Distinguished Lectures Distinguished Lectures

India-China Relations: Compete or Engage

  • Distinguished Lectures Detail

    By: Amb(Retd) Nalin Surie
    Venue: Indian Institute of Management Ahmadabad
    Date: February 16, 2012

Thank you for inviting me for this interactive session on "India-China Relations-Compete or Engage?” My thanks also to the PD Division of MEA for sponsoring my participation.

The focus is to be on economic issues and hence I will not dwell on the political and other aspects of our relations. My views on the overall relationship were set out at some length in a keynote address I delivered on Dec 12 last year at a UGC sponsored conference on India China relations at Thrissur. The text is on the website of the Public Diplomacy Division of MEA and hard copies are also available for those interested.

To put today’s discussion in perspective I would like to highlight some basic facts which have an important bearing on the subject under discussion today.

China is India’s largest neighbor. We are the two most populous countries in the world. China is now classified as an upper middle income country and India as a lower middle income country.

Our systems of political governance are markedly different; India is the world’s largest democracy while China is a one party state, theoretically communist.

There is a desire at the highest political level in both countries to overcome differences and establish a wholesome and mutually beneficial partnership. Translating this on the ground into practical reality often runs into anticipated barriers that arise from the past history of the bilateral relationship and our differing approaches to issues.

China is a country that is more than three times the size of India in area terms while its population is only 14% larger than India’s. Both in GDP and per capita GDP terms the Chinese economy is three times plus that of India.

In recent years, China and India have been amongst the fastest growing economies in the world and their shares, particularly that of China, in the global economy have steadily increased. In fact, China is today the second largest economy in the world in absolute terms, the largest exporting nation and the second largest trading nation (approximately 13% of world trade). India’s share in global trade is low. (2.7%). The government’s target is to double the share by the end of 2020. As part of this process the target is to double exports to US $ 500 billion by the end of 2013/14 over the figure for 2010/11.

Currently, India’s trade with China is approximately 10% of its overall trade (it is around 2% of China’s trade). If the projections made for bilateral and total trade are fulfilled this percentage may not change substantially by the end of 2015 at which time the target is for bilateral trade to reach US $ 100 billion.

(Note: all percentages are approximations.)

India and China are amongst the fastest growing economies in the world and while China has sustained a 9-10% growth over more than three decades, India has over the last three decades maintained a growth rate of over 6%. Both countries have been seriously impacted by the recent and ongoing financial and economic crisis. This has lead to slightly lower growth rates even though the reduced growth rates remain the envy of most countries. Both countries have had to undertake serious programs of quantitative easing which have, inter alia, lead to excess monetary supply and inflationary pressure although the rise in prices in China has been relatively moderate compared to that in India.

The impact of the global financial and economic crisis has underlined the urgency, in China in particular, for the need to take corrective action to ensure long term sustainability of Chinese growth. This is yet another area where there is a substantial difference between the paradigms followed in our two countries. In India the development paradigm has largely been based on growth of domestic demand whereas in China it has been anchored on external trade and infrastructure development/ investment in capital goods. The infirmities of the latter model have been well understood by the Chinese leadership and economists and efforts have been underway since the beginning of this century to encourage domestic demand to play a greater role in the Chinese economy. However, so great is the vested interest in sustaining the current development pattern that these efforts have not been too successful. There are of course a host of other reasons for this also. But, if the views of the senior Chinese political leadership are examined, it is clear that this effort and that towards sustainability will find greater resonance in coming months and years.

Interestingly enough, there are now tendencies and trends visible that would suggest that the overall development paradigms in the two countries may be moving in a direction closer to that of each other. While China is encouraging greater focus on generation of domestic demand, India has begun to integrate more with the international trading system and also lay greater stress on manufacturing. The National Manufacturing Policy announced in November last year by Government of India plans for the share of manufacturing in GDP to increase from 15/16% to 25% by 2021. This is expected to create a 100 million jobs. For its part, China will enhance the share of its GDP derived from the services sector in the coming decades.

Let me now turn to the broader characteristics and major problems afflicting the two economies. From the political and social angles the major issues facing planners and politicians in both countries are : growing regional inequalities, growing disparities in income distribution (ironically, the Gini coefficient in China is considerably higher than in India), the rural urban divide and the problems of rural urban migration, demands of greater urbanization, inadequate health and educational facilities, the problem of productivity in agriculture, the need to generate millions of new jobs every year, the status of women etc. The scale of these problems is unique to India and China and our respective socio-economic and developmental experiences can be exchanged to mutual benefit. The more we do so the more the commonalities we will find both in terms of problems and the solutions for these problems.

The India China economic partnership has grown very rapidly, particularly since the beginning of the 21st century. Please bear in mind that in 2000 bilateral trade between our two countries was just under US $ 3 billion and at the end of last year was reportedly at US $74 billion. Following the setback after the 1962 attack on India, trade relations were officially resumed in 1978 and MFN treatment extended to each other in 1984.China is today India’s largest or second largest single country trading partner However, the balance of trade is hugely adverse and in China’s favour. This is not a sustainable state of affairs and a series of consultations have been underway to find ways of reducing the imbalance although so far there seems to have been little success in this regard. India is today largely an exporter of raw materials to China and an importer of finished products. This of course also requires us to rethink our own national policies so that our raw materials can be processed within the country.

Chinese companies have been able to win a huge number of contracts in India, amounting to over USD $53 billion, especially in the thermal power, telecom and roads/ civil construction sectors. (Turnover realized is over USD $ 24 billion). There has not been too much Chinese investment in India so far (approximately USD 300 million) although more and more Indian companies have begun to invest in China. Cumulative planned Indian investment in China is reportedly around USD one billion and spread over 600 projects with actual investment so far of just under half a billion dollars. This is because Indian companies, like those from other parts of the world, have found it attractive to use China as a source of production and supply both for the domestic Indian market and for their third country markets. Indian IT companies have found a large market in China to service their multinational clients operating out of China.

India and China are committed, in terms of a series of important agreements signed at the highest level during the current century, to deepen and diversify their relations and strengthen mutually beneficial cooperation. In the Principles enunciated for the Development of Relations and Comprehensive Cooperation between the two countries during PM Vajpayee’s visit to China in June 2003 it was agreed that continued expansion and intensification of India China economic cooperation is essential for strengthening bilateral relations. This has since been reemphasized during subsequent high level political interaction. On the last such occasion when PM Wen Jiabao visited India in December 2010, it was agreed, in view of the growing opportunities in the economic relationship to establish a Strategic Economic Dialogue to enhance macroeconomic policy coordination, to promote exchanges and interactions and to join hands to address issues and challenges appearing in their economic development and enhance economic cooperation. The first meeting of this dialogue, which is headed by Deputy Chairman Planning Commission on our side and the Chairman of the NDRC on the Chinese side, has already taken place last September. We also have with China other dialogue mechanisms on the economic side such as the Joint Economic Group at Commerce Minister level and a working level dialogue at the level of officials. You will find a very useful note on India China commercial and economic relations on the website of the Indian embassy in Beijing.

I have dwelt at some length on the major aspects of the India China economic relationship to help respond to the question this discussion meeting is addressing. From the above it is clear that the question needs to be looked at from several aspects viz., that of bilateral and international trade; that of participating in each other’s domestic economies; that of learning from each other’s socio-economic and developmental experiences and participation in international economic decision making.

Insofar as bilateral and international trade are concerned, China is the much larger player in the overall system and in the next 3-5 years that situation is not expected to change notwithstanding our own plans to enhance our external trade profile. But, the pattern of bilateral trade will have to change. China will need to allow market access in areas of our strength e.g. pharmaceuticals, chemicals, IT, agricultural products, fruit and vegetables. Secondly, to the extent that our export baskets are similar, China will continue to provide very substantial competition in third country markets especially since it is still not wholly a market economy. Thirdly, insofar as critical imports are concerned, for example, oil and other commodities, the enormous Chinese demand does put a pressure on prices which can impact adversely on India but, there are ways and means of cooperating to mitigate such impact. Such cooperation will however not be easy but may ultimately be necessitated by self interest.

Insofar as functioning in each other’s domestic economies is concerned, there are clear and obvious complementarities but there are problems of access in the Chinese market particularly in the areas of comparative advantage for India which need to be addressed. Secondly, the Chinese economy offers low cost opportunities for Indian manufacturers but as our own system veers towards greater emphasis on manufacturing and technological upgradation, this advantage may begin to wane. There are also issues regarding the participation of Chinese companies in Indian projects especially their ability to under quote equivalent domestic manufacturers. This is work in progress and, as the Chinese economy becomes more and more market oriented and the Indian economy adds more capacity and becomes more efficient and productive, may become less of a problem.

There are security issues that have a bearing on participation in some sectors and industries which cannot be wished away by either side.

It is clear that from the broader developmental perspective both countries have an enormous amount to learn from each other, to address the most critical socio- economic challenges that they face. There is, though, still not enough interaction on these issues perhaps because of the very different systems of political governance in our two countries and because of an inherent belief in segments of the Chinese leadership that democracy is still not an appropriate system of political governance for China at its present level of socio-economic and political development.

The international economic and political architecture needs to be revised. The major changes taking place in growth patterns around the world have made the need for change even more pronounced on the economic side and the urgency for this change was brought home by the recent global financial and economic crisis which in effect continues. The upgrading of the G20 process has demonstrated that India and China working together can play a vital role in bringing about a change that is conducive for the further economic development of both countries This has also been clear at the WTO and on negotiations on climate change. Unfortunately, in all such fora, competitive tendencies between the two countries have not always been successfully kept at bay. Perhaps this is because the Chinese believe, and at this point in time rightly so, that they are a much larger player in the international economy than India.

To me therefore, the answer to the question that this interactive session has to address is very clear. Competition cannot be wished away since India and China offer clear alternatives especially in so far as political governance is concerned, and India has now been able to successfully establish that the world’s second most populous country, a relatively poor country, can effectively function as a plural democracy and yet sustain high growth rates.

Competition between India and China in economic matters, be it in the domestic or international contexts, cannot be wished away either. At the same time, there are complementarities and engagement which has proved to be mutually beneficial. The areas of cooperation are growing. Foresight and realpolitik would suggest that greater engagement would be to even greater benefit to both countries than competition. The challenge is to manage relations in such a way that engagement and cooperation outweigh competition.

Thank you for listening with such patience. I look forward to your questions and comments.