Why are the Indian and Chinese economies decoupling?
Vikram Sood | 07 Sep, 2020
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India has strong geopolitical, historical and economic reasons to disentangle itself from China's arms
Many experts argue India is the weaker power unable to take on China.
In an article in Foreign Policy, James Crabtree argues that a trade war
with China would be a bad idea for India. In his view, India's "military
is inefficient, underequipped, and dogged by procurement corruption
scandals". To develop its military strength, India needs a dynamic
economy, and an "inward economic direction" would only benefit China in
the long run. Therefore, an India-China decoupling is a terrible idea.
analysts are wrong. Their argument against decoupling is based on three
implicit assumptions. First, India is a deeply-divided country unable
to act or respond decisively. Second, India is dependent on the Chinese
economy for its growth. Third, China's rise is inexorable and India has
no option but to come to terms with it. These assumptions are true, but
it is an error of judgment to treat them as unqualified truths.
A Trip Down Memory Lane
Indians with longer historical memories than many of these experts,
these arguments sound familiar. Anglo-Saxon publications have long
hectored, advised and moralized on Indian issues. On July 5, 2014, the
editorial board of The New York Times made a case against India's
membership of the Nuclear Suppliers Group. To be admitted, India needed
"to sign the treaty that prohibits nuclear testing, stop producing
fissile material, and begin talks with its rivals on nuclear weapons
In response, Gurmeet Kanwal, a retired Indian
brigadier-turned-defense analyst, called the editorial "partisan and
condescending". Some even saw it as neocolonial. He pointed to "the
existential threat posed by two nuclear-armed states on India's borders"
that led India to develop its nuclear weapons capability. Kanwal argued
that India had been a "responsible nuclear power" with a "positive
record on non-proliferation" and had "consistently supported total
nuclear disarmament." In typical Sikh humor, he advised nuclear
ayatollahs to focus on real proliferators and let go of the cap,
roll-back and eliminate (CRE) stance they had adopted against India
since the 1990s.
Just as India stood up to the US on the nuclear
issue in the 1990s, it is capable of standing up to China in 2020. An
India-China conflict is highly undesirable. Ideally, New Delhi and
Beijing should be able to work something out over endless cups of tea.
However, sanctimonious advice from foreign experts about dire
consequences of an India-China decoupling has to be taken with a bucket,
not a pinch, of salt.
In 1998, India went nuclear despite dire
predictions for its economy. Many in Washington assumed that India
depended on the West for its economy. Barely seven years prior, India
had experienced a serious financial crisis. The Gulf War and slowing
exports to the US crippled an economy by rising deficits and increasing
debt. The precipitous decline of the Soviet Union meant India no longer
had a godfather to bail it out. So severe was India's 1991 currency
crisis that it had to pledge its gold reserves and liberalize its
economy to get a bailout from the International Monetary Fund. In 1998,
India was better off than in 1991 but certainly not in a strong
position. Nuclear tests put it under immense pressure.
At the UN,
the Conference on Disarmament condemned Indian nuclear tests. In the
preceding years, India had watched the West ignore the 1989 Tiananmen
Square crackdown and fete China for its economic reforms. Condemnation
for nuclear tests strengthened, not weakened, India's response. It stood
up to the West, ignored experts and upended nuclear apartheid. Today,
India is again in a mood to defy experts and stand up to China.
Like Love, Trade Is Complicated
troops amass on the India-China border, a full-scale economic war has
broken out. It is leading to a structural break in the Indian economy.
Both public opinion and political leadership is now committed to
decoupling from China. In India, there is a ban on 59 Chinese apps by
government authorities. Major trade bodies have formally announced
boycotts of Chinese products. For instance, the Confederation of All
India Traders (CAIT) has listed 3,000 such products. CAIT is a national
umbrella organization with 40,000 smaller trade bodies and 70 million
traders as members. The government has tightened country of origin rules
for e-retailers and other sellers.
Demand for Chinese products
is declining. Xiaomi is no longer India's top-selling phone. Samsung has
replaced it. Increasingly, selling Chinese goods using Southeast Asian
free trade agreements is becoming difficult. The existing business model
of buying in China and selling in India is under pressure.
additional twist, Indian tax authorities have conducted raids on
Chinese companies and individuals for money laundering. It led to the
arrest of a Chinese national. Apparently, he was married to a woman from
India's northeast border state of Mizoram, had spuriously obtained an
Indian passport and been arrested earlier for espionage. It seems trade
is not as simple as experts imagine it to be. Intelligence, influence
and geopolitics are inextricably intertwined with trade, business and
investment. In the India-China economic relationship, three largely
forgotten factors are noteworthy.
First, India enhanced trade
ties with China not only for economic reasons but also geopolitical
ones. Becoming a key market and investment destination for China was
supposed to reduce the risk of conflict and wean Beijing off Islamabad.
Aggressive Chinese actions have made India reconsider this strategy and
Second, India's manufacturing sector is reasonably
well developed but has suffered from Chinese competition since China
joined the World Trade Organization (WTO) in 2001. A 2018 parliamentary
report concluded that Chinese imports were playing "a negative role for
(India's) domestic industry". The report warned about the loss of jobs,
an increase in bad debts for banks, a decline in tax revenues and a
worrying dependence on China for critical products. It concluded that
China does not play by WTO rules and "the problem of Chinese dumping is a
matter of concern across the globe".
India is not alone in
having concerns about China's abuse of WTO rules. A 2018 report to the
US Congress expressed concern at "China's continued embrace of a
state-led, mercantilist approach to the economy and trade". It detailed
"substantial costs borne by WTO members as a result of China's
problematic trade regime" and the challenges presented by its
"non-market economic system". Given China's track record, there is a
case to be made for India taking a more protectionist path.
is another tiny little matter. Protectionism has played a key role in
industrialization for any latecomer. Furthermore, industrialization has
been the key driver of economic growth. In a 2019 article, one of these
authors observed that the first major act passed by Congress was the
Tariff Act of July 4, 1789. Without protecting its infant industry, the
US would not have emerged as an industrial power.
China has followed the American playbook on steroids. It has powered
through the largest and fastest industrialization in history. Its
companies enjoy the advantages of infrastructure, cheap financing and
political support. Therefore, they have been able to achieve economies
of scale. As a result, Indian companies have been blown away. An
India-China decoupling might give sectors from aerospace components to
advanced pharmaceuticals a second chance.
Third, Chinese imports
into India are nice-to-have, not must-have, goods. Demand for them is
elastic unlike the inelastic demand for energy from the Middle East and
the US. An India-China trade war that leads to a decoupling of the two
economies could lead to short-term pain but has a strong rationale for
the longer term.
The Shape of Things to Come
In any case,
experts forget that India is unlikely to turn entirely inward as it did
after independence in 1947. Recently, billions of dollars have poured
into India from the US. Reliance Jio, an Indian mobile internet company,
raked in $15 billion in 10 weeks. This is indicative of a deeper trend.
Given new geopolitical imperatives, India is now looking to boost
economic ties with friendly powers. It wants Korean, Japanese, European
and American firms to set up shop in the country. Foreign market players
who can act nimbly would be in a good position to grab some of the
approximately $60 billion China's trade surplus with India. There are
new investment, manufacturing and trading opportunities emerging as the
status quo changes and a new order emerges.
predict a short-term price shock as Chinese goods stop coming into the
country. They forget that India has struggled with jobless growth even
during the best of times. Decoupling with China could boost domestic
manufacturing not only for large but also for medium and small
industries. This would increase employment, tax revenues and even demand
thanks to a multiplier effect. Improved job figures further increase
political support for decoupling and decrease India's need to subsidize
agriculture so heavily. For decades, agricultural subsidies have put
pressure on public finances. If a lower amount is spent on subsidies,
pressure on the fiscal deficit would abate.
To sum up, India has
strong reasons to decouple and no longer consider WTO rules sacrosanct. A
tectonic shift is underway. After World War II, a new rules-based order
emerged. The end of the Cold War strengthened this order and led to
visions that Western democracy was the final destination for all
societies. With polarization and partisanship at home, Western
democracies themselves are in peril. The order that emerged in 1991 is
crumbling and a new one is about to emerge. History offers us lessons as
to what to expect.
In the past, India and China focused on their
spheres of influence with the Himalayas keeping them apart. Both
prospered. In this age of trade, peace and prosperity, a Chola empire
based in the modern-day southeastern state of Tamil Nadu ruled Malaysia
(Putrajaya), Indonesia (Srivijaya), Sri Lanka and the Maldives. The
Middle Kingdom held sway over Mongolia, Korea and Japan. Both India and
China could go back to sticking to their historic spheres and to trading
with each other.
At the moment, China has followed salami
tactics and encroached on territory India claims as its own. China has
also been meddling in Nepal, Myanmar and Sri Lanka, India's key
neighbours. Since 1963, China has been in a close alliance with
Pakistan. Yet China has never played a role in the Indian subcontinent
and cannot suddenly turn into an overlord here. Therefore, close
India-China economic ties no longer make strategic sense.
China disingenuously claims to meet India halfway while insisting that
the onus to improve the border situation lies entirely with its
neighbour. This is a one-way, not halfway, diplomacy that suggests
aggressive intent. The Chinese also seem determined to win the war of
narratives and are enlisting the support of free market ayatollahs to do
so. It is only natural that the Indian narrative is bound to be
different. It is in sync with the new realities of the day, which drive
India's decision to decouple its economy from China. Trade, investment
and deep economic ties are a jolly good thing with allies and friends,
not with rivals and foes.
(Vikram Sood is former RAW chief and
Atul Singh is a journalist, CEO & Editor-in-Chief of Fair Observer.
The views expressed are personal.)
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