China-India Brief #67

China India Brief #67


Published Twice a Month
January 12 – 26, 2016

Centre on Asia and Globalisation
Lee Kuan Yew School of Public Policy


Guest Column

Economic power shifts between China and India?

by David Scott

economic-growth-graph

Dry statistics show a shift of economic fortunes emerging between India and China during 2015. The first, second and third quarter figures for 2015 GDP growth were 7.0%, 7.0% and 6.8% for China; but were 7.5%, 7.0% and 7.4% for India. This change of fortunes can be seen in the Global Economic Prospects report drawn up in June 2015 by the World Bank, which followed GDP growth rate figures for 2000-14 with forecasts for 2015-17.

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Similarly, in October 2015 the IMF’s World Economic Outlook prediction for 2016 was of India’s 7.5% GDP growth rate ahead of China’s 6.3%. The Chinese leadership itself set a target of 6.5% for the 2016-2020 period. The International Growth Predictions from the Center for International Development (CID) at Harvard University published in May 2015 saw longer-term Indian acceleration and Chinese slow-down for the 2015-2023 period; “important reversals”, whereby “after decades spent trailing the growth of its northern neighbor and economic rival” India was projected to record average annual growth rates of 7.9%, nearly double China’s 4.6% projected growth over the period.

Both states are engaged in economics-driven rise in the international system, but now India’s economic rise may be starting to impact more in the international system? How has this come to be?

At the start of the 1970s China and India had similar size GDPs. However, the Dengist economic revolution, in which capitalist economic models were adopted by China, delivered high growth from the mid-1970s onwards. This left China with a subsequent quarter of a century of high economic growth at a time of continuing low economic growth rate for India.

Furthermore, even when two decades later the India pursued economic deregulation, which did deliver higher growth rates during the 1990s, China’s recorded GDP growth rates remained higher than India’s. This is reflected in the World Bank average for China of 10.5% growth during the 2000-2010 decade, whereas India’s average during that decade was 7.2%. This economic growth was why there was widespread talk at the start of the century of the 21st century being China’s Century.

The result was a Chinese economy almost triple the size of India’s, as for example in World Bank figures for 2014 which, taking into account Price Purchasing Parity (PPP), estimated China at $18,031 and India at $7,393 billion trillion. Did such a gap matter? Economic size affects the potential size of military budgets. The Stockholm International Peace Research Institute (SIPRI) 2015 Fact Sheet has China’s military spending of $216 billion (2.1% of its GDP) overshadowing India’s $50 billion (2.4% of its GDP).

Despite this previous widening gap in the size of their respective economies, the official emphasis by the two governments has been on economic cooperation, on Chindia synergy between these two neighbours, with both countries’ economic rise underpinning an Asian Century, and both economies described as complementary to each other. This ignores some serious trade asymmetry. Figures from the Indian Department of Commerce’s Import-Export Data Bank show that though bilateral trade had risen over the decade to $60.4 billion in 2014-2015, this masked an equally rising all-time high Chinese surplus (and corresponding Indian deficit) of $48.5 billion. Such imbalances cause increasing political frictions and are increasingly resented by India.

Of course this is not to say that economic success is certain for either country. Both countries suffer from heavy burden of corruption, and India has further constraints of caste impediments, and the challenge of creating employment for its rapidly growing potential workforce.

Furthermore it remains true that high growth is easier from a low base, whereas it is more difficult from a higher level. Successful economies thus tend to naturally slow down. China may then be a statistical victim of its own success. Conversely India’s higher growth rate figures on a lower base are easier to achieve, as China earlier had done so. This still leaves a situation whereby China’s lower growth from a bigger base means that in size its economy increases more than that generated by a higher Indian growth rate from a lower base.

Nevertheless, this slow down in Chinese growth figures (already subject to some scepticism about them being massaged) come in the wake of growing analysis pointing out the structural shortcomings of the Chinese economic model, hampered by a heavy statist hand, privileged position of state enterprises, and growing debt figures become an increasing drag on economic vitality. Politically, China’s one party system is indeed able to deliver short term quick direction and infrastructure projects, but in the longer-term may well be unable to open up a free economy. An aging population means a declining workforce and rapidly ageing pensions/care time bomb. This aging population was a direct result of the One Child Policy enforced since 1979, with its replacement in October 2015 by a Two Child Policy, representing an attempt to reverse this process. However in demographic terms the pattern for China is already set for the next half century.

In contrast, India has been posited as a long term economic bet. In such a vein, India saw the highest Foreign Direct Investment FDI inflow for new projects among all nations in the first half of 2015, attracting $31 billion in capital expenditure from foreign companies, and overtaking the hitherto China at $28 billion. Politically, India’s democracy may indeed be more chaotic in the short term, but it permits greater entrepreneurial centres of power to flourish. Its young population profile gives it a growing work force for the next half century, along with a so-called “demographic dividend” of income growth and savings through a higher proportion of its population being able to contribute to the economy. Talk by the Modi administration of the 21st century being India’s Century reflects a sense of economic shift, with India now set to outperform China over the coming decade. This is of economic but also political significance.

 

 

David Scott is an ongoing consultant-analyst and prolific writer on India and China foreign policy, having retired from teaching at Brunel University in 2015. He can be contacted at davidscott366@outlook.com.

 

The views expressed in this article are solely those of the author and do not necessarily reflect the position or policy of the Lee Kuan Yew School of Public Policy or the National University of Singapore.


 

News Reports

Bilateral Relations

Xi congratulates on launch of “Visit China Year” in India
Xinhua, January 16
Chinese President Xi Jinping has congratulated on the launch of the “Visit China Year” in India, while extending sincere greetings to the Indian people. The Chinese and Indian peoples enjoy a long-standing friendship, Xi said in a letter of congratulation sent to the opening ceremony of the “Visit China Year” held Thursday night in New Delhi, India. The two peoples learn from each other and set a model for cross-cultural communication, playing an important role for the progress of human civilization, Xi said. China and India have remarkable complementary advantages and significant potential for cooperation in various fields, Xi said.

India elected to Board of Directors of China-backed AIIB
The Hindu, January 17
India, one of the founding members of the AIIB, has been elected to the board of directors of the China-sponsored Asian Infrastructure Investment Bank which is expected to begin loan approvals before the end of this year. The bank, however, said the Vice President the post for which India as the second largest shareholder aspired for will be selected on merit. “With regard to senior positions like Vice President and Director Generals the basic principle is meritocracy. This can never ever be compromised,” former Chinese Finance Minister Jin Liqun who was elected to be the President of the bank told the media here.

India may ease visa norms for China
The Hindu, January 18
India is all set to overhaul its security cooperation agreement with China and further liberalise visa norms for the neighbouring country, a senior government official has told The Hindu. If the agreement comes through, China will deport Indians accused of terrorist acts and operating in Chinese territory after its agencies conduct an independent probe, the official said. To begin with, a Memorandum of Understanding (MoU) signed in 2005 between the Ministry of Home Affairs and the Ministry of Public Security, People’s Republic of China, is being revisited to expand its scope, said the official. The MoU was signed for exchange of security-related information to combat terrorism. “The new agreement will also factor in contemporary global threats like the Islamic State, as many Chinese nationals are also learnt to have joined the extremist outfit, especially those from the Uighur region who are fighting for a separate state,” said the official.

 

News Reports

China and India in the Regions

Russia upgrades security strategy to tackle Western threats: official
Xinhua, January 18
Russia has upgraded its national security strategy by taking into account the worsening international situation as a result of the policy pursued by the United States and its allies, a senior Russian security official said. “The U.S. and its allies have continued their policy of opposition to a multi-polar world order, and to centers of power alternative to the West,” Yevgeny Lukyanov, deputy head of the Russian Security Council, said in a statement published on the council’s website. Meanwhile, Lukyanov said Russia intends to strengthen cooperation with its partners within BRICS, the Shanghai Cooperation Organization, APEC, G20 and other international institutions, and actively taps the potential of the Commonwealth of Independent States and the Eurasian Economic Union. He also stressed the need to continue developing special strategic partnership with China and India.

Look East Policy: India to host military exercise with 18 ASEAN Plus countries in March
The Indian Express, January 20
As part of the Look East policy, India will conduct one of the largest multi-national military exercises from March 2 to 8 in Pune. The Field Training Exercise (FTX), christened Exercise Force Eighteen, will see participation of over 360 personnel from 18 ASEAN Plus countries. “This exercise is an outcome of our effort because the ASEAN Defense Ministers’ Meeting, ADMM Plus had planned for two separate exercises for Humanitarian Mine Action and UN Peace Keeping Operations in 2016. During ADSOM Plus (ASEAN Defence Senior Officers’ Meeting) held in Malaysia in March 2015, we offered to bring the two exercises together and conduct the joint FTX this year,” a senior army official said.

China building base in Pakistan would push India towards US: Expert
The Economic Times, January 23
Describing Chinese assertiveness in the region as an opportunity for the US, an expert from an advisory group has said that China’s move to build a base in Pakistan would bring India more closer to America. “A more assertive China with expeditionary capability could lead nations in the region to be more receptive to supporting US efforts to shape the security environment, and to US objectives in Asia,” said Kristen Gunness, CEO of Vantage Point, a China-focused advocacy group. “This could specifically be an opportunity to sway those nations that are currently leery of fully supporting US efforts, for example, nations such as Thailand, Malaysia, and India, should China build a base in Pakistan, for example, potentially fall into this category and could be receptive to increased dialogue with the US,” Gunness said in his testimony before US-China Economic and Security Review Commission.

US-China conflict not inevitable: Pentagon head
The Straits Times, January 24
The United States is committed to safeguarding security in Asia, and will respond to developments in the region while ensuring its defence forces are “fully resourced” to keep the peace, said Secretary of Defence Ashton Carter. He made plain that this US stand was a long-standing one, and its strong presence in Asia over the past seven decades had not impeded the rise of Japan, or the rapid development of South Korea and South-east Asia. Similarly, the US was not out to block China’s progress, he said. Nor did the US wish to force its partners in the region to pick sides. Besides, apart from China, India is also rising, and so too is a resurgent Japan, Mr Carter noted.

Vietnam to gain satellite views of South China Sea thanks to Indian agreement
Sydney Morning Herald, January 26
India and Vietnam are enhancing security ties in a move likely to heighten tensions with China over territorial disputes in the flashpoint South China Sea. Vietnam has approved India setting up a satellite tracking and imaging centre in southern Vietnam that will that will give Hanoi access to pictures from Indian earth observation satellites that cover Asia, including China and the South China Sea.India has 11 earth observation satellites in orbit that can provide military intelligence, with existing ground stations in the Andaman and Nicobar islands, Brunei, Biak in eastern Indonesia and Mauritius.Carlyle Thayer, an expert on Vietnam from Australia’s Defence Force Academy, said the new tracking facility shows that India’s and Vietnam’s interests are “converging over China and the South China Sea.”

Former Maldives President opposes ‘pro-China’ tilt
The Hindu, January 26
Mohamed Nasheed, the former President of the Maldives, on Monday warned his country’s leadership against abandoning traditional allies in the Indian Ocean and building a foreign policy “that would alienate or disturb Indian security and safety.” Mr. Nasheed, who has been allowed under international pressure to seek treatment here, feared the present ‘pro-China tilt’ would lead to instability in the region. Mr. Nasheed stressed that an “India-first” foreign policy approach “is probably the only sensible foreign policy view that we should have in the Indian Ocean”.

 

News Reports

Economy and Trade

China mobile cos may set up plants in India
The Hindu, January 13
Chinese mobile phone makers have started looking at India to set up base and may line up investments worth $2 to $3 billion in the next two years. The investments could help generate jobs for about 1 to 2 lakh people, said the Indian Cellular Association (ICA). “They (the Chinese companies) are still seeing India as the hottest next destination, ICA National President Pankaj Mohindroo said during a China-India Mobile Phone and Component Manufacturing Summit. This is a huge endorsement of PM Modi’s ‘Make in India’ vision,” said Mr. Mohindroo.

India invites Chinese companies to participate in their economic upgrade
Global Times, January 17
Since becoming the world’s largest exporter in 2009, the “Made in China” label has garnered a global reputation. These small labels, affixed to all products manufactured in China, represent the nation’s strong manufacturing industry, surging economic growth and the 600 million manufacturing jobs that have lifted 500 million people out of poverty. India, one of China’s closest trading partners as well as one of its geographically closest neighbors, has more than any other country witnessed China’s ascent this past decade. As such, in its first major event of 2016, the Consulate General of India in Shanghai invited over 150 CEOs from Chinese companies to share their insights, expertise and experiences as well as offer new business and investment opportunities in India.

China’s service outsourcing grows in 2015
Xinhua, January 20
China’s service outsourcing industry continued to grow in 2015 despite subdued economic growth, with both onshore and offshore contracts posting remarkable increases in value, official data showed. Chinese companies inked service outsourcing contracts worth 130.9 billion U.S. dollars, up 22.1 percent year on year, Shen Danyang, spokesperson for the Ministry of Commerce, told a press conference. Of the total, offshore service outsourcing contracts reached 87.29 billion U.S. dollars, rising 21.5 percent from a year earlier. China is the world’s second-largest service outsourcing provider after India. The State Council described the sector as a “green industry” that will be a new engine for tertiary industry and a boon to employment.

Two-day Bangladesh investment, policy summit kicks off
Xinhua, January 24
A two-day “Bangladesh Investment and Policy Summit-2016” began in capital Dhaka on Sunday to showcase private sector investment opportunities in Bangladesh for both local and foreign investors. Officials say the summit focuses more on investment opportunities and will have both plenary and parallel business sessions. Bangladeshi Prime Minister Sheikh Hasina on Sunday morning inaugurated the summit, hosted by the Prime Minister’s Office (PMO), Board of Investment, BUILD (Business Initiative Leading Development) and the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI). Tauhidur Rahman Khan, a director Board of Investment (BoI), had earlier expected a total of 147 international participants from countries including India, China, Japan, Indonesia, and Sri Lanka in the summit.

 

News Reports

Energy and Environment

Study reveals your nitrogen footprint – and who it is impacting
The Guardian, January 25
You’ve heard of managing your carbon footprint. But how about your nitrogen footprint? Emissions of reactive nitrogen into the environment have increased more than 10-fold over the past 150 years, contribute to deaths from air pollution and water pollution. Overall, researchers found just four countries were responsible for almost half the world’s nitrogen footprint: China, India, the US and Brazil. Something like a nitrogen tax, which would put a cost on reactive nitrogen use, was needed, said Arunima Malik of the University of Sydney. “We need to look at economic signals, and how best to manage these externalities.”

China’s slowdown stokes fears of Peak Oil demand
The Wall Street Journal, January 25
A bedrock belief among oil forecasters has been that China’s voracious appetite for fossil fuels would stoke global energy demand for decades to come. That assumption now appears increasingly shaky. Oil prices fell 7.4% to $29.80 a barrel after Chinese data released Monday showed that diesel fuel use fell in 2015 from a year earlier. A study issued last week by consultancy ESAI Energy said China’s oil-demand growth rate between now and 2030 would be less than half that of the previous 15-year period. “If demand won’t come from China, who will step in to fill China’s shoes?” said Erica Downs, a senior analyst for the Eurasia Group who focuses on the country’s energy sector.

 


Analyses and Commentaries

China, the missing piece to the Pakistan puzzle?
The Hindu, January 14
Of all the casualties from the Pathankot attack, perhaps the one least spoken about was the India-China dialogue. By calling off his visit to Beijing that was due at the beginning of January, National Security Adviser Ajit Doval may have sent a signal that dealing with the crisis at hand with Pakistan was more important than the next chapter of the protracted border talks with China. Yet nothing could be further from the truth. For a number of reasons, Prime Minister Narendra Modi’s engagement with China is not just more connected than ever with its Pakistan outreach, it is a natural consequence of his desire to connect with all of South Asia. The first reason is that the Pakistan-China bond, often termed an “all-weather friendship”, is deeper than ever before, reinforced by the concrete to be used in their biggest infrastructural initiative, the $46-billion China-Pakistan Economic Corridor (CPEC) announced in April 2015. Second, China is involved closely in other subcontinental developments, such as the Afghanistan-Taliban talks, that will have a bearing on India-Pakistan ties. Third, the biggest source of tensions between India and China, the border issue in Jammu and Kashmir, is geographically linked with Pakistan. And fourth, on the subject of terrorism, it is China that has had a higher rate of success in controlling the levers in Pakistan that run terror groups than most other countries.

AIIB offers new channels for global finance
Xinhua, January 15
On January 16-18, the Asia Infrastructure Investment Bank (AIIB) is scheduled to launch its inaugural ceremonies and hold a Board of Directors meeting to start operations. As early as Feb. 25, 2015, the AIIB Articles of Agreement were signed by different nations. It’s the first China-initiated multi-lateral financial institution, which is headquartered in Beijing. In 2014, Beijing contacted other nations to move ahead on AIIB. In October, 21 Asian nations, including China, India, Malaysia, Pakistan and Singapore signed The Memorandum of Understanding on Establishing the AIIB. From November 2014 to March 2015, bank negotiations were held in Yunnan, China, Bombay, India and Alma-Ata, Kazakhstan. The meetings had outlined policy making, business and operational systems, governance structure and the rules for acceptance of new members. China is the second-largest economy of the world. The AIIB would enable China to join the international financial system, which would also include its efforts for the Chinese currency Yuan going more international and supporting the Silk Road Economic Belt.

Preventing a water war in Asia
The Washington Times, January 18
Just when Asia was getting accustomed to the Chinese threat to the oceans of Southeast Asia, there’s another water worry for Asians. The government in Beijing controls the health of six major South and Southeastern Asian rivers, the heart of life in the region. All of the rivers rise on the Tibetan plateau. The Chinese have been on an intensive program of dam-building on the upper reaches of the Brahmaputra, the Irrawaddy, the Meman Chao Phya and the Mekong, which would give them the ability to control these arteries of commerce, as well as irrigation of rice and other crops, for vast areas downstream. The Dalai Lama points out the obvious, that China’s dam-building could lead to conflict. He warns that India’s use of the Tibetan water “is something very, very essential. So, since millions of Indians use water coming from the Himalayan glaciers I think [India] should express more serious concern. This is nothing to do with politics, just everybody’s interests, including Chinese people.”

India will step up as China’s economy slows, says Josh Frydenberg
The Guardian, January 20
The urbanisation of India and its swelling middle class will step in to fill the breach as China’s economic growth slows, according to the resources minister, Josh Frydenberg. Despite a slowdown in China and the International Monetary Fund cutting its forecasts for global growth for the third time in less than a year, Frydenberg said that the fundamentals of the world economy were still in favour of commodities. The IMF downgraded its growth forecasts for China and expected Brazil, a large exporter of iron ore like Australia, to remain mired in recession in 2016 amid lower Chinese demand. “Other opportunities in the region, particularly in Asean countries, particularly in India, will hopefully meet the hole that has been left by the slowdown in China,” he told Sky News.

Sobering reflection from Davos
The Hindu, January 25
China’s stock market turbulence and the impact its growth slowdown is having on the global economy were dominant themes last week at the annual World Economic Forum in the Swiss Alpine resort of Davos. And as the four-day gathering of international finance and corporate captains, government policymakers and central bankers wound down on Saturday, the jury was still out on whether China is headed for a hard landing or is in control of its transition. That China and its fortunes have come to dominate discussions is testimony to the extent to which its companies and manufacturing industry have integrated with the rest of the world, as well as to the increased international concern over the perceived opacity of the country’s banking and financial sector’s real levels of indebtedness.

A most exceptional friendship
The Indian Express, January 26
The participation of French troops in the Republic Day parade on Tuesday — the first ever by a foreign contingent on Rajpath since Independence — is doubly significant. It marks the end of India’s prolonged military isolationism and unveils the emergence of France as India’s most trusted international partner. While India’s quest for multi-polarity has often drawn it closer to China and Russia, Delhi is painfully aware of the dangers of jumping from the frying pan into the fire. Exchanging American global primacy for Chinese domination makes little sense for Delhi. As a leading Western power with shared political values, France is a more credible partner for India in constructing a more equitable world order through a new concert of major powers. Modi gets the big idea on France. His problem is in getting Delhi to translate it into action.

 


Books and Journals

Contemporary Demographic Transformations in China, India and Indonesia
Springer, 2015
This book, edited by Christophe Guilmoto and Gavin Jones, examines the profound demographic transformation affecting China, India, and Indonesia, where 40% of the world’s people live. It offers a systematic, comparative approach that will help to better understand the changing social and regional recomposition of the population in these regions.

The Relationship Between Economic Growth, Energy Consumption, and CO2 Emissions: Empirical Evidence from China
Science of the Total Environment, 2016
Following several decades of rapid economic growth, China has become the largest energy consumer and the greatest emitter of CO2 in the world. Given the complex development situation faced by contemporary China, Chinese policymakers now confront the dual challenge of reducing energy use while continuing to foster economic growth. This study, by Wang Shaojian, Li Qiuying, Fang Chuangin and Zhou Chunshan, posits that a better understanding of the relationship between economic growth, energy consumption, and CO2 emissions is necessary, in order for the Chinese government to develop the energy saving and emission reduction strategies for addressing the impacts of climate change. This paper investigates the cointegrating, temporally dynamic, and casual relationships that exist between economic growth, energy consumption, and CO2 emissions in China, using data for the period 1990–2012. The study develops a comprehensive conceptual framework in order to perform this analysis.

 


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