The Challenge of Living Next to China

The note of elation that seems to have crept into our discourse because of India’s GDP growth once gain creeping past China’s cannot be missed. But the elation misses an essential reality. That is that the Indian and Chinese economies are now in two entirely different stages of development. For a start China’s GDP is more than four and a half times bigger than India’s. Their GDP now is about $12 trillion and India is inching towards $2.4 trillion. How China moves and acts in the future will affect the developed economies enormously as it has been the major provider of growth for the last two decades, and India’s growth had little bearing or derived little benefit from it.

India and China now exist in different orbits of the world economy. A slowed down China now growing at 6.6% still adds $7-800 billion to global growth, while a speeded up India now growing at more than 7% adds a mere $160 billion.

For India to pick up the Chinese slack and matter to the world, it needs to be posting a more frenetic 9-10% over the next decade or more. There is not even a glimmer of that now. Hope is a good thing but wishful thinking leads to serious consequences. We must be careful and realistic when we analyze our prospects and decide on our actions.

However, demographics seem to favor India, but it is still for India to show that it can take advantage of it. In the meantime China just keeps growing. While China’s population has now stabilized at 1.3 billion, India’s might stabilize at 1.6 billion around 2050. Because its population has stabilized, China is rapidly aging, which means its economic growth will inevitably slow down. India’s youthful demographics favor its continued growth for a much longer period. Thus even if India keeps growing at the present rate of about 7%, its GDP could surpass that of a China with a declining growth rate by 2050. But this is taking the best-case scenario for India and a more pessimistic scenario for China. But we must also keep in mind that India seldom meets its promise and China has made a habit of surprising the naysayers. Yet in the recent years there has been much speculation about the emerging rivalry between India and China. A good deal of this owes to the fact that India too has joined China in the high GDP growth club.

What does this imply for the world’s power structure? True the world’s economic fulcrum will shift to Asia. Already Asia’s GDP exceeds that of the USA and EU. By 2050 it will account for about over 50% of World GDP, with India or China having the biggest GDP. But this is in the future and often the future has a habit of not happening as predicted. So we must look at the present.

The real problems in China will get accentuated, as exports to the USA and EU will slow down, as the USA in particular is determined to reduce its trade gap. Also low cost production is shifting to other low labor costs economies like Vietnam and Indonesia. China will naturally attempt to overcome this by stimulating domestic consumption and can even finance it by slowly reducing its foreign reserves, as Saudi Arabia and others are doing now.

However much China may invest by running down its reserves, it will be irrational to expect near double-digit expansion when demographic trends are against it. The high growth period in China is petering off and that is the transition we must be wary off. Where will the world get its next growth engine?

Demography favors India. But the Indian political discourse gives no inkling of any awareness of this or inclination to put immediate politics aside for a period to set course for the long term.

Geography and recent history have made the India-China relationship a difficult one and one in which the USA will find ample space and opportunity to inveigle itself to its advantage. This is a made to order situation for strategists and leaders in the three countries to ply their trade with plenty of worst-case scenarios. It would hence seem that India and China are destined to live out the foreseeable future as rivals, if not adversaries.

China’s aggressive soft power diplomacy has widely been seen as arguably the most important element in shaping the Indian Ocean strategic environment, transforming the entire region’s dynamics. By providing large loans on generous repayment terms, investing in major infrastructure projects such as the building of roads, dams, ports, power plants, and railways, and offering military assistance and political support in the UN Security Council through its veto powers, China is actively buying goodwill and influence among countries in the Indian Ocean region. The list of countries that are coming within China’s strategic orbit appears to be growing.

China is big not merely in terms of territory and population, but also military might. Its Communist Party is presiding over the world's largest military build-up. And that is just a fact, too—one that the rest of the world has to come to terms with. China's defence budget has almost certainly experienced double-digit growth for two decades. According to SIPRI, a research institute, annual defence spending rose from over $30 billion in 2000 to almost $215 billion in 2016. SIPRI usually adds about 50% to the official figure that China gives for its defence spending, because even basic military items such as research and development are kept off budget

This is not a sum India can match and the last thing we need to get caught in is a numbers game. A one party dictatorship will always be able to outspend us, even if our GDPs get closer.

That said the threat from China should not be exaggerated. There are three limiting factors. First, unlike the former Soviet Union, China has a vital national interest in the stability of the global economic system. Its military leaders constantly stress that the development of what is still only a middle-income country with a lot of very poor people takes precedence over military ambition.

The real test of China's willingness to keep military spending constant to GDP will come when China's headlong economic growth starts to slow further. But on past form, China's leaders will continue to worry more about internal threats to their control than external ones. Last year spending on internal security outstripped military spending for the first time. With a rapidly ageing population, it is also a good bet that meeting the demand for better health care will become a higher priority than maintaining military spending.

Now if one were an Indian planner, he or she would be looking at the China/Pakistan axis with askance. India has had conflicts and still perceives threats from both, jointly and severally. The Tibetan desert, once intended to be India’s buffer against the north now has become China’s buffer against India.

Now if one were a Chinese planner, he or she would be looking with concern over India’s growth and increasing ability to project power in the IOR. The planner will also note what experts are saying about India’s growth trajectory. That it will be growing long after China gets walking sticks. That it is the ultimate pivot state in the grand struggle for primacy between the West led by the USA and Japan, and China.

In the recent weeks there has been much talk about a Quad of nations – USA, Japan, Australia and India – to confront the spread of China’s dominance. But we must not forget that unlike the USA, Japan and Australia who are physically distant from China, India lives cheek by jowl with it sharing a long and contested frontier. It is Indian and Chinese troops that face each other eyeball to eyeball. Conflict cannot be a standoff affair for both nations. Both have too much to lose by it. Peace and growing economic interdependence are more viable options.