The problem

EXACTLY a hundred and one years ago on 27-28 May 1905 when the Japanese combined fleet commanded by Admiral Heihachiro Togo put to sword the Imperial Russian Baltic fleet of Admiral Zinovy Rozhdestvenski in the Tsushima Straits off Japan, the world first woke up to the rise of Asia. Historians called it the greatest naval battle after Trafalgar. But more, it was the first time that an Asian nation had defeated a western power. Japan was soon acknowledged as a world power, continuing to grow in stature and wealth till it embarked on a collision course with the USA – beginning with Pearl Harbour and ending with Nagasaki. By the middle of the last century, joining a defeated Japan in the quest for an Asian century were China and India. China had liberated itself from a century of humiliation, anarchy and internal exploitation in 1949, while India had become free of Britain’s colonial clutches in 1947.

A defeated Japan renewed its drive to prosperity under new constitutional arrangements dictated by the USA, taking its place in the postwar world order under the shadow and protective embrace of the USA. It continues to do so. Poverty stricken China and India chose independent and unique paths to liberate their vast populations from destitution and backwardness. Their climb soon became a race between two systems and ideologies though it never became another Cold War, this despite a war in 1962 over yet unresolved border disputes. China and India, never the best of friends, have now caught the world’s attention with their dramatic economic growth rates. They are among the top ten of the world’s economies and are projected to be among the top three by the middle of this century. This rise to the high table by two of the world’s poorest nations – China’s per capita is $1100 while India’s is $540¹ – is once again seen as a competition, not necessarily of ideologies but most certainly of national will and determination.

When China launched its economic liberalization programme in 1978, its per capita income was less than India’s, as was its GNP. But it surged past India in the early 1980s and has not looked back since. India’s economic reforms were launched in 1992, impelled more by the dire financial straits it found itself in rather than any ideological realization that a micro-planned system was just not doing the job for it. At the time when the two countries began their reforms, China’s economic growth was higher than India’s as were its social development indices. The average economic growth in India’s first reforms decade was only 0.2% more than what it was in the previous decade.² It is only recently that India has truly joined the race by posting much higher growth rates. This has much to do with the favourable demographic phase India is passing through, with a vast majority of its population in the period of highest productivity and consumption. China on the other hand has noticeably begun to grey and this advantage will accrue to India around 2020.³ By then India will also be the world’s most populous country. That is why many economic experts are betting heavily on India. This optimism, however, is conditional upon continuing with the reforms process, unsaddling the high cost bureaucracy from its perch, and maintaining internal stability and order, both easier said than done.

In the recent years Pakistan has shown us how easy it is to wage a low cost, low intensity war on India. We have also in the recent years seen how regional imbalances and maladministration can provoke large sections and areas of India to join in an armed struggle for a better deal. This is just the ideological dry tinder for a Chinese regime that still proclaims to be inspired by the teachings of Chairman Mao! On the other hand, the Chinese have shown that they are capable of combining revolutionary zeal with economic pragmatism. The Chinese economic resurgence and its capture of huge export markets, particularly in the USA, has been made possible by huge infusions of capital by western MNCs, and Hong Kong and Taiwan capitalists seeking an totalitarian economic greenhouse of low wages and high productivity. It is thus not surprising that Wal-Mart has emerged as China’s major import client, last year sourcing goods valued over $22 billion from mainland China alone.⁴

Indian exports are now led by the IT sector’s dramatic growth made possible by high quality and largely state subsidized education and low wage costs. China enjoys a labour cost advantage over India, but Indian managers and IT professionals have shown greater ability and facility to interact with the West. China has made known its intentions to match India’s IT prowess, just as India has begun semaphoring its intent to match China’s manufacturing prowess. While many see the present as a happy divide with China visualized as the world’s factory and India as its back office, neither nation is satisfied with this arrangement. India too would like to become the world’s factory for the simple reason that it is only manufacturing that can provide the needed new jobs each year to absorb the millions who are entering the labour market or are unproductively engaged in agriculture or petty retail at present. Equally, China too would like to become the world’s office as it gets a much higher value addition than manufacturing.

India’s expansion of manufacturing will have to be matched by an expanded share of international markets for manufactured goods, possible only by huge investments and reduced labour costs. Chinese manufacturers will expectedly resist Indian efforts to attract investment by reducing manufacturing costs. In recent years we have seen Chinese companies making a bold bid for world markets in automotives, domestic appliances and electronics. Many Indian companies too have now joined the race, with Tata Motors and Videocon being noticeably quicker off the block. Obversely, the expansion of manufacturing in China and India has also led to the growth of Sino-Indian trade, expected to cross $20 billion in the coming years.⁵ China is now India’s second largest trading partner and for some months last year it was also the biggest buyer of Indian goods, surpassing US imports from India.⁶

In recent days we have seen yet another spurt in oil prices. They have touched $75 a barrel and many forecast will cross $100 within a few months. With world oil production now close to peak production, the price rise is mostly attributable to a rise in demand mostly from India and China where a visible new prosperity and expansion of the middle class has given rise to a voracious appetite for personal motor transport and hence for fuel. The rising incomes also make high fuel costs more bearable and so we have yet to see signs of flagging consumption. In a bid to shore up supply lines, India and China have begun a worldwide hunt for assured reserves and have often got into bidding wars. Central Asia with its significant oil reserves is now once again the playfield for the Great Game, this time between a resurgent Russia, US oil companies, China and India.

Usually sites of major reserves are also major consumer markets to enable oil consumers to pay for their oil habit. But India’s access to the region is curtailed by China’s close ally, Pakistan. The question then is, will China encourage Pakistan to remain obdurate or be more conciliatory? So far China has shown that it is not averse to using Pakistan to smite India. The recent revelations by General V.P. Malik in his book on the Kargil War⁷ that China made threatening military moves in 1999 at the height of the conflict is once again evidence of this Chinese attitude. Yet, on the other hand, the Chinese leadership has increasingly extended a hand of friendship towards India. The problem seems to be that the other still remains hidden behind its back! India’s leadership is yet to take a call on this.

The goals of the lone superpower are clear. While continuing to engage China economically, it would like to curb it in geopolitical terms, adding to Chinese fears of encirclement, or Containment II. The Chinese must indeed feel uncomfortable. Japan has shown signs of renewed economic muscle, Taiwan periodically raises the banner of independence, and Vietnam has not forgotten the past. Russia, while seemingly engaged in frenzied economic and military cooperation with China, is also wary of the huge influx of Chinese migrants into the vast open expanse of Siberia. At present it is estimated that there are more than two million Chinese living in this corner of Russia, fuelling suspicion of eventual Chinese intentions.⁸ It seems increasingly apparent that the USA wants to strengthen relations with India and both its president and secretary of state have made this abundantly clear. The Chinese, no doubt, fear that India too will once again become an adversarial nation, now aligned to the USA. India on the other hand seems to have no assurance from China that its recent warmth has a long-term quality about it. The border talks proceed slowly and the situation in Tibet continues to fester. Meantime business is better than usual.

This issue of Seminar draws upon a recently held meeting organized by the Centre for Poicy Alternatives, Delhi, on the emerging trends in Sino-Indian relations with a view to engaging a wider spectrum on issues that may well decide the fate of our region in the days ahead.

MOHAN GURUSWAMY

 

Footnotes:

1. World Development Indicators, World Bank, 2005, pp. 22-24.

2. Mohan Guruswamy, et al, ‘Will India Catch-up With China?’ Seminar 557, January 2006, pp. 69-74.

3. World Development Indicators, UNDP, 2003.

4. K. Subramaniam. ‘Wal-Mart and China – Wholesale Lessons for India’s Policy Makers’, The Hindu Business Line, 1 July 2005; and Bhanoji Rao, ‘Industry, Ugly Duckling’, The Economic Times, 1 December 2004.

5. Anil K. Joseph, ‘Sino-India Trade to Break New Record This Year at $20 bn’, 17 April 2006, Outlook India.

6. DGCI&S, Kolkata.

7. Gen. V.P. Malik, Kargil: From Surprise to Victory, Harper Collins, 2006.

8. Vladimir Radyuhin, ‘A Chinese Invasion’, The Hindu, 23 September 2003.