It’s time that China seriously engaged with India

Author: Yizhe Daniel Xie, Waseda University

The topic of China dominates almost every economic and foreign policy discussion in India. Yet the concept of a rising India is still a foreign concept in the circles of Chinese elites. Many Chinese are often surprised or amused by the enthusiasm of analysts in comparing China and India. In the eyes of many Chinese the only similarities are that both countries are in Asia and have a population of over a billion people.Chinese President Xi Jinping with Indian prime minster Narendra Modi in New Delhi, 18 September 2014. (Photo: AAP)

It is not difficult to understand why China neglects India. Both nations gained independence in late 1940s with similar economic situations and challenges, but now China is far ahead of India in almost all development indicators. In 2014, China’s nominal GDP and GDP per capita were both approximately five times larger than India’s and Chinese people are expected to live nine years longer than their Indian counterparts.

With the help of decades-long high economic growth China has reduced its poverty headcount ratio to 7.3 per cent (99 million people), compared to India’s 21.9 per cent (273 million people). China has also lowered its illiteracy rate to 3.6 per cent, whereas India’s sits at 28.9 per cent. China’s gender equality at the workplace — measured through the female-male labour participation ratio — is also an impressive 84 per cent, compared to India’s 41 per cent. Even in the field of sports China’s 88 medals at the 2012 London Olympics outshone India’s 6 medals.

The tendency of mass media to report ‘negative’ news further worsens India’s image in China. The widespread perception of India among Chinese is as a place of over-crowded and out-dated public transportation, dirty and unpaved roads, poverty and slums, worse-than-China pollution and the outrageous rape cases. In 2014 only 0.17 per cent of Chinese outbound tourists visited India. The chaotic image of India helps Chinese authorities promote their political system and shy away from the idea that Western democracy can work in all countries regardless of size.

But continued ignorance of India is likely to blind China from seeing a land of opportunities. PWC predicts that by 2050 India will become the second largest economy after China. Regardless of whether India can replace China as the world growth engine or even catch up to China, it is certain that India will offer tremendous opportunities to China.

India is rebalancing its economy towards the manufacturing industry. Unlike China, India did not take advantage of its cheap and abundant labour, but instead jumped to a skill-based IT and service industry. While this helped millions of Indians into the middle class, the nature of the industry makes it structurally unable to absorb millions of illiterate and low-skilled labourers who remain in the agricultural sector.

Swiftly recognising this problem, Narendra Modi, then chief minister of Gujarat, poured resources into manufacturing and successfully led his home state to becoming the fastest growing state in India with an average annual growth rate of nearly 10 per cent from 2001–2012. In September 2014, four months after he became prime minister, Modi launched the ‘Make in India’ campaign, which aims to increase India’s share of manufacturing from 16 per cent to 25 per cent and create 100 million manufacturing jobs by 2022.

A manufacturing boom in India would benefit Chinese manufacturers. Rising labour costs in China and lackluster demand from developed economies squeeze the profits of Chinese manufacturers (especially in labour-intensive sectors) from both sides. India’s labour costs in manufacturing are a mere 26 per cent of China’s. And India has the opposite of China’s ageing society, with 65 per cent of Indians under 35 years of age. In 2025, India will have 111 million, or 47 per cent, more people aged between 15 and 29 years than China. India can provide Chinese manufacturers with both cheap labour resources and a sales market.

Although China does not produce the highest quality products available, its business model may have an advantage in India given significant market similarities. Like in China, the majority of Indians still earn a low income and affordability is the biggest factor in determining consumer behaviour. Chinese firms are well-accustomed to this kind of consumer behaviour in developing countries.

The success of Chinese firms will lie in their ability to navigate India’s uncertain and sometimes overlapping regulations, understand what customers need, and produce cheap products in a great quantity. With accumulated capital Chinese businesses are well-positioned to succeed in India. Indeed, many forward-looking Chinese firms, including computer technology firm Lenovo, information and communications technology provider Huawei and electronics company Xiaomi, have already invested in India.

Of course, India still faces numerous challenges. And cultural differences, language barriers, a metastatic bureaucracy and inadequate infrastructure may all hinder greater economic ties with China. But China should remember that they also faced similar challenges in the early stages of economic development. And, if rapid development in China provided the first wave of global growth then a rising India will underpin the next. China needs to recognise this and be prepared to ride the wave.

Yizhe Daniel Xie is a PhD Candidate at the Graduate School of Asia Pacific Studies, Waseda University, Tokyo and a Young Leader at CSIS Pacific Forum. He is now conducting research at an international economic policy think tank in New Delhi. Previously he worked with Industrial Bank of Korea Securities in Seoul and Goldman Sachs in Beijing.

He thanks Deloitte Tohmatsu Consulting and CSIS Pacific Forum for the Young Leaders Special Internship program in Japan.

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