governance, political economy, institutional development and economic regulation

Ni Hou

(photo credit: india.com)

Arun Shourie- minister in the earlier NDA government and senior BJP leader was being strategically alarmist when he went public on May 1 warning Prime Minister Modi against succumbing to the seductive spell, which the Chinese put on Pandit Nehru (India’s first Prime Minister) eagerly accepting his diplomatic largesse and support whilst remaining firm on giving nothing in return, which was not expressly bargained for and agreed.

Mr. Shourie has a flair for the dramatic and an uncanny ability to be evocative in his speech, sweetly hitting hardest, where it hurts the most. The Chinese “betrayal” of Pandit Nehru’s “brotherly” love by invading India in 1962 broke Nehru’s heart and spirit. He succumbed to the body blow two years later. China supporters maintain that unclear messaging from India forced China to retaliate since it perceived India as being bent on unilaterally disturbing the status quo along an un-demarcated Himalayan border between the two countries. Be that as it may, the China-India 1962 war, in which, despite heroic, determined but futile resistance from an ill-equipped and poorly led Indian army, China soundly trounced India, has left an open wound for India, which is still raw more than five decades later.

One doesn’t need to go back to 1962 to be sure that China is not a natural ally for India. We are just too similar with few complementarities and hugely competing priorities.

India-China, twins separated at birth?

Both countries are in a race for fuel, which neither have and both need to grow their economies and feed their people. One out of every three humans is either Chinese or Indian. China is racing to achieve high income economy status (per capita GNI> US$ 12,746) whilst India is striving to be an upper middle income economy-where China is today (per capita GNI> US$ 4,125). Both need to find export markets to fuel their growth. Both are relative “outsiders” to the high table of developed countries and both are jostling for space. Both peoples are hugely entrepreneurial and compulsively competitive. But there the similarity ends.

Even twins grow differently

India is barely at the threshold of being a lower middle income economy but its international, political engagement is larger than its economic heft. China is already an upper middle income economy but traditionally prefers to remain below the international diplomacy radar and boxes well below its weight, except when it perceives its national interest directly at stake.

India is a democracy of long standing, grounded on the compulsion of complex heterogeneity and plurality. China is a largely homogenous, beneficent, authoritarian meritocracy.

India is has been institutionally and ideologically networked into the developed world due to its colonial heritage and the facility with English. But it is a recent and somewhat unwilling, entrant to the international trade and investment value chains. China’s culture and values are unique and somewhat autarkic but its planned tapping of developed country knowledge, innovation, research and technology market has worked well. Its pragmatism, easy adaptation to change and determined implementation of a growth strategy by integrating into trade and investment value chains, sets it apart from even its East Asian neighbours, most certainly India and previously communist countries.

Given the lack of complementarities and the visibly rivalrous character of the relationship why has Prime Minister Modi steadfastly wooed the Chinese?

Why China eyes India

China knows well what it wants from India. It wants to service India’s booming market with cost competitive goods and services. This is why a bilateral trade target of even US$ 100 billion per year is rather limited for China. Given a choice it would rather shoot for US$ 200 billion so that it can buy into India’s growth prospects for adding at least 1% to its GDP growth over the next few years.

Growth is flagging in China. This is worrisome for the leadership which has built its credibility by “filling people’s pockets to shut their mouths”- a snide reference to the grand political bargain in which Chinese citizens agree to trade in individual freedom for material gains.

India has a trade deficit of 50% of US$ 37 billion with China. Bilateral trade is US$70 billion.  This is higher than the aggregate trade deficit which is 20%. Further expansion of trade will likely worsen this deficit, since China is a more efficient mass producer of goods. Trade with China is consequently only a lever for India with which to negotiate alternative benefits in investment; security cooperation and mutually supportive diplomatic stances in multilateral fora.

So what is it about China which should excite India?

China made Indian Gods

Rather than predictably moan about the trade deficit with China Prime Minister Modi should praise the Chinese people for their achievements.

First, thank them for sending affordable goods to India thereby directly benefiting Indian consumers and forcing Indian industry to become competitive through attrition of uncompetitive businesses.

Second, thank China for being a role model for developing countries on the following three counts. (A) Illustrating the virtues of savings and investment led growth, particularly in manufacturing (B) Establishing the necessity of increasing public investment in human development and social protection (C)  Providing to the developing world a model for enhancing employment, jobs and rapid reduction in poverty

Third, invite them to visit India as Tourists, Students, Scholars and Friends so that our great cultures can learn from each other directly.

The gloved fist

Much has been made of the Chinese excursions into India even as President Xi was eating Dhoklas with Prime Minister Modi in September 2014.  Was this part of an elaborate Chinese plan to remind India that sipping green tea together does not mean China will give up its claims on Indian territory? Or were they a Peoples Liberation Army game plan to stab the reformist Xi in the back and undermine his international credibility? We may never find out. But what it does illustrate is that diplomacy is like sleeping with snakes-one has to sleep light, remain vigilant, move slowly but definitively and remain calm and unperturbed by the ensuing rattles.

Chinese cash

Should we fear Chinese investment in India? Clearly they have the cash and we have the need for it. One reason why we need the cash is to generate jobs. This means that the standard Chinese model of project implementation which relies on Chinese expatriates does not suit our needs. Rather they should build Indian skills in project implementation in keeping with their celebrated record in project implementation.

Partnership with Indian companies is the best model for Chinese investment in India so that social benefits and tax revenue flows downwards to the people of India whilst corporate profits flow to China. Other than a very short negative list of investments in sensitive border areas, Chinese investment should be welcomed. In fact co-partnership in international value chain related production can be of mutual benefit in services, engineering and chemicals.

End game

Prime Minister Modi’s China strategy must needs be minimalist. India looms too large in China’s neighbourhood for comfort. China will pull no punches in consciously trying to establish its dominance in South Asia and thereby cramp Indian influence. This is very similar to the effort India spends on cultivating Vietnam now and Taiwan earlier to the chagrin if China.

The best that India can hope to do is to stop China from playing “spoiler” in India’s unfolding growth story. Chinese support for Pakistani Terror or Maoist rebels in east India is an illustration of such proxy efforts. The best way of neutralizing “spoilers” is to co-opt them into the game as active participants. We must encourage China to develop significant investment stakes and trade links with India so that they too benefit from India’s growth. Actively encouraging highway and rail links across borders is a good place to start. India must aim to become “too big” in the Chinese investment portfolio for it to stall Indian growth- this is what “protects” the US.

It is inconceivable that Mr. Shourie is oblivious of this imperative to reach out to China. Could it be then be that his highly publicized “missive” to the PM was just a charade, dreamt up by the BJP “dirty tricks” department, to build up PM Modi as a strong and forceful leader with the reach; the credibility and the strategic depth to ignore inner-party, high level resistance to warming up China-India relations? In other words was Mr. Shourie’s advice given with the full knowledge that it would be ignored?

Similarly, could it be that the recent government action against Greenpeace and the Ford Foundation for crossing red lines by supporting activities against the national interest, were also initiated to project Mr. Modi’s government, ahead of the China visit, as being strongly nationalistic, able and willing to cock a snook at the US, just to illustrate, that India is not wedded to any traditional power block.

Far-fetched or not, PM Modi leaves for Beijing on a stronger wicket, as a friend of China, than he started with in September 2014, in part, thanks to Mr. Shourie.

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