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How India Can Rise to the China Challenge

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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 Natarajany 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 com- munity 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 indus- trial 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. yCorresponding author, in the size of the two economies. [email protected]. Until 1978, the Chinese Communist 2 How India can rise to the China challenge • March 2021 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 di- tion 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 infor- mation 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 cap- ital flows can shift towards portfolio ital.
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