A slowing China is still a tough act to follow, but India has the edge in the long term

The inexorable growth of China’s gross domestic product has been the dominant event of the past three decades. China, having surpassed Japan a few years ago, is now taking aim at the United States, whose nominal GDP stands at $18.5 trillion compared to the former’s $11.4 trillion.

It took China a little less than a decade to make a similar leap to overtake Japan. The Chinese GDP is expected to surpass that of the US well before 2020, when it is projected to be about $24.6 trillion against the Unites States’ $23.6 trillion.

To replicate China’s achievement might be a tall order for a country like India, which matches it in size and potential but not in political structure and national will.

There seems a misplaced notion prevalent in India that China’s slowdown means an opportunity for India. Even the chief economic adviser to the government, Arvind Subramanian, though somewhat circumspect, has said, “Cheap oil will help our macro-economic indicators. The Chinese slowdown and massive excess capacity in sectors like steel will put pressure. But cost of building infrastructure has come down due to a fall in commodity prices. This will boost infrastructure development. India will remain an attractive destination.”

However, there is little evidence to show that the government is investing more in infrastructure. The capital expenditure to Budget ratio and the capital expenditure to GDP ratio are both still pointed south. To expect foreign capital to build India’s infrastructure is to be naïve. Foreign funds invariably come with a short-term perspective. And as recent experience shows, investment in India’s infrastructure is neither easy, nor does it offer attractive returns.

The economies of China and India are in two entirely different stages of development. For a start, the former’s GDP is now in excess of $11.4 trillion while the latter’s has just scaled $2 trillion. How China moves and acts in the future will affect the developed economies enormously as it has been the major provider of growth in the last two decades. India’s growth, on the other hand, has had little bearing or derived little benefit from it.

The neighbours exist in different orbits of the world economy. A slowing China, now growing at slightly short of 7%, still adds between $700 billion and $800 billion to global growth, while a speeded-up India, with a growth rate of 7%, adds a mere $160 billion.

For India to pick up the Chinese slack, it needs to be posting a more frenetic 9%-10% growth rate over the next decade or more. There is not even a glimmer of hope of that now. And while hope is a good thing, wishful thinking leads to serious consequences. We must be careful and realistic when we analyse our prospects and decide on our actions.

Present, not future

Although the Chinese economy does not compete directly with that of India, its effect on the global economy is likely to influence the Indian economy. In this regard, whether a slowing China will really create more opportunities for India needs rethinking. If the global economy slows down further as a result of the Chinese economic restructuring, it would be difficult to see why a sluggish world economy would help India.

There are many factors that have hampered the Indian economy. The most important ones lie in its policy options and the level of domestic development rather than the external environment or international factors. The Indian economy is in a more favourable demographic transition and how this will be translated into the kind of growth China experienced in the past three decades depends on the sagacity, determination and vision of our leaders.

The success of the Indian economy in the years ahead depends on a number of crucial elements. The most important ones would likely be the leadership’s policy options and internal interactions. Seeing how major policies relating to a common, nationwide tax regime – the goods and services tax – and land acquisition have been stymied do not present an optimistic picture.

However, demographics favour India. China’s population has stabilised at 1.3 billion. The country is now rapidly ageing, which means its economic growth will inevitably slow down. India’s population, on the other hand, will stabilise at 1.6 billion only in 2050, giving the country a young workforce for a much longer period, and continued growth as a result of it.

Therefore, even if India continues to grow at the present rate of 7%, its GDP will surpass that of China by 2045. And if its population stabilises in 2050, then in all likelihood, its GDP PPP (purchasing power parity) will also surpass that of China. It is now about one-third of China’s.

In recent years, there has been much speculation about the emerging rivalry between the two countries. A good deal of this owes to the fact that India, too, has joined China in the high GDP growth club.

But what does this imply for the global power structure? True, the world’s economic fulcrum will shift to Asia. Already, Asia’s GDP exceeds that of the US and the European Union. By 2050, it would account for over 50% of the world GDP, with India or China having the biggest GDP. But this is in the future and often, the future has a habit of not turning out as predicted. So we must look at the present.

The Chinese slowdown

There is one important aspect that must be made absolutely clear: the present financial crisis in China does not affect its overall economic prospects one bit. Financial crises are inevitable, as greed and irrational expectations will always drive the market upwards till reality catches up and pulls it down.

But when some people lose money, others make money. So, to judge China’s economic prospects by what happened to the stock market betrays an inability to separate issues pertaining to financial market behaviour and the economic reality.

Also, to think the housing bubble is a crisis that will not be surmounted would be unwise. Most unoccupied housing units in China, as is in India, have been paid for. Those who speculated in the property market will get hurt in the process, but the economy has already gained from the investment. Future investment in the Chinese real estate market will also be slow. But that, too, is inevitable as the population is ageing, and new housing demand will reduce.

The real problems in China will get accentuated, as exports to the US and EU slow down, with the US in particular determined to reduce its trade gap. Also, low-cost production has already started shifting to other low-labour-cost economies like Vietnam and Indonesia. China will naturally attempt to overcome this by stimulating domestic consumption and can even finance it by slowly reducing its foreign reserves, as Saudi Arabia and others are doing now.

But however much China may invest by running down its reserves, it would be irrational to expect near double-digit expansion when demographic trends are against it. The high-growth period in China is petering off and that is the transition we must be wary off. Where will the world get its next growth engine? Again, demography favours India. But the Indian political discourse gives no inkling of any awareness of this or inclination to put immediate politics aside for a period to set course for the long term.

The transition from an export-driven GDP to an internal consumption demand-driven economy will be a daunting task for China. Its exports are mostly low-labour-cost exports, and hence skill levels are low. Internal consumption will demand goods of higher sophistication and the retention of labour will be a problem.

As demands rise and domestic standards of living rise, people will expect more from the system. As the psychologist Abraham Maslow theorised, there is a hierarchy of needs, and so when one demand is satiated, people will want more. This will increasingly take the form of demanding more political and social freedoms.

As China becomes upper middle class-dominated, the challenge to the primacy of the Communist Party will be from upper middle class values. These values are universal. Thus, growth, which is increase of choice for the consumer in goods and services, will be increasingly accompanied by demands for more choice in immediate governance issues.

Obviously, China’s interaction with the global economy and its size will only demand its greater participation in its organisation. It will need to invest more in other countries to create markets for itself. For instance, if China invests in India, it will create a long and continued demand for Chinese goods. The current adverse trade situation will not be allowed to continue for very long.

China must also invest more in rebalancing the international economic system. The world cannot only depend on Western demand and consumption, financed by printing more money to finance it. China must team up with other large developing economies such as India, Brazil and Indonesia to restructure the International Monetary Fund and the World Bank.

Playing catch-up

Geography and recent history have made the India-China relationship a difficult one and one in which the United States will find ample space and opportunity to inveigle itself to its advantage. This is a made-to-order situation for strategists and leaders in the three countries to ply their trade with plenty of worst-case scenarios. It would seem that India and China are destined to live out the foreseeable future as rivals, if not adversaries.

China’s aggressive soft-power diplomacy has widely been seen as arguably the most important element in shaping the Indian Ocean strategic environment, transforming the entire region’s dynamics. By providing large loans on generous repayment terms, investing in major infrastructure projects such as roads, dams, ports, power plants and railways, and offering military assistance and political support in the United Nations Security Council through its veto powers, China has secured considerable goodwill and influence among countries in the Indian Ocean Region. The list of countries within China’s strategic orbit appears to be growing.

The rise of China as the world’s greatest exporter, its largest manufacturing nation and its great economic appetite poses a new set of challenges. At a meeting of South-East Asian nations in 2010, Yang Jiechi, China’s foreign minister at the time, facing a barrage of complaints about his country’s behaviour in the region, blurted out the sort of thing polite leaders usually leave unsaid. “China is a big country,” he pointed out. “And other countries are small countries and that is just a fact.”

Indeed it is. And China is big not merely in terms of territory and population but also military might. Its Communist Party presides over the world’s largest military build-up. And that is just a fact, too, one the rest of the world has to come to terms with.

China’s defence budget has almost certainly experienced double-digit growth for two decades. According to SIPRI, a research institute, annual defence spending rose from over $30 billion in 2000 to almost $215 billion in 2015. SIPRI usually adds about 50% to the official figure that China gives for its defence spending, because even basic military items such as research and development are kept off budget

This is not a sum India can match and the last thing we need to get caught in is a numbers game. A one-party dictatorship will always be able to outspend us, even if our GDPs get closer.

That said, the threat from China should not be exaggerated. There are several limiting factors. First, unlike the former Soviet Union, China has a vital national interest in the stability of the global economic system. Its military leaders constantly stress that the development of what is still only a middle-income country with a lot of very poor people takes precedence over military ambition.

The increase in its military spending reflects the growth of the economy, rather than an expanding share of national income. For many years, China has spent the same proportion of GDP on defence (a bit over 2%, whereas America spends about 4.7%).

The real test of China’s willingness to keep military spending constant will come when its headlong economic growth starts to slow further. But on past form, China’s leaders will continue to worry more about internal threats to their control rather than external ones. Last year, spending on internal security outstripped military spending for the first time. With a rapidly ageing population, it is also a good bet that meeting the demand for better healthcare will become a higher priority than maintaining military spending.

Like all the other great powers, China faces a choice of guns and butter, or more appropriately, walking sticks. But till then, it is “nervi belli pecunia infinita” or unlimited money is the muscle of war.

Advantage India

India, on the other hand, will keep growing long after China has stopped. Its youthful population and present growth trends indicate the accumulation of the world’s largest middle class in India. This growth is projected to have begun in 2015 and will continue well past 2050.

In fact, during this period, India, and not China, will increasingly power world economic growth. In 2050, of India’s projected population of 1.6 billion, 1.3 billion will be from the middle and upper classes with the lower classes being a constant at around 300 million, as they are now.

India already has the world’s third largest GDP in PPP terms, something our prime minister likes to emphasise, presumably for its better optics. Many economists prophesise that in 2050, it will be India that will be the world’s biggest economy, not China. In per capita terms, we might still be poorer. But in over GDP (PPP) terms, it will be bigger.

Now comes the dilemma for India.

In his book The Revenge of Geography, Robert Kaplan writes, “As the United States and China become great power rivals, the direction in which India tilts could determine the course of geo-politics in Eurasia in the 21st century. India, in other words, looms as the ultimate pivot state.”

American strategist and naval historian Alfred Thayer Mahan once noted that India, located in the centre of the Indian Ocean littoral, is critical for the seaward penetration of both West Asia and China.

Now if one were an Indian planner, he or she would be looking at the China-Pakistan axis with suspicion. India has had conflicts with and still perceives threats from both, jointly and severally. The Tibetan desert, once intended to be India’s buffer against the north, has now become China’s buffer against India. The planner would not be looking at all if he or she were not looking at the Indian Ocean as a theatre. After all, the region is also China’s lifeline and its lifeblood flows here.

And if one were a Chinese planner, he or she would be looking with concern at India’s growth and increasing ability to project power in the Indian Ocean Region. The planner would also note what experts are saying about India’s growth trajectory. That it will be growing long after China gets walking sticks. That it is the ultimate pivot state in the grand struggle for primacy between the West, led by the US and Japan, and China.

There is a certain equilibrium in India-China affairs that make recourse to force extremely improbable. Both modern states are inheritors of age-old traditions and the wisdom of the ages. Both know how much of the sword must be unsheathed to send a message. This ability will ensure the swords remain recessed and the ploughshares are out at work.

It is in this context that China’s diplomacy holds some vital lessons for India. Japan is the largest overseas investor in China. The US is China’s biggest trading partner and contributes hugely to the Chinese economy with is gigantic annual trade deficits. Yet, these two nations are highest in China’s ranking of adversaries.

Prime Minister Narendra Modi seems to have drawn some lessons from this and is seeking a closer and deeper economic and financial engagement with China, even though many in India’s security establishment may disapprove of it. He is also well aware that unlike the US and Japan, who are physically distant adversaries, India lives cheek by jowl with China with a contested frontier. It is the Indian and Chinese troops who face each other eyeball to eyeball. Conflict cannot be a standoff affair for both nations. They have too much to lose by it. Peace and growing economic interdependence are more viable options. Not surprisingly, the leaders of both nations are investing heavily in them.