these three big themes of scal- wages and pensions in overall military ing back state intervention, restoring expenditure comes down to below half. the separation of powers and achieving the rule of law. These changes will induce a next phase of high GDP growth, in which India should be able to match Chinese GDP. In economic thinking, China is ahead of India in terms of shedding the au- tarkic mindset. This is visible in Chi- Alongside these issues, the long-run nese openness to international trade foundations of Indian success lie in the and FDI and most visible in the area of maturation of the liberal democracy. international finance and RMB interna- This requires renewed vigour of pro- tionalisation. There is a need for Indian tecting civil liberties, enshrining each economic policy to do much more by individual and overcoming the fault way of embracing international trade lines of caste and creed. While In- and finance. In financial economic pol- dia has moved to a greater extent than icy, there was pioneering work in 2003- China on achieving a liberal democracy, 2007, of building Mumbai into an inter- there is a long distance to go before In- national financial centre and the rupee dian democracy is able to live up to the into a global currency, which is freshly letter and spirit of the Constitution of relevant in the context of competing India. It is important to reiterate that with China. The first element of that the conflict with China is ultimately a is to reverse the long-term decline of challenge of building a market econ- the share of India in global activity on omy located in a liberal democracy; to Indian underlyings, that has arisen ow- the extent that a vibrant liberal democ- ing to poor choices in India on financial racy does not come together, it will mar economic policy, taxation and capital the possibility of achieving economic controls. dynamism.

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V. Is the thought of 2. The Indian financial system allo- matching China just wishful cates capital better than the Chi- nese financial system. This gives thinking ? India an edge in translating the The fundamental arguments of this pa- flow of investment into increased per are not predicated on China far- GDP and thus reduces the conse- ing poorly. However, there is reason to quences of the gap between invest- believe that India can fare better than ment in India vs. investment in China in the coming 20 years or so: China. 3. Chinese exports are fragile to the 1. Demographic factors are in favour extent to which they have been led of India, where the outlook for the by state interventions, the extent working age population is supe- to which they are shaped by dis- rior to that of China, where the tortions in finance, exchange rates one-child policy of 1979-2015 co- and subsidies. This raises ques- erced households into a premature tions about sustainability of the 2 ‘baby bust’. Recent estimates sug- level and the growth rate of Chi- gest that the Chinese working age nese exports. The exporting that population has already peaked (at takes place from India is grounded about 1 billion) and will now de- on the true competitive advantages cline steadily. The Indian working of operating in India. If anything, age population is expected to peak the Indian state generally impedes at about 1.15 billion in 2045, which firms that seek to export from In- gives a 25 year period of increases dia, which suggests the up side po- in the working age. We must of tential from rational policies which course be cautious about the extent remove these impediments. to which persons in the working age translates into persons who 4. In the ultimate analysis, the suc- are working and producing GDP. cessful nations of the world are This maps to the underlying prob- characterised by market-oriented lem of igniting private investment economic policy located inside a that can get the labour force partic- liberal democracy. While this is ipation rate up from the present true at all levels of per capita GDP, levels of about 43% to Chinese- this is particularly true of a mod- style values of about 70%. ern dynamic economy that is par- ticipating in the information age. 2 Fertility, mortality, migration, and population China’s path into the future re- scenarios for 195 countries and territories from 2017 to 2100: a forecasting analysis for the Global Bur- quires political and economic free- den of Disease Study, Vollset et. al., The Lancet, dom. However, it is difficult in 14 July 2020. each country, to learn how to do

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market-oriented economic policy have the economic, commercial, intel- and to operate a rule of law sys- lectual and cultural might to compete tem. The experience of countries directly with China. The puzzle lies such as the USSR, China and India in refocusing upon the domestic policy has shown that there is a long and flaws which have held India back, and difficult journey in order to put in finding the energy and intellectual the elements of liberal democracy capacity to address them. and market-oriented economics in At present, the difference in GDP be- place. In this journey, it is likely tween the two countries is large. In that India is ahead of China. In- nominal terms, Chinese GDP is at $14.9 deed, it is not hard to see the links trillion while India is at $2.6 trillion. between the rise of Xi Jinping as a Expressed in comparable PPP terms, strong leader in China, the decline China is at $24.2 trillion while India is in Chinese optimism and growth at $8.7 trillion. Looking forward, rea- and the increased stress that has sonable scenarios for Chinese growth come for China from militarism involve growth rates like 3, 4 or 5 per and nationalism, from enhanced cent. Reasonable scenarios for India’s conflict with many neighbours. growth involve growth rates like 4, 6 or 8 per cent. If India is able to address do- 5. In the history of global economic mestic policy flaws, then growth rates growth, latecomers have achieved like 6 or 8 per cent become more fea- faster and faster catchup to the sible. There are many scenarios over global frontier of knowledge; there the next 20 years or so where the com- are such possibilities for India to parison becomes less unequal. As an achieve extremely rapid growth example, if India grows at 8 per cent over the next 20 years or so. and China grows at 4 per cent for the 6. China has embarked on the course next 20 years or so, the two GDP val- of having conflicts with a large ues in comparable PPP terms emerge number of countries. There is the in 2041 at $53 trillion for China and $40 risk of over-reach. India’s posi- trillion for India. tion in foreign policy, in contrast, is much more equanimous, with good relations with many (though VI. The outlook for trade not all) of the natural partners in liberalisation and FDI the desired coalition. India has been a great beneficiary of These differences suggest that the no- opening up to the world. The path to tion of ‘strategic patience’ is not just prosperity and strength lies in deep- wishful thinking. There is reason to ening that engagement. This involves expect that at a future date, India will going beyond trade in goods to trade in

13 How India can rise to the China challenge • March 2021 services and agriculture. Most global ity at future dates. Strategic thinking trade takes place within corporations; about India’s relations with ASEAN the agenda of increasing trade activ- countries will help illuminate future ity is synonymous with creating con- paths for India on RCEP. Going beyond ditions for global firms to operate in trade agreements, there are consider- India. The first phase of trade liberalisa- able gains which can be obtained from tion involved simple problems such as unconditional unilateral liberalisation removing outright bans or quantitative for cross-border trade and finance. restrictions and removing customs tar- About half of global trade takes place iffs. The focus has now shifted to ‘Deep within multinational firms, with partic- Trade Agreements’ (DTAs) which con- ipation in global value chains (GVCs). stitute comprehensive removal of bar- Central to the objective of a greater in- riers and creating conditions for deep ternational economic engagement by engagement. India is the problem of India becom- India’s approach to trade agreements ing a good host to multinational firms has been grounded in skepticism about (both Indian and foreign). Thousands the gains from trade. As a consequence, of global firms are presently in the pro- in India’s long history of trade relation- cess of reviewing the extent of their ships with the world, the rate of growth exposure to China. This has created of Indian exports is not significantly an opportunity for greater FDI into In- higher to those countries with FTAs as dia. The barriers that inhibit FDI into compared to countries with which such India consist of capital controls, taxa- agreements are absent. Addressing this tion, regulation and rule of law. Funda- paradox requires many elements, in- mental reforms to these areas, based cluding a fresh awareness of the gains on root cause analysis, will simulta- from cross-border trade and finance ac- neously help the domestic economy tivities, engagement with the needs of and influence the decisions of global our domestic industry, addressing the firms who are evaluating new locations needs of all interest groups, walking for production. These fundamental re- away from potentially harmful deals, forms are good not just for foreign and like we may have done with RCEP (Re- Indian multinationals: they are good gional Comprehensive Economic Part- for all firms operating in India. In nership) and negotiating comprehen- this sense, they are fully aligned with sive agreements rather than separate the problem of re-igniting high GDP ones for goods and services. growth in India. A major decision has been taken, in Beyond promotional events and fairs, the form of not being part of the RCEP. the need today is to understand the dif- The analysis and back channel nego- ficulties faced by firms which may be tiations about RCEP needs to be nur- considering investing in India and un- tured to be able to preserve flexibil- dertake policy reforms which address

14 How India can rise to the China challenge • March 2021 the constraints that they see. Most big erate a handicap of 10%, then exports international corporations already have of $1 trillion will require subsidies of a presence of one kind or other in India, $100 billion, which is fiscally infeasi- have evaluated the difficulties of oper- ble. It is better to solve bad policies ating in India and have assigned a low at the root cause and benefit not just weight to India in their global organisa- exporting firms but all firms. tion of production. Increased engage- A new perspective which has to be ment from these firms will come from brought into trade policy is the ques- deeper policy reforms and not commu- tion of resiliency in the trade relation- nication strategies. The new entrants ship with China. While most trade con- are most likely to be small or medium nections with China are appropriate sized firms, who are less able to justify and optimal for India, there is now a expenses on lawyers, accountants and new level of business continuity risk government liaison that is required to associated with these. Private firms overcome the Indian regime of inter- have ample incentive to deal with sup- ventionist economic policy, administra- ply chain fragility. In addition, there tive state and limited rule of law. The is a case for some effort on the part of decisions of both classes of firms would state organisations also, in laying the be positively influenced if India under- groundwork for increased resilience took the requisite process of economic when faced with potential disruptions reforms. in the future. This is a novel dimension It is tempting to leave the difficulties which trade policy in India needs to of capital controls, taxation, regulation work on. and rule of law intact and instead offer One important dimension of the fiscal subsidies to foreign firms to op- India-China relationship is the emer- erate in India. This approach does not gence of cyber crime led by state ac- achieve the desired goal. For an anal- tors. China is one of the countries ogy, exporting is attractive because it which have created cyber crime and proves the presence of high productiv- cyber warfare capabilities, which are ity. When firms learn to compete in the termed ‘advanced persistent threats’ in world market, this generates productiv- the field of computer security. ity gains at home. When firms export India is exposed to this problem from on the back of export subsidies or ex- two points of view. First, there is the change rate distortions, this constitutes danger of attacks by state actors upon export fetishism, a mixing up of the systems in India -- government or pri- means and ends. Fiscal resources are vate -- as vehicles for inflicting harm also tiny compared with the size of the upon India. Second, there are linkages economy and the magnitude of the dis- between this problem and the greatest tortions imposed by poorly constructed Indian export: software and processing policy frameworks. If bad policies gen- services. Attacks upon systems built

15 How India can rise to the China challenge • March 2021 by Indian firms and attacks upon work world has an interest in questioning being done in India for the global value Chinese methods of creating IT stan- chain of services production, could ad- dards, protocols and platforms which versely impact India’s most important work within China but directly or indi- industry. India thus has an interest rectly create barriers for global technol- in global solutions on cyber warfare ogy companies to operate in China. and cybercrime. Indian diplomacy needs to engage VII. Retreating from itself with like-minded countries, to economic engagement with build towards: (a) Frameworks for at- tribution through which attackers are China identified through respected multilat- There is a search for levers to harm eral forums, thus avoiding the lack of Chinese firms operating in India, or trust in claims about attacks made by Chinese goods / services being sold in any one government; (b) A system of India. Many such moves are ultimately sanctions and adverse consequences self-defeating for India. imposed by multiple countries upon The prime objective of economic pol- any attacker regardless of the iden- icy strategy should be to think at a tity of the victim; (c) Establishment of strategic level, to build India into an treaties with countries where govern- advanced economy. To the extent that ments agree to not attack each other; India gets rushed into undertaking self- (d) Build towards international frame- defeating actions, this actually ampli- works akin to the regime of nuclear fies the harm. Every immiserizing ac- control; and (e) Placing the behaviour tion that India takes is a victory for of Chinese state actors on these ques- those who would like to see India stay tions as one element of the diplomatic weak. relationship with China. What is important in such analysis Cyber warfare and cybercrime is one is not the small analysis of the impact element of a larger problem: India has of a proposed move upon China, but an interest in the other aspects of mak- a fuller analysis of the impact of a pro- ing the global economy safe for trade posed move upon Indian growth and in IT-related services, which includes prosperity, particularly when we take the issues of protection of data, encryp- into account longer timeframes and the tion and individuals from state surveil- counter-moves that China can under- lance, an open markets approach that take. is supportive of cross-border activities, There are three areas where there is where the global community exerts it- a case for a retreat from engagement self against economic nationalism that with China: might periodically recur in some country or the other. As an example, the 1. There is a case for introducing re-

16 How India can rise to the China challenge • March 2021

strictions against companies con- cisions require deliberation, analysis trolled by the Chinese state from and intellectual capacity in the policy having a controlling stake in a process. hotlist of sensitive infrastructure Apart from these three areas, it is assets (e.g. the JNPT or Delhi Air- hard to envision useful strategies for port though not (say) a highway retreating from trade and investment from Nagpur to Nashik). linkages with China. Alternative sourcing networks and 2. There is a need to avoid lock- destinations for Indian exports need ing into Chinese-controlled tech- to be systematically developed, to nological standards and instead compensate for the adverse impact work with global standards pro- of these calibrated policy responses cesses. In particular, India must upon India-China engagement. The de- go on a path for mobile tele- globalisation that is implied in these phony, on questions such as 5G, three paths – the reduced cross-border with global standards and avoid engagement for India with China – Chinese-controlled standards. needs to be compensated by a strong 3. India must police against and path of opening up to the world econ- block Chinese state surveillance of omy so as to avoid the adverse im- Indian persons, which appears to pact upon India’s growth possibilities often be done through backdoors through inward looking policies. in network equipment. Indian ad- vocacy in international circles, of VIII. Innovation policy computer networks and technological standards where privacy is China is a difﬁcult rival for India to protected, would be more persua- face not just because the Chinese GDP sive if the Indian state rises up to is much larger than the Indian GDP. the checks and balances of healthy Chinese scientiﬁc, intellectual and tech- liberal democracies when it comes nological capabilities have considerably to state surveillance of citizens. outstripped those of India. Chinese universities and intellectu- While these are the three areas for als are now ahead of India. The top work on retreating from engagement Chinese university (Tsinghua Univer- with China, there is a danger of hurried sity) is at rank 23 in The Times Higher decisions and strident headlines. So- Education Supplement (THES) rank- phisticated policy work is required in ing, while the top Indian university each of these three areas, in order to de- (IISc) is at rank 301-350. Indian pol- vise nuanced and calibrated responses icy attempts and resourcing of univer- as opposed to hurried sweeping deci- sities are STEM-oriented. Not only sions and bellicose headlines. Such de- has China built superior capabilities

17 How India can rise to the China challenge • March 2021 in STEM (science, technology, engineer- need to remove the barriers between ing and math), they have also built full- academia and the industry. At present, stack capabilities in the social sciences, commercialisation of research by aca- the humanities and the fine arts; Ts- demicians is hindered by rules and by inghua University has symmetry be- culture. There are enormous gains to tween its strengths in all the areas. It be had through a two-way street, where is likely that the best Chinese experts the industry funds academics and aca- on India understand India better, when demics are deeply connected into the compared with the capabilities of the industry. We need to support and ap- best Indian experts on China. plaud academics who build for-profit This is an unacceptable position for companies while being employed in re- India on a strategic scale. In the sce- search institutions. nario of India emerging as an equal of This re-engineering of mechanisms China within 20 years or so, a necessary through which government resourc- condition is the institutional capacity ing goes into universities and firms of the intellectual sphere. This brings -- public and private -- lays the eco- innovation policy to the fore. nomic foundations for great universi- Pulling together state spending in ties. Alongside this lies the problem higher education, space, defence and of governance of universities, which nuclear, the sheer magnitude of the when reformed can lead to the emer- resource flows are not inconsiderable. gence of elite universities in India, The difficulties in India lie in the insti- which will become serious competitors tutional capacity, the extent to which on a global scale. resources are translated into outcomes. The better institutions within India do IX. Industry comparisons not involve a great deal of enhanced expenditure per researcher when com- The Indian economy has demonstrated pared with the more flawed institu- stellar growth from 1991 to 2019 – 275 tions. Billion to 2.9 Trillion US$ GDP, 18 B Better public financial management to 330 B US$ Exports, though Imports (“PFM”) approaches for state expen- have also accelerated from 24 to 514 B diture will make possible contracting- US$, foreign exchanges from less than a out and grant-and-review mechanisms billion to 425 B US$ and the most heart- through which public money will go to ening data, that population below the non-government actors (whether uni- poverty line has dipped from 45% to versities or firms) in a meritocratic 22%. In 2019 an Enam Research study way, generate a higher bang for the mentions that India was ranked glob- buck and induce higher spillovers into ally 9th by market capitalisation and 5th knowledge in the economy. in nominal GDP, on course to become Alongside this, there is a great the third largest economy in the world

18 How India can rise to the China challenge • March 2021 by 2030. India has also one of the top to three key differentiators: two agriculture bases in the world on all agricultural output parameters and 1. Focus on attracting FDI, develop- is also the world’s largest producer of ing SEZs, Infrastructure Develop- farm equipment. India is also among ment – Physical, Digital and Social the top five in coal and iron ore produc- which have made it attractive for tion, steel and cement and reached the overseas investors in addition to top in terms of real estate construction attractive taxes and currency rates. in 2019. In spite of these pluses, India needs 2. The 13th Five Year Plan based on to find structural answers on FDI in- five key themes of innovation and flows, exports and tourism to weather conscious shift to higher value global liquidity shocks and cope with added manufacturing. fluctuating energy prices. The trade deficit of 6% and a depreciating rupee 3. Made in China 2020 with its tar- losing 5% CAGR for ten years remain geting of ten key sectors for addi- areas of concern and it is alarming that tional government support. These the growth rate of exports has stag- sectors are: nated at 2.5% per annum since 2014 and India has not benefited from the • New energy vehicles, global shift of nearly a trillion dollars • Next-generation information from oil exports to industrial exports. technology (IT), The study points to just two sectors • Biotechnology, where India has a huge asymmetry • New materials, with China, apparel 37% to 3.8 % and • Aerospace, footwear 39% to 2%. In this paper, • Ocean engineering and high- we have considered three sectors for tech ships, deeper analysis – areas where India is • Railway, in danger of losing the race and becom- • Robotics, ing China dependent, areas where In- • Power equipment, dia has a real opportunity to be imports • Agricultural machinery. independent and select sectors which can be sectors where India can enjoy India has recently launched Produc- global dominance. We have considered tivity Linked Initiatives and chosen sec- the extent of asymmetry, the supply tors for deep investments. To succeed chain dependencies and a strategy of in the future, we have done an assess- patience to move from “less China” to ment of global opportunity and rela- “China less” over the next ten years. tive status of India and China to advo- A deep analysis of China’s economic cate industry specific strategies in three prowess built over the last decade point broad categories of industry sectors.

19 How India can rise to the China challenge • March 2021

Category 1 Huge asymmetry areas ii. Category 2: Opportunities where India must progressively re- to focus on self reliance (“At- duce dependence. manirbhar”) and meet domestic demand Category 2 Opportunities to focus on self reliance (“atmanirbhar”) and Telecom – The global market in 2019 meet domestic demand. was 1.74 trillion US$ and rising spending on wireless communication due to shifts to cloud technologies and mobile Category 3 Global industry building devices is changing the complexion of opportunities. this industry. India’s revenues in this sector stood at 96 billion US$ while China’s mobile ecosystem added 750 billion US$ to the country’s economy in i. Category 1: Huge asymme- 2018. China’s success in deregulation try areas where India must pro- has led to mega companies like China gressively reduce dependence Mobile, China Tower, China Telecom and China Unicom and more recently, With the largest natural availability of Huawei and ZTE. rare earths, China has a dominant po- India’s opportunities for the future sition here, controlling 90 percent of lie in the move from traditional copper- global production. With many clean based networks to dense optic fibre ca- energy applications and high-tech in- ble networks and the entry of major dustry products like electric and hy- private sector players like Jio with fo- brid cars dependent on rare earths, the cus on 5G. in 5G, India needs to be concern of the world at this huge de- committed to block the entry of Chi- pendence on China is the only factor nese players for both self-reliance and going against Chinese dominance in fu- security reasons. There is an impera- ture. Australia and the USA will chip tive to stem the influx of imports of away at China’s share. India has per- Optical Preform, Optical Fiber, and formed in this industry below potential Optical Fiber Cable products through in spite of significant beach sand min- Safeguard and/ or higher Basic Cus- eral deposits. tom Duty, to encourage local capac- The future game plan for India has to ity development. Indian government be to make the mining and production should allocate 1% of annual GDP to- of rare earths more attractive for the wards publicly funded fiber infrastruc- private sector and become part of at ture and reduce dependency on private least some global supply chains in this sector. Broadband connectivity itself area. has a correlation with GDP growth, so

20 How India can rise to the China challenge • March 2021 a sustained, structured program will ated by China. Investments in smart enable further economic growth across robotics and factory automation, exten- sectors. sive investments in AI and prosperity It is important to underline recent driving consumer appliances are all developments in India in this segment. pluses for China. India needs to acceler- While the entire start-up investment in ate the roll out of 5G and IoT and lever- India was less than 15 billion US dol- age initiatives such as Digital India and lars, Reliance Jio’s ability to raise over the Smart Cities Mission to usher in a 20 billion US dollars at an equity val- new era for electronics products. uation of 58 billion US dollars demon- Tremendous opportunity has been strates the tremendous global tech ma- lost in hardware even while the soft- jors and investors see in the potential ware and business process industries of the telecom segment in India. have made great strides. While India In the investment announcement has built an outstanding Information made by Google, who came into Jio at & Communications Technology (ICT) the same valuation as ﬁerce tech indus- industry with dominant market share try rival Facebook, CEO Sundar Pichai in IT, Engineering, BPM and Product said their excitement stemmed from Engineering services in the world, In- the potential for millions of users in In- dia has missed the opportunity in core dia to become owners of smartphones. ICT. The core ICT layer includes base With the advent of 5G and the massive stations, routers, blade servers, phones, expansion and national push that Jio is laptops, etc., that are built using semi- expected to make, Google expects that conductors like semiconductor chips, new opportunities will be unlocked, hardware processors and other com- powering the vibrant eco-system of ap- ponents like optoelectronics and sen- plications and pushing innovation to sors. A big frontier for core ICT sys- drive growth for the Indian economy. tems is Cloud for 5G, which will need It may be worth emphasising that a new class of server blades with the China must be barred from partici- capability to support wireless networks pating in India’s 5G revolution, both with multi-gigabit per second through- from security and self-reliance points puts. Important thrust areas in semi- of view. conductors includes special purpose engines for deep neural networks ca- iii. Category 3: Global industry pable of handling large modelling ap- building opportunities plications with large volumes of data and co-packaged optical transmissions Consumer Electronics – The global with massive processing power bits per consumer electronics industry is ex- second and connectivity from a single pected to reach 838 billion US$ in 2020 chip. Through core ICT, the industry with over 151 B US$ revenue gener- will move from just software to hard-

21 How India can rise to the China challenge • March 2021 ware along with embedded software and Japanese manufacturers, though and firmware and this will be the pass- China is counted among the largest port for India to be a true participant markets worldwide. China’s early in the multi-trillion-dollar global core moves in the autonomous, electric and ICT industry. connected car segment and their dom- ICT will be the key enabler of many inance in the batteries production for high growth industries in India includ- electric cars have led to projections of ing biotech, pharmaceuticals, advanced market leadership by 2040, which India materials and even energy. India’s best should watch, emulate and challenge. bet to enter the core ICT eco-system is Indian Atmanirbhar or self-reliant to grow new companies while expand- production of cars conforming to all ing the existing industry efforts in this emission standards have to be ramped area. India requires entrepreneurial up and an aggressive push for exports university researchers and engineers made. All major auto makers in Japan, from industry within and outside the Korea, USA and Europe should be in- country. The initial opportunities for centivized to use India as the base for India will be in the design layer – sys- massive global production. Special tems and semiconductor design where automotive SEZs offering significant the engineering skill sets are largely tax benefits and excellent infrastructure available and investments are relatively could be the way forward. smaller. However, semiconductor and India should leverage its successful other component manufacturing is im- IT and auto component sectors to man- portant too and careful planning will age the complex systems of vehicle elec- be needed to build this sector. tronics and connected vehicles and use By focusing strongly on all three lay- the accelerating investments of global ers – domain, services and core ICT players in Indian manufacturing plants and building a new era of patents and to accelerate in this critical sector. inventions, India can truly lead the Initiatives like the Ministry of IT’s world in all aspects of ICT. A reason- STPI Centre of Excellence for Au- able 10-year target for India in core ICT tonomous, Connected, Shared and Elec- can be a 5% share of global revenue, tric Vehicles need to be substantially which means a 200 billion dollar plus supported through domestic R&D and per annum value addition by 2030. In- investments to enable India to take a dian engineers have what it takes; there lead in the next generation of trans- is now the ability to be part of a China- portation. less supply chain, attract global venture Chemicals – The global revenues in capital and build the 200-million-dollar this segment had reached 3.94 trillion core ICT capability for the country. US$ in 2019. India’s revenues of 150 Automobiles – The global markets billion US$ places it far behind China, have been dominated by US, European which became the world’s largest pro-

22 How India can rise to the China challenge • March 2021 ducer in 2009 and today enjoys over opportunity to substantially ramp up 40% of global industry revenue. With healthcare revenues and also make big 676 chemical parks and more than 60 impacts on the global pharmaceutical million employed compared to India’s industry. There is an upside poten- 2 million, China is far ahead in this tial if Indian companies become major sector though given the context of oil global producers of COVID vaccines prices moving to lower levels and Chi- and syringes. Tele-health and wellness nese labour costs rising, China’s com- tourism are also signiﬁcant segments petitive advantage might be less in fu- to be exploited. ture. On the pharmaceutical side, the In- India has opportunities to leverage dian drugs industry is a heavy user a China Plus One objective of many of Active Pharma Ingredients (APIs) global consumers to present a real alter- sourced from China. In an environ- native destination by creating special ment where China is seen as a bad ac- purpose SEZs, positioning the country tor in the global economy, where Chi- as a leader in certain value chains and nese nationalism can harm counterpar- segments and showcasing the use of ties abroad, this presents a problem. digital technologies and Industry 4.0 Solutions have been discussed in de- smart production systems as well as tail in this paper, including sourcing low-cost labour to be the destination of diversiﬁcation, boosting API domestic choice for the future. production with committed offtakes by Healthcare and Pharma- While In- Government players. dia has done well in the pharma seg- Agriculture- While China has the ment, a large percentage of inputs to highest agricultural output of any coun- any drug manufacturing comes from try with sixteen successive bumper China. China also has one of the food crops and over 800 billion US$ fastest growing healthcare markets in value added in FY20, India remains the world. Of the total 8.4 trillion US$ somewhat monsoon dependent and global healthcare market, China’s mar- has low farm productivity. Agricul- ket size will cross 1.3 trillion in 2020, tural exports from India recorded over while India is in the region of 200 bil- 38 billion US$ in FY19. The opportu- lion US$. China’s pharma market was nity is huge with the global food and valued at over 140 billion US$ in 2019 agriculture technology and products while India’s domestic market was just market size projected to have crossed in excess of 20 billion US$ in 2019 and 500 billion US$ in 2019 with food and an estimated export of 16 billion US$ beverage processing equipment having in FY 20. the highest segment share and aquacul- With strong focus on healthcare in ture products growing fastest. India and the extensive use of digital India has the potential to double technology and services, India has an farm income by 2022 and the growing

23 How India can rise to the China challenge • March 2021 use of genetically modified crops will their needs and hence make India an improve yields. Agri exports should integral part of the new supply chain. be a focus area for the country. The It is inherently WTPO compliant and adoption of food safety and quality serves the need of those who would assurance mechanisms such as Total like to see their global value chains in- Quality Management (TQM) including sulated from a possible trade war be- ISO 9000, ISO 22000, Hazard Analysis tween India and China. and Critical Control Points (HACCP) As India moves to become a five and Good Hygienic Practices (GHP) by trillion US$ economy, the one area of the food processing industry will of- dominance that India has, the 190 B fer several benefits which have to be US$ Software, Engineering and Busi- exploited. ness Process Management industries India’s quest for success and self- could propel the accelerated building sufficiency in agriculture has resulted of a trillion-dollar Digital India. In- in large farm lands being used for vestments in the core ICT opportunity wheat and rice production. While this could add two hundred billion US$ to has been a relatively secure segment of a potential 300 billion US$ that the do- GDP growth, there is an opportunity to main and services led approach can be- move towards much higher productiv- come. And the vast sectors of financial ity agriculture including grains, fruits services, agriculture, healthcare and e- and organic produce which would have commerce enabled through digital plat- higher farm productivity and free up forms could generate half a trillion dol- land parcels for industrial and other lars of value addition through digitally productive uses. enabled services. Finally, it is an encouraging step that the Indian government has com- X. Conclusion mitted US$ 26.6 billion to address the nation’s manufacturing capabilities India is at the cross-roads. India can and enhance exports across 11 sectors become the dominant alternative to the through Production Linked Incentives. China-centric supply chains that have These include mobile handset and com- dominated Asian trade and larger parts ponents, automobiles and auto compo- of the world in the last twenty years. nents, solar photovoltaic (PV) modules, The country and our policy planners speciality-steel makers, man-made and will need strategic patience in abun- technical textiles, food processing, spe- dance and a very nimble response sys- cialised pharmaceutical products, ad- tem that acts on global cues and pro- vanced chemistry cell battery, and IT pels India to a platform of symmetry in hardware. This scheme relies on identi- the years to come. In the coming era of fying National and Global Champions strategic globalisation, India must lead! in each sector to manufacture part of In 2047, we will be at 100 years of

24 How India can rise to the China challenge • March 2021 independence. At 5% GDP growth, the political and domestic differences China will be at a GDP of $86 trillion with China in public, make alliances by then in PPP terms. If India is able with like-minded countries and build to produce sustained growth of 6% for up our own industrial and economic these 26 years, GDP in PPP terms will muscle. be $39 trillion, and if Indian growth There is a fine line between the poli- manages to get to 8%, then the GDP in cies of Indian socialism, of self-reliance PPP terms will be $64 trillion. Both sce- and import-substitution, as opposed narios require profound policy work in to a spirit of Atmanirbhar which is India, on building the institutions of grounded in Atmavishwas, where a a market economy located in a liberal confident India engages with the world democracy. But if the required changes without insecurity. This paper advo- are put in place, both scenarios are cates a progressive “Less China” ap- much better than the present, where proach, by taking adequate security India has a GDP which is one-third of precautions and yet staying away from China’s (in PPP terms). myopic jingoism and realising that China’s attempts at military, eco- China is a major source of new tech- nomic and political hegemony could nologies, in areas like solar and battery potentially precipitate a cold war be- technologies and many others includ- tween other developed economies and ing capital which will be necessary in- China, which changes the strategic pos- puts to our growth in the short term. sibilities for India. While China has India stands at a huge opportunity – retained private innovation and large to emulate and surpass China in terms enterprise as keys to its own growth, of economic growth and take our suc- the crackdown on large Internet mo- cesses as a democratic, English-fluent nopolies and the insistence on loyalty nation to rise fast and be at the centre to the party from entrepreneurs such of global value and supply chains of as Jack Ma provides a wedge that helps the future. Understanding China, its emphasise the importance of replacing model and its present and future direc- China at the centre of many global sup- tions will be essential. ply chains, by India. As researchers, writers and strong India needs to be aware that neither patriots, we the writers of this policy the USA nor Europe nor indeed large paper believe that ours cannot be a countries in Asia have talked about any one-off effort. In 2021, the events of Chinese boycott and indeed with the Doklam and Ladakh are fresh on the ASEAN countries which led RCEP and minds of Indian thinkers, which gen- the new trade deal between the Eu- erates urgency for the work program ropean Union, many elements of the that led up to a document such as this China-centric world of globalisation one. However, the China-India relation- continue to grow. India must present ship is not a problem that is amenable

25 How India can rise to the China challenge • March 2021 to a one-off work program. It is likely that in the short term, a certain nor- malcy might be restored, and the problem will shift from urgent to important. However, the Indian policy community requires sustained long-range knowledge building activities on China. We need to know more about China. We need to continuously recalibrate the In- dian strategy based on current developments. In an array of practical areas, ranging from electric vehicles to taxation of corporations, we need to constantly study China, compare-and- contrast with India and plan the economic, military and international relations aspects of the relationship. In order to achieve this, multiple long-range research programs need to be estab- lished, at multiple research institutions that will produce knowledge and ex- pertise. We believe this is a call to action and we have to deal with the issues and the opportunities that we have outlined here and in more detail in the full paper with urgency and alacrity. In the words of Swami Vivekananda, we must “Arise, Awake and Stop Not till the goal is reached.”