China-India Economics

Challenges, Competition and Collaboration

Amitendu Palit

• Publisher: Taylor & Francis
• Year: 2013
• eBook ISBN: 9781136621611
• Edition: 1
• Topic: Economics
• Subtopic: Economic Theory
• Index: Economics

A review of the existing literature on the China-India comparative theme conveys the distinct impression that the literature largely projects China and India as intrinsically competitive entities. While much has been written on where and why China and India are contesting, particularly from a political sense, very little attention has been devoted to mutual collaboration, whether existing or potential. Such possibilities are at their greatest in economics, which will dominate the future China-India relationship.

This book explores Sino-Indian ties from a comparative economic perspective and argues that it is erroneous to visualise the ties either from exclusively competitive or collaborative perspectives. The future relationship between the two countries will be characterised simultaneously by two 'C's: competition and collaboration, which are both linked to common challenges facing them. Arguing that while competition in the economic sphere is inevitable, given their size and aspirations, the book contends that negative externalities from competition will encourage both countries to collaborate and expand the scope of such collaboration. The book's refreshing angle makes it a must-read for those interested in Sino-Indian relationship.

1China-India economics

Contour and context

The economic relationship between China and India was too small to notice even a decade ago. With bilateral trade at around US$2 billion and hardly any investments either way, neither country could have visualised the other as a major economic partner in the years to come. A decade later, however, there are distinct signs of the economic relationship maturing into one of the most robust commercial associations of modern times. This is not only because of the astounding rate of growth in bilateral trade, which has shot up to US$60 billion within less than a decade. It is also because of the increasingly larger roles that Chinese and Indian entrepreneurs and businesses are beginning to play in each other's economies through a variety of industrial ventures and innovative initiatives. As two of the world's fastest-growing emerging market economies, both are exciting prospects for each other. Together, they also symbolise the emergence of an economically resurgent Asia.

While the economic ties were small at the beginning of the current century, they were practically non-existent when the Indian Prime Minister Rajiv Gandhi visited China a little more than a couple of decades ago, in December 1988, at the invitation of the Chinese Premier Li Peng. The visit was intended to break the ice between the two countries, which had had an acrimonious relationship for more than two decades. Economics or trade barely found mention in the joint Press Communiqué issued by the two countries on the occasion except for the establishment of a Joint Economic Group (JEG).¹ This was in marked contrast to the communiqué issued during Premier Wen Jiabao's visit to India in December 2010, 22 years after Rajiv Gandhi's visit. The statement, on this occasion, was conspicuous in its emphasis on economic cooperation and the progress achieved in bilateral trade and investment ties. Not only did it spell out various directions of future economic engagement such as setting a trade target of US$100 billion to be achieved by 2015, and cooperation in infrastructure, environment, finance and information technology, the statement also institutionalised a strategic economic dialogue between the two countries to ‘enhance macroeconomic cooperation, to promote exchanges and interactions and join hands to address issues and challenges appearing in the economic development and enhance economic cooperation’.² Economics clearly dominated the agenda, leaving little doubt about the views of both countries on the important role it was playing and was expected to play in the relationship between the Asian giants.

As most are aware, economics is one of the relatively bright spots in a bilateral relationship that is still shrouded by mistrust and unease. Paradoxically, economic engagement between China and India has been increasing and expanding despite the two countries failing to move forward on various other grounds. The boundary dispute involving claims over territories in the Himalayas has been the biggest stumbling block in the improvement of relations.³ Little progress has been made on resolving the dispute though both countries have been discussing the issue at periodic intervals. Tibet has been another contentious aspect of bilateral ties. With both countries taking tiny steps (e.g. concluding a border trade protocol for resuming land trade through the Nathula Pass between Sikkim and Tibet in 2003, or signing an agreement for exchange and cooperation in defence in 2006) for maintaining cordiality and increasing bonhomie without actually addressing the flashpoints, the relationship has remained edgy despite improving substantially on some fronts.

Why has economics flourished despite tacky ties, to emerge as the strongest hope in mending fences between two estranged neighbours? The answer probably lies in the hunger of economic agents on both sides to respond to benefits accruable from well-defined comparative advantages in production and consumption. Trade has grown on expected lines, with exports from both countries bridging domestic supply gaps in the other, which mostly arise from structural and occasionally policy-driven distortions. Such growth has been facilitated by both countries figuring in the global trade club of nations administered by the World Trade Organisation (WTO). Clearly, both countries have been alert to and aware of the opportunities created by globalisation and have acted rationally by responding to them, notwithstanding the physical location of such opportunities in a neighbour with strained ties. The instincts driving trade and investment between the two countries have been further energised by the rapid economic growth experienced by both in recent years. High growth - and the imperatives for maintaining such growth - has created a virtuous and mutually reinforcing process where both countries have been trading goods and services across borders in a sustained and aggressive fashion, paying little heed to the discord these borders continue to create. In this respect, economics has been the most powerful tool forcing the two countries to review their relationship in a larger and positive domain compared with the narrow circumspect prism of dispute- based distrust.

History is supportive of economics playing the lead role in Sino-Indian ties, as commerce was the binding factor between the two countries for centuries. Sino-Indian commercial engagement flourished for centuries, with the ‘Silk route’ - connecting Europe and the Mediterranean to East and Southeast Asia through the Gulf, Central Asia and India - being the conduit for movement of goods. The route served not only as passage for goods, but also as the key channel for travel of Buddhist monks back and forth between India and China. While these commercial and cultural exchanges are documented from the first century onwards, the two countries were probably trading even earlier, given the references to Chinese silk in Arthashastra, written in fourth century BC.⁴ With India and China being by far the largest economies in the world until the early nineteenth century and the maturing of the industrial revolution in Europe, and Asia being the most economically prosperous continent, there is little surprise in their trading vigorously with each other in a variety of products, particularly silk and spices. The trade links were slowly lost as both countries went into economic decline from the nineteenth century and lost the reins of world commerce. The latest round of economic globalisation, which picked up from the 1980s and gathered momentum following the end of the Cold War, has drawn the two countries back into an increasingly dense web of commercial exchanges. In between, of course, there was a brief history of armed exchanges and diplomatic friction lasting for almost three decades from the early 1960s. Coming at a time when both countries, with their large populations traumatised by decades of economic marginalisation and strains of war, were grappling with the political and economic challenges of adjusting to an ideologically divided world after the Second World War, the conflict of the 1960s drove a deep psychological wedge between them. Insecurities with respect to each other increased at an alarming rate, some of which prevail even today. India nurses these insecurities to a greater degree, as it was at the receiving end of the 1962 conflict and continues to suffer the burden of the historical baggage.

Given the ‘trust deficit’ characterising the relationship (trust deficit is discussed further later in this chapter), economic engagement between China and India cannot overlook the ominous, even if theoretical, possibility of such engagement in the future being disrupted by strained political ties. Chapter 6 examines this possibility by looking at the bilateral relations of China and India with other countries that provide contextual similarities to the Sino-Indian relationship. What is critical in this context is the degree of comfort (or lack of it) with which both countries approach their co-existence. As neighbours with a recent history of hostilities, and a much longer history of shared peace, both countries need to approach their future ties giving due weight to the contrasting realities: they are strong economic partners but weak political allies.

It is also important to view the economics between China and India from a larger global perspective. The interface between the world's most populous and fastest-growing economies cannot be bottled up within a bilateral domain; it has wider ramifications for the rest of the world as well. There are several spheres where Sino-Indian economics will create ripples. These include world markets for energy, natural resources, raw materials, labour and technology. Both countries will function in these markets as competitors as well as collaborators, depending upon how they perceive their roles in these markets vis-à-vis the challenges they face. Indeed, the future contours of China-India economics - as the later chapters explore in greater detail - will revolve round the dynamics involving three ‘C's: common challenges to development, and the competition and collaboration for managing these challenges.

That both China and India are developing, and are yet among the largest and fastest-growing economies of the world, gives birth to a unique set of dynamics governing their bilateral economics. Both countries have to overcome multiple challenges of managing high growth with effective development as they prepare to take up the reins of the world economic order in the years and decades to come. These challenges, often similar and discussed in Chapter 2, will give rise to two divergent arms in their interface: competition and collaboration. Whether the latter will co-exist in the China-India economics as an intrinsic feature of their broader bilateral relationship in the years to come, or whether one will overcome the other, will depend upon how the two countries accept and adjust their economic and political relationships. The process will be influenced by a set of economic, social and institutional features that determine the context of the relationship. The rest of the chapter discusses these features with a focus on their likely influences on bilateral economic ties. The features are obviously not exhaustive and there could be many more equally critical factors determining the pace and quality of economic engagement. However, the factors discussed are certainly among the most critical and would go a long way in determining the quality of bilateral economic outcomes in the medium and long terms.

Large populous economies with multiple domestic issues and concerns

‘Large’ is an unavoidable adjective with respect to both China and India. The two countries are among the largest in the world in terms of land areas and populations. With land areas of 9,326,410 sq km and 2,987,000 sq km respectively, mainland China and India are the second and seventh largest countries in the world, and the largest and third largest respectively in Asia. In terms of number of people, they are the world's largest and second largest countries respectively, with populations of 1.34 billion and 1.20 billion. From a comparative perspective, India, in spite of being one of the largest countries in Asia and the world, has a land size that is only a little more than one-third of China's. While in area terms China is much bigger than India, the population gap between the two is narrowing. According to the latest population censuses in both countries, India is catching up fast with China, with its population expected to be as much as or more than China's by 2030. India's comparatively higher rate of population growth despite a relatively smaller geographical area implies a more dense distribution of population than China's: almost 400 people every square kilometre in India compared with fewer than 150 people every square kilometre in China.

Being large for China and India is not limited to their geographical areas and number of people. Their ‘size’ is evident in several other aspects of their economies and economic transactions with the rest of the world. They are among the world's leading primary energy consumers and are projected to account for more than 50 per cent of the growth in global energy use in the next couple of decades. They are among the world's largest oil consumers as well as importers of crude oil. They also figure among the world's top producers and consumers of coal. This is hardly surprising given that both countries are among the world's largest electricity consumers. China and India are now ranked the world's first and third largest emitters of atmospheric carbon dioxide too.⁵ Energy consumption and carbon emission trends in the two countries are unlikely to change in the foreseeable future as both countries are expected to grow rapidly as the world's major automobile markets. High energy consumption and the concomitant effect on the environment arising from higher use of cars are also inevitable impacts of urbanisation. The sizes of urban populations in the two countries are among the largest in the world, though as shares of total populations urban communities in China and India are less than those of many developed countries and emerging markets. India is the world's largest dairy market but ironically has per capita milk consumption lower than the global average owing to its large population. China, despite not being a traditional milk-drinking country, now has one of the world's largest dairy markets. Between them, the two countries produce almost 60 per cent of the world's vegetables, 35 per cent and 12 per cent of the world's sheep and goat meat and cattle meat, and 55 per cent of the world's tea.⁶ They have the world's largest labour forces - 780 million and 478.3 million respectively - which are five and three times, respectively, the American labour force of 154.9 million.⁷

Large endowments of factors of production determining economic output - land, natural resources and labour - entail for both countries a variety of issues in nurturing, managing and productively exploiting the factors. The issues are not limited to complexities arising from physical management of these factors but also stem from impact of such management on livelihoods. For both countries, it is imperative to take note of concerns of multiple communities and stakeholders, who could perhaps be individually small from a macro-perspective, given the large sizes of the two economies, but are nonetheless significant in determining political stability, social harmony and economic balance. It is impossible for either country to overlook the concerns of different producers while developing external exchange and transaction relations. This probably explains why, despite having large economic sizes (as measured by both nominal GDP at current market prices and purchasing power parity (PPP)), they retain economic structures with several imperfections that hardly reflect well- functioning markets. The persistence of high tariff walls in India and diverse non-tariff barriers (NTBs) in China underline the efforts of both countries to address domestic concerns by ensuring that specific producers do not suffer injuries to their livelihoods due to rush of imports. Both countries, given their large domestic economies and multiple interest groups, and the significant roles they play in supply and demand of global resources and commodities, have to be mindful of the numerous producer and stakeholder concerns they need to manage. On certain occasions, these concerns become common and encourage both to work together for influencing global policy actions. The Doha Development Agenda (DDA) of the WTO and climate change negotiations are perfect examples.

From a bilateral perspective, multiple stakeholder interests influence the pattern of Sino-India economic relations and will continue to do so in future. Only large countries with diverse specialisations and producer interests display the kind of contrasting reactions to different aspects of bilateral commercial engagement with each other as do China and India. Thus, while chemical manufacturers in India agitate over loss of ground in the domestic market to Chinese imports and demand protective action through the imposition of anti-dumping duties, Indian telecom service providers eagerly look forward to imported mobile handsets and equipment from China for expanding networks. Similarly, while NIIT from India seamlessly expands IT learning and outreach programmes in China, pharmaceutical manufacturers from India encounter extensive problems in procuring import licences from China. Large size and diverse domestic interests will continue to produce conflicting responses to the China-India bilateral economics, depending on the respective perceptions producers and consumers from each country have about the other.

Developing economies assuming significant positions in the world economy

The world economic order in the new century is turning out to be different from what most had envisaged even a couple of decades ago. The last century, and a considerable part of the nineteenth century also, was marked by Western Europe and the USA's domination of the global world order. Maddison's (2007)⁸ estimates of world GDP for several centuries show that in 1700 Asia (excluding Japan) accounted for 57.7 per cent of world output, with India and China accounting for 24.4 per cent and 22.3 per cent and Western Europe having a share of 21.8 per cent. By 1820, Asia held 56.4 per cent, with China and India having shares of 32.9 per cent and 16.0 per cent and Europe's share at 23.0 per cent. The decades thereafter witnessed a steady decline in Asia's economic clout accompanied by an increase in the economic influence of Europe and the US, with their shares in world GDP increasing to 33.0 per cent and 18.9 per cent by 1913, when Asia accounted for only 22.3 per cent and China and India's shares came down to 8.8 per cent and 7.5 per cent respectively. Asia, China and India became more insignificant players in the world economy by the middle of the last century, when in 1950 Maddison's estimates find them holding only 15.6 per cent, 4.6 per cent and 4.2 per cent of world GDP respectively. While by 1973 Asia's share had marginally improved to 16.4 per cent (primarily due to strong performances by the newly industrialising economies of Northeast and Southeast Asia, such as the Republic of Korea, Taiwan, Hong Kong and Singapore), China and India still held small shares of 4.6 per cent and 3.1 per cent in world output. Europe and the US accounted for around half of the global output almost throughout the last century.

The overt dominance of the two Western continents in the global economic order is showing distinct signs of ebbing in the current century, underlying a shift in the economic balance of power. According to the International Monetary Fund's (IMF) PPP GDP estimates for the year 2010, Europe and the US now account for less than 40 per cent of global output. China and India's combined share is now a little more than 19 per cent of world output, which is a significant increase from the lowly 7.7 per cent combined share they had in 1973.

While China, India and the Asian region's strong comeback in global economics after almost two centuries implies a decisive alteration in the locus of global growth and economic activity, which is expected to intensify after the latest financial crisis that has ravaged Western economies, China and India's emergence as fastest-growing major economies has created a somewhat unprecedented situation in global economy. Srinivasan (2006) argues their high growth and occupation of increasingly greater spaces in world production, as well as large consumption of raw materials and resources that is occasionally manifest in mutual competition, are viewed by most rich nations not only as the advent of two new markets with untapped business opportunities but also as threats to their own economic prosperities. China is the first developing economy to figure among the top ten economies of the world in several decades. India, another developing economy, is on the threshold of doing so.⁹ They represent clear deviations from the popularly accepted notion that the world's largest economies are also developed countries. Both countries, notwithstanding their high trend rates of economic growth, are still much below the development levels achieved by the advanced economies. Both figure among ‘medium’ human development countries, with China ranking 89 in the world human development ranking of countries while India follows at a distance with a rank of 119 (UNDP 2010). While their economies are large and expanding at rapid rates, the gaps between growth and development are noticeable as they lag behind almost half the world in human development ratings. It would probably be embarrassing for both countries to note th...

Table of contents

• Front Cover
• China–India Economics
• Routledge studies in the modern world economy
• Title Page
• Copyright
• Contents
• List of Figures and tables
• Acknowledgements
• 1 China–India economics: Contour and context
• 2 Common challenges and prospects for collaboration
• 3 Competition: Present and future
• 4 Trade: Engine of bilateral collaboration
• 5 Collaboration: The global agenda
• 6 The economics–politics dynamics, competition and collaboration
• 7 Gazing into the crystal ball
• Notes
• References
• Index