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India-China: Living with Realities of Interdependence

India and China can change history but not geography. They have been each other’s neighbours since the dawn of civilization and may continue to remain so till eternity. Their destinies are intertwined and their socio-economic progress is complementary rather than antagonistic.

The two Asian giants will be each other’s suppliers, customers, competitors and partners-in-progress as the two markets of combined 3 billion people continues to develop business, accelerate investment and boost ties in trade and commerce. More than 36% of earth’s people reside in India and China.

“Businessmen from both countries are working over strategies on how to best collaborate with each other in their respective marketplace constituting of billions of people,” says Girija Pande, a corporate veteran and Chairman of the Singapore-based Avalon Consulting.

China undertook its first major round of economic reforms in 1978 but the process is still a work-in-progress. The emerging superpower continues to experiment with its own version of perestroika and yet another round of major reforms to restructure the economy is now in the offing. The focus of this fresh initiative will be on domestic consumer-driven economy AND LOCAL CONSUMERS. This marks a tectonic shift from the hitherto INVESTMENT/export-oriented manufacturing of goods and services.

The onset of the Great Economic Recession, or GER in 2008 across the globe provided the Chinese mandarins and apparatchiks with a critical opportunity for introspection. It dawned upon them that such heavy reliance on exports to boost the local economy is a risky proposition in the global village. Export competitiveness and sales of goods and services overseas is a doubled edged sword. It gives a boost to local production and employment, swelling up the foreign exchange coffers but during a global economic downturn, it also means that if European Union or North American powerhouses witness a slump or start sneezing non-stop, China is bound to catch a flu with no end in sight.

“China’s priorities are changing because the global investment and trade have slowed down and the cost uncompetitiveness would reduce demand for Chinese products in the global market,” said Pande, a leading China-expert for more than three decades.

To consolidate its position as a global power, the central government in Beijing is undertaking major reforms in the financial sector even as it also tackles pollution and corruption. Beijing seeks to address all these internal challenges on a war footing as the dynamics of the domestic market are also changing with focus shifting from eastern and coastal regions to the rest of the country, Pande observed. The cauldron of two Chinas is churning.

While China sets about to boost its local consumption to tackle slowdown in domestic growth, it also wants a bigger share in the global pie.

To sustain its exports and global presence at a high level, China would be eyeing its neighbours where the 500 million Indian consumer-driven middle-class is by far the largest.

India, as one of the fastest growing economies in the world, is becoming increasingly attractive investment destination and consumer market.

China has massive foreign exchange reserves to invest in the other emerging economies, particularly India. This investment reserve fits well into India’s scheme of things. Indian requires close to $1 trillion for infrastructure development including roads, ports, railways, civil aviation, power and mining.

Pande fervently calls upon the Indian investors to leverage on China by devising elaborate strategies for increasing both, presence in the Chinese market of 600 middle-class million consumers, and collaborating with them to attract Chinese foreign direct investment, or FDI in 17 sectors that are critical for the country’s development.

Advantage or Disadvantage China?

The manufacturers in China will be more than keen to relocate to India because they are facing rising costs and shortage of manpower at home. The low-interest regime is getting phased out, the electricity tariffs have increased and logistics and productivity no longer carry the crucial edge that can make a difference between success and failure for a business enterprise. The strengthening Chinese yuan is also contributing to erosion of cost competitiveness for local manufacturers in the global marketplace.

“The Chinese foreign direct investment should make a beginning by setting up at least six industrial parks in India,” Pande told fii-news.com.

First things first. “To begin with, let us start by getting Chinese businessmen to set up industrial parks with world class infrastructure,” he said. This can be followed up with Chinese FDI flow through companies, industries and manufacturing companies operating out of these industrial parks, stressed Pande who has served as President of Tata Consultancy Services for Asia Pacific region.

“FDI would be the fastest way to bridge India’s trade deficit with China,” Pande said.

Currently Chinese FDI in India is negligible while the two-way bilateral trade stands at $65 billion and is heavily tilted in favour of the Dragon. As India will continue to remain a large importer of capital goods in the medium term, its trade deficit with China is forecast by experts to increase to $58 billion from $32 billion during 2013-18. In a best case scenario, India’s exports to China will rise to $87 billion by 2017 but still may not be enough to curtail the ballooning trade deficit.

For the aforementioned and other equally important factors including India’s smaller manufacturing base, China considers its southern neighbour as an import and export market.

China and India have set a target of having a two-way bilateral trade of $100 billion by 2020. Over the next 10 years, India will continue to import high skill technology intensive goods from China and export raw materials to its largest neighbour till Indian manufacturing comes of age and gets global scale.

For several years now, India and China have been negotiating about the development of tourist trade but not much has moved on the ground. At present, 100 million Chinese trot the globe annually and millions among them have interest in Buddhism but only a fraction among them find their way to India, the neighbour next door. India, with its strong cultural and heritage links, has yet to develop the Buddhist circuit though eons have passed since it was first envisaged. A three-pronged road, rail and air link connecting India’s Buddhist sites with metropolitan cities such as Delhi and Mumbai can give a decisive push to Chinese tourist inflow into India.

Aggressive but healthy competition

India should aggressively compete with China, among others, in the sectors of information technology, auto component manufacturing, media and entertainment and tourism.

“India should give the Chinese companies fast track approval in domestic projects and likewise seek reciprocity for its businesses in China,” he stressed.
The Indian industry will have to make some important investments of its own in the medium-term, commit resources and coordinate with the central government to induce China and its entrepreneurs to loosen their purse strings.

India is striving to increase its economic investments, trade and geopolitical presence in Southeast and North Asia including China through its ‘Look East Policy’, which the current government at the centre has tweaked to ‘Act East’.

During the next decade or two, India will focus on investing in infrastructure and manufacturing in a big way while China will pour its financial resources heavily in the services sector because they have a large consumer market, said Pande who has co-authored a book on “The Silk Road Rediscovered”, which covers growing ties between India and China.

The general perception is that India is a back office and China is a manufacturing hub. “We, as businessmen, believe that there will be convergence as India will become a leading manufacturer and invest in infrastructure while China will invest and grow in services,” Pande said elaborating on his medium-term bilateral outlook.

There are over 100 Chinese companies in India and 165 Indian companies in China. These numbers are set to increase. Direct cross border mergers or acquisitions of Indian and Chinese companies will soon become a reality. Often these may happen via third country route. India’s business conglomerate Tata Motors entered China through its acquisition of Jaguar Landrover which had a Chinese subsidiary. Likewise, China’s Lenovo is tapping the Indian market through purchase of IBM PC subsidiary. Chances are that the next cross border acquisition by a company from either side of the border would have a major subsidiary and operations in the Indian or Chinese markets.

The Chinese are working doubly hard to create global brands, which they can call their own with indigenous roots and they want to take the next vital step in the international business race. They no longer want to be known as the assembling hub and supplier of ancillaries and components for European and North American companies.  Alibaba, Lenovo, Huwavei and Xiaomi are currently rated among the handful of Chinese international brands with a global reputation but many more may join the list soon.

India can help the Chinese realize this dream. India is known for two of the best-known brands in human resource development in the world, the Indian Institutes of Management, or IIMs and Indian Institutes of Technology, or IITs. In turn, alumni of these institutes have contributed in building corporate brands. China can draw upon India’s expertize in global management practices, brand building, brand management and skills’ inculcation in human resources.

Thorns at the border fence

For such knowledge sharing and exchange to happen, India’s central and states’ governments will also have to sort out security related issues, often touted as hypersensitive due to the bitter memories of the war in the autumn of 1962.

Leaders of both countries have agreed to resolve the thorny border issues through negotiations but parleys are going on at a snail’s pace and are tinged with Indian apprehensions over China’s motives with frequent incursions by its military troops on the ground.

As an emerging superpower, Beijing has a tremendous responsibility on its shoulders to maintain global peace but its armed forces frequently get involved in power posturing and geopolitical brinkmanship. The Chinese are more aggressive in the South China Sea and in East China Sea than elsewhere. China has often remarked that Indian Ocean is not India’s Ocean but all efforts to remind and convince them that South China Sea is not China’s Sea have so far been in vain.

Nevertheless, Pande is an eternal optimist. “Strategically, Indo-China ties are on the upswing,” he observed. Broadly speaking, in this century, Indo-China ties will be among the top 10 relationships in the world.

He points out that the Chinese and Indian leaders are working together and coordination on multiple multilateral fronts including global governance, environmental sustainability, countering and preventing terrorism, creation of Asian Infrastructure Bank and a BRICS Bank for Brazil, Russia, India, China and South Africa.

“Despite several irritants India and China are both on the same page internationally – be it in the climate change fora, World Bank and on many policies formulated in the United Nations re global governance,” Pande said.

Despite the lingering differences over border issues, the silver lining is that Indo-China Line of Actual Control, or LAC is one of the most peaceful disputed borders globally, with perhaps not a single bullet fired since 1975.

In a nutshell, both countries can’t do without each other and the best option for them is to shrug off the historical baggage and instead change the fortunes of the billions of their citizens for the better through multi-pronged cooperation. The two giants need to be aggressive not at the national border but the marketplace. This will require a radical change in mindset amongst policy planners and more importantly its business leaders.

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