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 can’t 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. Its GDP is now about $12 trillion, while 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 past two decades, and India’s growth had little bearing or derived little benefit from it.
They exist in different orbits of the world economy. A slowed-down China now growing at 6.6 per cent still adds $700-800 billion to global growth, while a speeded-up India now growing at more than seven per cent 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 per cent 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 analyse our prospects and decide on our actions.
However, demographics seem to favour 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 stabilised at 1.3 billion people, India’s might stabilise at 1.6 billion around 2050. Because its population has stabilised, China is rapidly aging, which means that its economic growth will inevitably slow down. India’s youthful demographics favour its continued growth for a much longer period. Thus, even if India keeps growing at the present rate of about seven per cent, 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, while China has made a habit of surprising the naysayers. Yet in recent years there has been much speculation about the emerging rivalry between India and China. A good deal of this is due to the fact that India too has joined China in the high GDP growth club.
But 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 United States and the European Union. By 2050 it will account for about over 50 per cent 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. Therefore, we must look at the present.
The real problems in China will get accentuated, as exports to the US and EU will slow down, as the US in particular is determined to reduce its trade gap. Also, low-cost production is shifting to other low-labour 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.
But however much China may invest by running down its reserves, it will be irrational to expect near double-digit expansion when the demographic trends are against it. The high growth period in China is petering off and that is the transition we must watch out for. Where will the world get its next growth engine? Demography favours India. But the Indian political discourse gives no inkling of any awareness of this or inclination to put immediate politics aside for a certain 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 United States 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 will 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 power, 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 buildup. 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 per cent 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 that India can match, and the last thing we need is to get caught up in 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 also 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 healthcare will become a higher priority than maintaining military spending.
Now if one were an Indian planner, he/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, has now become China’s buffer against India.
If one were a Chinese planner, he/she will be looking with concern over India’s growth and increasing ability to project power in the Indian Ocean Region. 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 US and Japan, and China.
In recent weeks there has been much talk about a “Quadrilateral” of nations – the US, Japan, Australia and India — to confront the spread of China’s dominance. But we must not forget that unlike the United States, 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.