I began thinking about writing my book in April 2009 when the world was getting back on its feet after the economic recession that had crippled it. When looking for themes, one story that fascinated me both as an entrepreneur and as a business journalist was the relentless rise of China. I was intrigued that when Deng Xiaoping put China on the path of reform, its economy was smaller than India’s. Even more critically, 32 years ago the Cultural Revolution had virtually decimated China’s economic institutions. It did not have a central bank or a stock market. The universities had been emptied out. There was virtually no judiciary, as the entire lawyer community had been annihilated. Economically and institutionally China was a very weak state in 1978.

What’s more, India had a bigger GDP. Its institutions of economic governance were maturing. It was evolving into a throbbing civil society and taking the road traversed by the developed democracies of the world. So the odds seemed to overwhelmingly favour India in 1978; China seemed such a hopeless case!

Take another marker. In 1990, China’s income per individual was smaller than India’s. That was just 20 years ago, which is a blink for civilizations. Yet today, China is four times India’s size; this is a stunning statistic that bears repetition. China’s GDP is $5 trillion, while India’s is around $1.25 trillion. Here is a country that has not only left us behind in 20 years but has made us a quarter of its size.

The people of this country need to legitimately ask those who manage its economy – and I do not have only the politician in mind – what has China done so right that India has not done? Unwittingly or by design, China seems to have picked up some of the most effective economic policies of the two ‘miracle economies’ that preceded it. Note that I use the word effective and not efficient.

From the Soviet Union, which was touted in the 1970s to overtake America in a couple of decades, China seems to have learnt the art of extracting massive surpluses and accumulating them in the hands of the state. As land is owned by the government and the peasant is a mere tenant, China extracted major surpluses by taking it away cheap and selling it at a high price. This is impossible in India – and mercifully so.

 

China also extracted surpluses from its workers by keeping wages extremely low. It did the same with consumers and trading partners by keeping the price of its currency artificially devalued against the American dollar. Finally, it kept the price of money virtually negligible for its state corporations, which can borrow from government banks at an interest rate of 3-4 per cent. It also kept the price of infrastructure services and industrial inputs very cheap, creating even higher surpluses in the hands of its public sector giants. All of these ‘extractions’ created massive surpluses for the Chinese state.

The trick it learnt from Japan, another ‘miracle economy’, was to dramatically engage with the western world. This was at sharp variance with the insular economy that the Soviets tried to build, leading to their miserable failure. But China boldly opened itself to a flood of foreign direct investment. This brought in a cascade of dollars, technology and management practices. It created a huge amount of foreign equity in the economy and laid the base for technological progress in the coastal areas.

What China did with the surpluses is even more dramatic. It invested massively in the economy – close to 50 per cent of GDP in infrastructure, farm productivity and soft areas like education and healthcare. No other country, at no other point in history, has invested capital at this astonishing scale. The conventional wisdom is that infrastructure and capital investment should keep pace with economic growth. China did not want to wait long years like the West did. Instead, it telescoped the investment over 20-30 years so that the rest of the economy, and household consumption, could play catch up with investment.

In the book I have called this the ‘escape velocity’ model of capital investing that India must examine very carefully. I have often wondered why India is so reticent about huge investments in its economy. I know there are constraints but there are options as well.

China’s other masterstroke was to lend large amounts of those surpluses to America – another trick that it perhaps borrowed from Japan. Today China and Japan each hold close to a trillion dollars in US Treasuries. By lending to America during the boom, they kept interest rates down on Wall Street, persuading US consumers to spend more, which in turn fed the export industries back home. This virtuous cycle actually continued until three years ago when the US asset bubble got pricked, and American consumers lost the capacity to spend.

 

Of course, such hyper investment has led to terrifying dualities; no one is saying that this has been an easy ride for China. Today it is grappling with major imbalances: between investment and consumption, in the massive bad debts that its banks are saddled with, and in a ravaged environment. But equally, it cannot be denied that no other nation in history has pulled more people out of poverty in as short a time.

I think the lessons for India are very clear. It should be investing in infrastructure far ahead of the curve. It should be much bolder in taking entrepreneurial policy risks. Once it manages to build 20 km of highways a day, it should double the target. The absorptive capacity of the Indian economy must go up. Otherwise we will have structural inflation in double digits. India also needs to fix its public finances. It should be far more welcoming of private investment, including foreign investment. The Indian state should shed its incremental attitude towards change and growth. If the state focuses on a few areas – education, healthcare and agriculture – and allows a properly regulated private sector to take off in every other sector (imagine if the Commonwealth Games had been done under the public-private-partnership model!), a lot of the problems can be solved.

 

The Indian state needs to now think in terms of quantum changes. Very often these arguments, put out by people like me, are dismissed as being ‘elitist’. They are not. There is nothing elitist about getting a land acquisition law that is fair to farmers. There is nothing elitist about building good roads faster, getting power to people, or providing them choice in education and healthcare. This is not about government versus the private sector. It is about getting the Indian state to be far more energized into taking quicker policy action. For instance, barring the Communists, no one is opposed to allowing 49 per cent FDI in insurance. But for a decade now, we have been unable to amend the law to make this happen. We have not been able to get a good companies law enacted, even though we have been at it since economic reforms were initiated.

The book looks at these issues. It does a lot of anecdotal mix and match. It makes point-to-point comparisons between the two countries. This is not a race that one country can win. This is actually a race which one country will lose. If China fails to repair its politics and handle the potentially destabilizing imbalances, it is in real danger of losing this race, even if it is four times India’s size today. India of course has to put much more energy into making and implementing fair and effective public policies.

 

Some respected commentators, who I admire, have said that the race is over; China has comprehensively beaten us. But if you rewind to the end of the last century, China’s economy was just as big as India’s is today. For a moment, please suspend time and compare China-2000 with India-2010; you will find that while their GDPs are comparable, India’s institutional strength is incomparably superior to China’s. So in a real sense, India is less than a decade behind China – that’s all, that’s how little the gap can be between these non-identical Asian twins. To my entrepreneurial mind, that’s how the opportunity should be tackled: China’s economy may be four times larger, but is less than 10 years ahead of India. That is not such a huge gap to bridge.

Now to another critical question: will China and India learn to live with each other’s ambitions, or become implacable foes in the 21st century? Let’s begin with a bit of history.

China and India lived together as peaceful, populous and prosperous neighbours until the 18th century. Then colonial powers took control and enervated their prosperity. In 1914, the British drew the McMahon Line and ruptured their peace. China believes nearly 150,000 sq km of its territory was fraudulently transferred to India. Both countries went to war in 1962; a militarily under-prepared India was thrashed, opening up deep psychological scars which have not been repaired to this day. Then both got absorbed in fixing their damaged economies; China dazzled the world with its $ 5 trillion prowess, and India attracted attention with its $ 1.25 trillion play. Today, the world’s fastest and second fastest growing economies are locked in an uneasy clasp.

A United Nations intelligence report titled Mapping the Global Future by 2020 has ‘likened the emergence of China and India in the early twenty-first century to the rise of Germany in the nineteenth and America in the twentieth, with impacts potentially as dramatic.’ Chinese premier Wen Jiabao echoed this to his Indian counterpart: ‘When we shake hands, the whole world will be watching.’ John Garver calls them natural rivals with their ‘decades-long, multilayered, and frequently sharp conflict over the lands and peoples lying around and between them.’ Ashley Tellis calls it a structural conflict between two natural competitors who are seeking to increase their influence on the world. While it may not become a malignant rivalry, he believes that if the two countries continue to gather economic and military muscle at the current rate, ‘there is a likelihood of this relationship turning into a dyadic rivalry.’

 

India and China also share a geographical water tower that feeds their rivers. The high-altitude glaciers of the Himalayas birth India’s Ganga, Indus and Brahmaputra, and China’s Mekong, Yellow and Yangtze. Together, these rivers cradle nearly three billion people, or half the world’s population. Alarmingly, a fifth of these glaciers have been destroyed in the last fifty years; the Intergovernmental Panel on Climate Change finds them ‘receding faster than at any other place in the world.’ Time calls it a global warming threat that ‘can be seen in real time, with our own eyes.’ The Earth Policy Institute calls ‘the melting of these glaciers the most massive threat to food security that we have ever projected.’

This has made China and India co-victims of a life-threatening ecological crisis. Will they cooperate to solve the problem, or go to war over food and water? Early signals are unclear. India is suspicious that China could be building dams to disrupt flows to downstream countries. Chinese researchers are not allowed to visit India’s glaciers, and China is sensitive about allowing outsiders into Tibet. But if there’s one area in which the two adversaries have sheathed their daggers, it’s over the environment, witness their near-perfect understanding and bonhomie at Copenhagen, as they closed ranks against the developed countries.

 

The India-China love-hate equation spills over into bidding for energy assets around the globe. See the way China outwitted India in Myanmar’s Shwe gas project. In 2004, India’s gas authority won the bid; but China leaned hard on the military junta to change the parameters, and ultimately wrested the deal. But of late, both countries are seeing plenty of merit in cartelizing their purchases. China did not bid against India for Britain’s Imperial Energy, and India returned the favour by staying away from Syria’s Tanganyika Oil. Since China and India import 40 per cent and 70 per cent of their oil respectively, the next step could be to pool their bids to maximize bargaining clout. Both would also like to join hands to kill the extra charge of $1-2 per barrel of oil, called the ‘Asian Premium’. India has dangled a $7 billion bait of power equipment buys from Chinese companies to meet its stretch generation targets.

Yet these are slivers of cooperation in an otherwise strained engagement; despite low key promises of support, China is known to have thrown several last-minute spanners into India’s exceptional civil nuclear treaty with America. Today, China is cocking a snook by giving Pakistan two nuclear reactors, a straight, uncomplicated tit-for-tat of the Indian-American deal.

 

A new theatre of competition for resources and markets is opening up in Africa and East Asia. China’s state corporations are thrusting deep into Sudan, Nigeria, Zimbabwe and other African territories. While the Indian government is somewhat diffident, private companies are launching equally audacious bids from their relatively meagre balance sheets – just one Bharti Airtel has splurged $ 10 bn in buying Zain Telecoms.

Even as China wants a piece of action in South Asia (with Afghanistan, Pakistan, Bangladesh and Myanmar), India is ‘looking east’ at the ASEAN +3 (i.e. Japan, China and South Korea) countries – it has already concluded free trade agreements with ASEAN and South Korea. India would like the grouping extended into an East Asian Summit (EAS); to balance China’s influence, India would not mind including the US and Russia. China, of course, would like the ASEAN +3 group to retain its primacy. While it’s early days to see how this alphabet soup of emerging Asia-Pacific alignments will play out, it’s just one more face-off that China and India have to deal with.

Perhaps the most perceptive commentary has come from Stephen Cohen. According to him, ‘India-China relations are greatly affected by China’s generally dismissive views of India.’ China regards India as a soft power which can be made to fall in line, if not totally dominated. China is convinced that ‘its civilization is older and greater than India’s.’ India, with its ‘modest accomplishments should behave in a suitably modest fashion; Indian assertiveness, the Chinese believe, does not seem to be justified; given New Delhi’s feeble economic and strategic record.’ Indians respond to this with ‘intrigue and fright’. The perceptions at both ends are ‘mired in stereotypes’, and awareness about each other is ‘abysmal’.

Many Indians suffer from a siege mentality, believing that China is out to encircle it by building alliances with Pakistan and Nepal. India is also hopelessly outflanked in the arms race – India’s $30 billion defence budget is puny compared to China’s official allocation of $70 billion (Rand Corp estimates China’s actual spend at about $200 billion). At 2.1 million in active duty, China has the world’s largest standing army. India has the third largest, after the US, with about 1.2 million officers and soldiers. While China’s stockpile is likely to go up to 1,500-2,000 nuclear warheads soon, India’s is estimated at only ninety.

 

So will this love-hate equation lead to collaboration or conflict? The answer lies in how each country ends up handling its politics and economics. If China clamps down on its quasi-openness, its politicians may be forced to ratchet up militant nationalism to try and deflect the upsurge in popular unrest. If India fails to harness its runaway democracy and create jobs, food stocks and literacy on a massive scale, its politicians may be tempted to cloak their failures in jingoism. Ironically then, both countries will have to ‘control’ their wildly opposing democratic urges to save the world from a ticking, epic conflict.

 

* Raghav Bahl is the author of Superpower? The Amazing Race Between China’s Hare and India's Tortoise. Allen Lane/Penguin Books, London, 2010.