Why Economic Engagement with China Matters

Ravi Bhoothalingam, Honorary Fellow, ICS

In the aftermath of the Dalai Lama’s visit to Arunachal Pradesh, India-China bilateral relations have plumbed new depths. China accuses India of using the Dalai Lama to provoke anti- Chinese sentiment, and says that diplomatic relations are “seriously damaged”. But His Holiness is a popular and revered guest in India, and so the Indian government’s resolute defence of his right to travel anywhere in the country remains fully in harmony with popular sentiment. Still, we should expect a climate of “cold peace” between the two countries for some time to come, with bilateral political issues remaining unresolved. However, a Sinophobic public climate can damage our own public interest, and this the government should work to avoid. Because China matters to India — if not politically — certainly in the realm of economic development. And it matters in four quite specific ways.

First, China is well on the way to becoming the world’s largest consumer. Its economy continues on its journey of re-balancing towards consumption as the dominant share (as against investment). Simultaneously, as China’s middle class grows to 800 million people (from the current 400 million) by 2022, its demand for consumer goods and services will grow manifold. This demand will include tourism, leisure services, appliances, wearables, health care including senior citizen care, green energy, financial services and digital/smart applications. All these goods and services will be sought from global as well as local sources. As a result, companies across the world will compete for a share of the Chinese consumer market.

India has a large and rapidly growing consumer market of its own. But our own companies would be well advised to pay close attention to both the Indian and Chinese markets. World-beating companies have never restricted their vision and ambition within national boundaries. By focusing on both India and China, Indian companies have an opportunity to achieve huge economies of scale. With low-cost, trained manpower and by revamping their systems to focus on “smart” manufacturing processes, Indian companies can capture the prime manufacturing space on the planet. Such a combination can power “Make in India” into a massive operation that is capable of generating the huge volume of employment demanded by India’s demographic dividend.

Secondly, China has the world’s largest investible reserves. And official Chinese policy is to invest these reserves to seek returns better than the current abysmally low numbers generated by holding US government bonds. Further, China has the advantages of both low cost as well as high efficiencies in the area of infrastructure development. This plays well with India’s infrastructure needs which are of the order of circa US $500 billion over the next five years. Moreover, for China, India is a safe and stable investment destination. India has a well regulated and developed financial infrastructure and a reliable — though slow — judicial process. Chinese investment in India can also offset — through the capital account — the deficit in Sino-Indian trade on the revenue account. There is thus a natural complementarity here, which needs to be brought to full flow for the mutual benefit of both nations.

Thirdly, China has already emerged as a new source of innovation and R&D. This is a novelty for India, long used to looking towards North America and Europe — with the occasional nod to Japan and Korea — as the fountainheads of scientific discovery. But all the indicators — patent registrations, citations in scientific journals, investment in R&D, the development and growth of scientific and technological talent — point towards China emerging as a global centre of innovation. Already, Chinese companies like Huawei andLenovo have displaced global leaders in their fields and gained huge market share on the basis of their innovatory technology and customer-friendly products. If India can unravel the business ecology of China, the innovatory potential can be harnessed for our own needs. And this can be a two-way process.

Fourthly, China’s launch of its ambitious ‘one belt, one road’ (OBOR) initiative three years ago has the potential to recreate a new infrastructural and connectivity framework for the world, just as the Suez and Panama Canals and the great transcontinental railways did in the late nineteenth century. India has so far shied away from connecting with OBOR because of worries that the China-Pakistan Economic Corridor (part of OBOR) challenges its legal claims on Pakistan-Occupied Kashmir (POK). But the OBOR presents an opportunity for India to link itself firmly into the trans-Asian production, supply and value chains of the future, and thus to enhance its global trade and to open markets for “Make in India” (MII). The economic and employment consequences of linking OBOR and MII would be massive. Surely, Indian diplomacy can figure out a way to protect our territorial rights without sacrificing potentially large economic benefits for our population.

Does this mean that China holds all the cards? Does India have nothing to offer? Not at all. India has a great many things going for it, and how these can be leveraged to create an India-China partnership that will generate widespread benefits, will be the subject of this writer’s next article. But to make this happen, India will need to master the art of managing political differences with China whilst pursuing a wider bilateral engagement encompassing economic and cultural dimensions. Japan is a master of this art. And provided the border remains peaceful, does it matter if the Sino-Indian boundary settlement takes another decade? But economic engagement with China — and the vikas that comes with it — can ill afford a delay.

This article was originally published as ‘Why China matters’, Business Standard, 1 May 2017.

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