August-October 2009

INDIA-CHINA CHRONICLE 印度中国新闻记事 August - October 2009

INSIDE STORY l Asia and the Global Financial Crisis : A Broad Overview l The Global Financial Crisis – Implications for Asia l The Global Financial Crisis: Implications beyond Economics l Development Agenda for India and China : Evolving a New Sustainable Model for Inclusive Development l The Peaceful Rise of India-China Economic Relations : A Constructivist View of India-China Relations

ICEC

COUNCIL

India China Economic and Cultural Council 印度中国经济文化促进协会

ICEC

COUNCIL

ICEC

COUNCIL Chairman

Contents

Abid Hussain

Vice Chairman V. Krishnamurthy

President P. S. Deodhar

Exec. Vice President Suresh Sharma

Advisory Board P. S. Deodhar Amir Ullah Khan Bibek Debroy C. V. Ranganathan Jairam Ramesh Mani Shankar Aiyar Rajendra S. Pawar W a n g Y a o (China) Chen Duo (China)

Secretary General Mohammed Saqib

India-China Development Studies Group P. S. Deodhar Mohammed Saqib Navneet Sharma Chunmei Rao Furong Tian Anchit Goel Irfan Alam

Solicitors

Asia and the Global Financial Crisis : A Broad Overview - Ramkishen S. Rajan

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The Global Financial Crisis – Implications for Asia - Tony Tan Keng Yam

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The Global Financial Crisis: Implications beyond Economics - Interview with Iftekhar Ahmed Chowdhury

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The Peaceful Rise of India-China Economic Relations : A Constructivist View of India-China Relations - Lim Tai Wei

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Development Agenda for India and China : Evolving a New Sustainable Model for Inclusive Development - P.S. Deodhar

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Role of India and China in addressing the Climate change crisis

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News Briefs Chinese President makes proposal for tackling global financial crisis at BRIC summit - July 2009

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China and India agree on a common platform on climate change http://chinaindiacitizensinitiative.blogspot.com/

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Need to improve on this climate change road map http://chinaindiacitizensinitiative.blogspot.com/

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Regular Features - Updates on Laws in India and China

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- TBT and SPS Notifications by India and China

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- Upcoming Exhibitions in India and China

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- Economic Indicators

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DESAI & CHINOY 88-B, Mittal Towers, Nariman Point, Mumbai 400 021.

The information contained in this magazine has been reviewed for accuracy and is deemed reliable but is not necessarily complete or guaranteed by The ICEC Council. The views expressed in this digest are solely that of the writers and do not necessarily reflect the views of The ICEC Council.

All advertising enquiries, comments and feedback are welcome at: response@icec-council.org K-19 (GF), South Extension Part-II, New Delhi - 110 049. Tel. : 011-46550348 www.icec-council.org

ICEC Council is a Registered Trust in India, Redg. No. 160 in additional Book No. IV, Volume No. 68 on pages 99 to 107.

Editorial Thoughts Dear Reader, We are delighted to present the latest issue of the ICEC newsletter focusing on the impact and implications of the global financial crisis for India and China. A year after the outbreak of the crisis, both countries are trying hard to cope with the emerging challenges in their domestic economies as well as in the global arena.

As the two republics enter the sixth decade of their formal diplomatic relationship, both are well positioned to redefine bilateral ties in the backdrop of radical changes in the international order. The financial meltdown has firmly established the dominance of the Chinese and Indian economies, which have remained resilient while the leading Western economies and their financial institutions have come to a screeching halt. The message is loud and clear: the two Asian giants have come of age. Both realize the criticality of cooperation and collaboration for maintaining their ascendancies. The rich dividends that can be reaped from greater engagement are visible from the spectacular increase in bilateral trade that has led to China displacing the US as India’s largest trade partner.

This issue pays special attention to the role of the global financial crisis in shaping the new world order from Chinese and Indian perspectives. The public policy challenges facing Asia after the crisis are outlined by Dr Tony Tan Keng Yam, Deputy Chairman and Executive Director, Government of Singapore Investment Corporation.

The multiple strategic aspects and outcomes of the crisis are analyzed threadbare by Dr Iftekhar Ahmed Chowdhury, former Foreign Minister of Bangladesh. Mr P.S. Deodhar, President ICEC Council elaborates the pressing development agendas for the two countries. The remaining articles examine further implications of the crisis and varied aspects of Indo-China economic engagement.

In order to further enrich the discourse on the global financial crisis and its ramifications on India and China, ICEC is organizing a conference for analyzing the impact of the crisis on the financial sectors of both countries. The initiative will bring together a large assembly of academic experts and finance practitioners from both countries for extensive interface.

Our readers would find that the newssletter has been titled afresh as India China Chronicle. We intend to expand the scope of this newsletter by increasing the number of scholarly contributions and articles on China, India and different aspects of their relationship. The current issue marks a beginning in this direction. We welcome your contributions. Team ICEC eagerly looks forward to your valuable comments and feedback.

Warmest Regards, Parama Sinha Palit, PhD

IN FOCUS Asia and the Global Financial Crisis: A Broad Overview - Ramkishen S. Rajan 2

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ntil the mid-1990s, emerging Asian economies were among the most dynamic in the world. In addition to the sustained growth of the newly industrialising economies (NIEs) - Hong Kong, Korea, Singapore and Taiwan - and the near-NIEs in Southeast Asia (notably the economies of Malaysia, Indonesia and Thailand), the Asian giants of China and (later) India were rapidly integrating into the global economy. The Asian crisis of 1997-98 brought the growth in the NIEs and Southeast Asia to a screeching halt. The region experienced a period of painful but much needed deleveraging and corporate and financial restructuring (including consolidation, loan loss recognition and restructuring of bad loans) as well as some institutional and governance reforms. The region faced setbacks with a series of negative shocks in 2000-03, including the collapse of the NASDAQ bubble, the spread of SARS, the Avian flu and some natural disasters, all of which helped delay a full-fledged recovery in both growth and asset prices. Although some doubts were expressed about whether the region could regain its lustre at all, Asia re-emerged quite strongly, with growth returning to pre-crisis levels and asset prices, in most cases, even surpassing their pre-crisis levels.

Asia and Pre-Lehman Brothers The sub-prime mortgage crisis and the housing downturn in the United States in 2006-07 was initially only viewed with passing interest by the media and policymakers in Asia. The belief – not without merit – was that the subprime market was too small to have any significant impact on the larger United States economy. In addition, Asian financial institutions were relatively unexposed directly to the United States' sub-prime market. As of May 2008, total reported write-downs for emerging Asian banks were less than three percent of global losses, compared to the capital and asset size of Asian banks. In addition, for its part, Asia

had not created such a (sub-prime) market, as securitisation had not advanced nearly as quickly as in the United States and Europe, and tighter credit regulations remained in place for the granting of loans.

Indeed, in 2007-08, there were a number of conferences and workshops to mark the decade since the Asian crisis took place. The general takeaway from these gatherings was that Asia was much stronger now; its economies were more resilient and flexible and much less vulnerable to a currency crisis in view of the rapid build-up in foreign exchange reserves and less dependence on short-term external debt.3 Asian banks were well-capitalised with lower nonperforming loan ratios and the corporate balance sheets had been strengthened significantly as well.4 Although there were political concerns in some parts of the region, such as Thailand, there was a noticeable sense of optimism, with the buoyant Chinese and Indian economies leading the way.

As the crisis started affecting the overall United States property market with negative repercussions on many over-leveraged and over-exposed United States and some European financial institutions, many confident Asian (and mid-eastern) sovereign wealth funds (SWFs) and government holdings companies viewed the depressed share prices of these institutions as a once-in-a-lifetime buying opportunity. While there were increasing fears about the impact of the crisis on the overall United States economy, the catchword in Asia in 2007-08 was "decoupling". As long as the slowdown in the United States was not "too sharp", the belief was that the rapid growth in China and India as well as the revitalisation of the Japanese economy would at least cushion the region, if not completely offset the slowdown in the United States and ensure that the region’s growth momentum was not completely derailed.

1 This paper develops on the remarks first prepared for "New Ideas in Development after the Financial Crisis Conference", Johns Hopkins-SAIS, 22-23 April 2009.

2 Ramkishen S. Rajan is an Associate Professor at George Mason University, Virginia, United States. He can be contacted at rrajan1@gmu.edu.

3 Only Korea showed some vulnerability on this measure, with the short-term external debt-to-reserves ratio still close to 100 percent (though much lower than 1997-98 levels).

4 IMF (2009) explores the resiliency of the Asian corporate sector.

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Asian Vulnerabilities, Crisis and Policy Responses This relative optimism was also mirrored in the initial International Monetary Fund (IMF) forecasts in mid-2008 for regional growth in 2009-10. Regional equity prices, too, remained reasonably steady until early 2008. While a slowdown from the 2008 levels was widely anticipated, it was expected to be relatively mild and things appeared relatively manageable for the region as a whole until the summer of 2008. The Lehman Brothers bankruptcy in mid-September 2008 was a “game-changer” for Asia, as it was for the rest of the world, as risk aversion skyrocketed, global credit markets withered dramatically and emerging market spreads widened markedly.

The extent of deterioration in Asia is also apparent from the sharp downward revisions in growth prospects for the region for 2009 and 2010 in August 2008, as compared to the initial forecasts of mid-2008.

Trade exposure: Smaller and more open economies heavily dependent on global exports were obviously extremely susceptible. While China has emerged as the largest export market to many Asian economies, the bulk of Asian exports to China are intermediate goods, with final processing done in China and re-exported to the United States and Europe.

On this count, we should note that many of the NIEs and Southeast Asian economies, especially Singapore, Hong Kong and Malaysia, had large export-to-gross domestic product ratios.

Indonesia experienced the most robust credit growth leading up to the crisis and, therefore, potentially faced the most risk. Many corporates in India were borrowing overseas in the wholsesale funding markets mainly in United States dollars. When foreign capital dried up, these entities had to replace it with domestic financing via banks, redemptions from mutual funds, etc., thus leading to a credit shortage domestically.

Taking the above three together, countries in Asia were particularly badly impacted because of the sharp decline in trade financing, much of which involved United States dollars (as regional trade is largely invoiced in United States dollars). While there was a worldwide economic slump, in countries such as Japan, production and exports contracted rather sharply in the fourth quarter of 2008, due mainly to the decline in global demand for automobiles, information technology and capital goods. The impact of this shock on Asia is apparent from the sudden drop in Chinese exports in late 2008 and the resulting decline in exports from the rest of Asia to China and other parts of the world. There was a spike in inventory to shipping ratios, as firms in Asia were not able to get the financing necessary to buy or sell their goods. The collapse in Asian exports was much worse than during the Asian crisis a decade ago.5

Dependence of foreign capital as a source of financing of the current account deficit: A slowdown or reversal in foreign capital flows would lead to a negative balance of payments shock in the form of exchange rate depreciation, sharp decline in foreign exchange reserves and/or interest rate hikes with deleterious effects on the domestic economy. Most regional economies ran current account surpluses and were, therefore, not very vulnerable in this regard, with the notable exceptions of Korea in particular but also of India and Indonesia.

The policy responses in Asia involved a combination of monetary and fiscal stimuli as well as the granting/widening of deposit insurance. The fiscal stimuli packages in many Asian economies such as China have been very sizeable.

Some Asian governments, notably in India, also supported specific entities like mutual funds companies and non-bank financial institutions and generally worked to extend credit to businesses and households and support the wellfunctioning of financial markets where possible.6 Although often insufficient, particular attention was paid in some economies to the plight of small and medium-sized enterprises (SMEs) which were especially hard-hit by the credit crunch.

Dependence on foreign capital as a source of domestic financing: Even countries that do not require foreign capital to finance current account imbalances but experienced massive capital inflows that fuelled domestic economic activity and asset markets are exposed to a sudden stop in foreign capital and curtailment of credit. India and

Given the lack of availability of the United States dollar in some economies, while some economies such as Singapore and Korea

Small and medium-sized enterprises (SMEs) were especially hard-hit by the credit crunch across geogra[phies oincluding India and China.

5 The IMF (2009) elaborates on contagion to Asia from the global crisis due to the trade channel. As it notes: Asia’s tightly integrated supply chain propagated the external demand shock rapidly across the region. The collapse in demand from advanced economies has been transmitted through the integrated supply chain, with dramatic effects on intraregional trade. Between September 2008 and February 2009, merchandise exports fell at an annualized rate of about 70 percent in emerging Asia – about one and a half times more than during the information technology sector bust in the early 2000s and almost three times more than during the Asian crisis in the late 1990s (p.3). The same report offers some evidence of the extent to which trade finance in Asia was impacted in the last quarter of 2008 (pp.9-10).

6 The issue of monetary policy and bank lending in India is the specific focus of a forthcoming ISAS Working Paper by M. Shahidul Islam and Ramkishen S. Rajan.

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agreed to swap agreements with the United States, others such as Korea and India sold their United States dollar reserves for local currencies to help meet the demand for United States dollars by their corporates. While there was some discussion about enhancing regional monetary and financial cooperation, not much of any substance was done in this regard. The policy responses were somewhat ad hoc and mostly uncoordinated.

Countries which have been running large fiscal deficits had relatively less room to stimulate their economies in response to the slowdown in external and private domestic economic activity. Large government debt could also make the stimulative effects of fiscal policy somewhat less effective. While emerging Asian economies have generally been fairly fiscally disciplined, India and the Philippines had relatively high government debt burdens due to past periods of relative profligacy.7 Lessons Going Forward After the sharp downturn in the latter part of 2008 and early 2009, the global and Asian economies appear to have stabilised. Much of Asia seems to be in a recovery phase, largely due to the thawing of credit markets as well as the impact of the large fiscal stimuli in countries such as China.8 As the global risk appetite has improved substantially, larger countries such as India which were impacted primarily due to the sudden stop in international capital flows as opposed to high dependence on export markets have seen the fastest to recover compared to smaller exportdependent economies such as Singapore and Taiwan where recovery is likely to be more tepid.9 The largely liquidityinduced surges in the global stock markets, albeit from a low base, have also no doubt added to the recovery momentum (though the sustainability of the market run-up remains to be seen), as have the relative easing of commodity prices.10 Going forward, however, the quick economic turnaround – fragile as it is – should not divert Asian policymakers from learning more valuable lessons from the global financial crisis.

Following the Asian crisis, and having witnessed the prolonged slowdown in Japan and the buoyancy of the United States economy since the 1990s, many policy makers and thinkers in Asia started to believe in the

supremacy of the United States’ approach to growth. In some cases, the belief was more externally-imposed as part of the IMF rescue packages in Indonesia, Thailand and Korea. Certainly, some elements of change such as the strengthening of financial and corporate sector balance sheets were good, as was the introduction of greater wage and exchange rate flexibility. The significant strides in corporate governance and transparency are also to be welcomed. Much, however, remains to be done. We consider a few of the following tasks and concerns: Development Philosophy: An important ingredient of the development success of many Asian economies up to the mid-1990s was that governments eschewed ideology in favour of pragmatism in policy-making and policy experimentation, that is, trying different things and learning from their mistakes, as well as those of the regional economies. However, after the Asian crisis (1997-98), there appeared to be a wholesale embracement of the United States’ approach to capitalism. The role of the government was rolled back in many cases and state-owned financial and industrial enterprises were divested quite aggressively.

Paradoxically, the United States’ policy response to the ongoing crisis has the traits of the pre-Asian crisis growth model, including policy experimentation and not allowing the policy to be straight-jacketed by free market ideologies.

The United States government is/policy-makers are trying whatever works and are learning from mistakes. Asia could probably learn a lesson from all this. In addition, relatively equitable growth, which was a hallmark of East Asian development, appeared to be replaced by the United States’ approach of growth-only focus with less attention paid by governments to the quality of growth.

Monetary and Financial Issues: Many economies, notably Korea, continued to liberalise the financial sector rather aggressively, including the introduction of foreign competition. The Greenspan-inspired view of a relatively light, market-based approach to financial regulations was all too readily accepted in many Asian economies. Market discipline and self-regulation proved to be grossly inadequate.

Prudential regulations need to be comprehensive, counter-cyclical and well-enforced and there is an urgent need to strengthen the abilities of supervisors to enforce regulations. Particular attention

7 Two important caveats. India’s consolidated fiscal deficit was much worse than the central government’s deficit due to large state-level deficits.

Notwithstanding the fiscal stimulus resulting from the crisis, the fiscal position of the Philippines has been gradually improving since 2004. The IMF (2009) discusses the fiscal stimuli programmes and extent of fiscal space in Asian economies.

8 Contrary to the IMF (2009) which noted “Asia’s growth path will continue to run parallel to the global economy” (p. x), Asian growth appears to have run ahead of the global economy.

9 The recently-conducted election and the formation of the new and likely quite stable government in India has also been a pull factor of capital inflows back into India.

10 The recent upsurge in oil prices since February 2009 (about 40 percent since February and June 2009) does not portend well for much of Asia which depends heavily on oil imports. It remains unclear whether this rise in oil prices is sustainable.

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needs to be paid to systemic risks posed by large institutions that are considered too large or too interconnected-to-fail.

There needs to be a fundamental re-evaluation of the role of government in regulating financial sectors by Asian countries to mitigate the chances, extent and impact of future financial busts and meltdowns. While the aim of regulatory overhaul should be to build a more stable and less crisis-prone financial system, crises will almost inevitably re-occur. Policymakers must also, therefore, consciously work towards redesigning central bank liquidity frameworks in order to facilitate more effective crisis-management as part of reorganising the post-crisis regulatory architecture.

Economic Diversification: Going forward, greater attention should be paid to diversifying growth engines.

Beyond focusing on electronics-based exports, they should consider alternative engines. For instance, Singapore has been actively promoting the development of integrated resorts to promote the local service industry to act as a buffer to electronics cycles. Concerted efforts must also be made to promote domestic demand in a sustainable manner (that is, preventing household and corporate stress), especially in larger economies such as China, Japan, Indonesia and Korea (India’s domestic demand, in contrast, is fairly robust).11 Even smaller economies such as Singapore, Malaysia and Hong Kong can do so by attempting to reduce domestic household and corporate savings. One way of reducing corporate savings (retained earnings) is by altering tax incentives so as to transfer corporate profits from retained earnings to greater dividend payouts to shareholders. While the ongoing fiscal stimulus is important in helping to alleviate the effects of the downturn, the medium- and long-term focus should be on rebalancing growth more towards domestic demand by focusing more on the provision of social services like heathcare, pensions, education, and social safety nets. An ease in uncertainties regarding the availability of or access to these social services should, in turn, reduce the need for precautionary savings and consequently assist in boosting domestic consumption. Improvements in infrastructure

should help improve the investment climate as well.

Governments in the region can certainly do more to assist in the financing and nurturing of domestic entrepreneurship and SMEs. Regional Cooperation:12 Apart from the fact that the ongoing crisis has illustrated clearly the risks of depending too heavily on external demand, emerging Asia needs to pay particular attention to boosting regional demand as there are serious questions about whether export-led growth has reached its limit with medium-term trend growth in the United States and the European Union likely to be slower than the leveraged-induced pre-2007 growth. While intraregional trade in Asia has appreciated markedly (about 50 percent of total trade), the bulk of the trade is in intermediate products with final demand still being the United States and Europe. In this regard, the region should redouble its efforts to pursue the various free trade agreements, particularly with China and India. Schemes to assist cross-border infrastructural development, the development of regional tourism, SMEs and other such initiatives should all be pursued with renewed vigour.

Some of the regional SWFs could work in concert with the ADB to deploy resources domestically and regionally for these purposes.

The collapse of regional trade partly due to the lack of trade financing indicates that there is considerable scope for boosting regional cooperation at the micro-financial level.

Greater focus should also be paid to reducing the extent of trade invoicing of regional trade in United State dollars which was adversely affected by the crisis due to a severe dollar shortage. Other areas to focus on include continued development of regional bond markets and coordination of policies during future international financial strains, including policies towards deposit insurance schemes.

Steps towards building a robust financial system should also help accelerate domestic demand by reducing the credit constraints of households and firms, although care must be taken to ensure that the credit expansion does not create "over-leverage" and consequent boom and bust cycles (as has been experienced by Korea since the Asian crisis).

11 The ADB (2009) discusses this issue in more detail.

12 The emphasis here is on trade and micro-financial issues. Macro-financial issues such as the Chiang Mai Initiative have been discussed in some detail in Rajan (2009).

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The Global Financial Crisis – Implications for Asia (Excerpts from a speech delivered by Tony Tan Keng Yam)13

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here are signs that the global economy is stabilising after the shock late last year. The massive policy support provided by governments and central banks is beginning to work through the world's economies.

Confidence is returning and fears of a meltdown in global financial markets and banks have receded. The reaction to the stress tests of major US banks indicate that the markets believe that these banks, with the support of the US government, will be able to weather the economic storm and earn their way out of future prospective losses. This prognosis is far from certain but the markets have chosen to give the banks the benefit of the doubt. Reflecting this, one closely watched measure of confidence, the Treasury Euro Dollar (TED) spread, has recently declined to pre-Lehman levels. The normalisation in credit flows in turn is supporting the recovery in global industrial production.

The global growth recovery is being led by economies that are not leveraged and have room for large policy stimulus like China, Japan, India, and other Asian countries. So despite historic falls in real GDP growth in some countries over late last year and early this year - and therefore dismal growth rates for 2009 - the worst seems to be behind us in Asia. Asian Economies are now expected to see continued improvement through 2010. The US and and other major developed economies are also expected to register positive growth later this year.

Global Economic Outlook The good news is that we appear to have avoided a global depression. Beyond this cyclical recovery, the global economic and financial environment has changed in three important ways. First, the developed world is likely to experience lower growth in the coming years. Deleveraging, de-risking, re-regulation and, on the margin, even some de-globalization are disrupting markets and dampening economies and could reverse some of the progress due to past liberalization, globalization, and reforms. At the same time, aging populations will increasingly be a drag on growth in the developed economies.

The bulk of the globalised banking system consisting of major banks I the US and key parts of Europe are likely to remain capital impaired and subject to greater regulation.

In the US, the banking sector is being supported by massive policy intervention and will likely be stable enough to support sub-par growth of 1-2%. However, it may not be strong enough to support credit needed for a sustained robust growth significantly above 2%. This is likely also

true for UK and parts of Europe with banking and real estate sector problems.

US household consumption is unlikely to be robust as spending is being undermined by weaker income prospects, high unemployment, falling house prices and the need for higher savings rate to maintain long run consumption and repay debt. Household de-leveraging is likely to take a number of years, keeping overall recovery muted. As if these headwinds were not enough, re-regulation, higher taxation, government intervention and the pressing need for medium term fiscal consolidation will also constrain growth in the developed world.

The severe impact of this crisis on employment, household wealth, and public finances also raises difficult political and policy challenges in the West, especially in the US and UK. In the short-term, how governments deal with the continuing crisis will be of the utmost importance. As the troubled US and Japanese recoveries in the 1930s and 1990s demonstrated, policy errors could dramatically change the global economic and financial outlook for the worse.

Longer-term, the already difficult trade-offs between populist measures and economic efficiency will become more acute. It will require considerable skill by policy makers to assuage widespread concerns over job security, income inequality, healthcare, retirement, and environmental issues while maintaining a dynamic and open economy.

The second major change in the global economic environment is increased risk of both deflation and inflation, reversing a three decade decline in inflation and growth volatility and hence macroeconomic uncertainty.

The golden age for asset markets that some have called “the great moderation� looks to have ended.

Given the weak economic recovery, excess capacity and high unemployment are expected to keep inflation under control over the next few years. Indeed, deflation remains a significant near term risk given extremely weak labour markets and downward wage pressure. With prolonged stagnation in employment and income growth, a vicious self re-enforcing downward spiral could easily develop.

Given high unemployment and the risk of stalling a nascent recovery, central banks may be tempted to accommodate higher inflation. Governments may also be tempted to deal with higher fiscal deficits and debt accumulated during the crisis via higher inflation.

13 Dr Yam is Deputy Chairman and Executive Director, Government of Singapore Investment Corporation at the Annual Dinner of the Economic Society of Singapore, held on 6 August 2009

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The global supply of commodities and labour could turn less friendly towards low inflation. Continued growth and urbanization in huge emerging economies will put pressure on food and energy prices, natural resources, and the environment. In addition, the slowing pace of global labour supply expansion will increase inflationary headwinds. This is because towards the end of the next decade, the pace of industrialization will eventually slowdown in China, while the capacity for other large emerging markets, such as India, to replace China’s contribution to global labour supply remains uncertain. At the same time, developed countries will start to see significant declines in their working-age populations.

The third major change in the global economic environment is the increasing importance of the emerging economies, anchored by China and India. Emerging economies are expected to account for more than half of the world’s GDP growth over the next decade. In 2000, for instance, emerging markets accounted for 20% of global growth, but over the coming decade this is expected to rise to about 60%.

Emerging economies are likely to displace the G-7 as the world’s largest economies over the next 10-15 years, even if per capita incomes will still lag behind the developed economies. This relative outperformance will be driven by (i) Larger savings and domestic demand potential, (ii) Relatively healthy public and private sector balance sheets, (iii) Policy flexibility, and (iv) Room for significant productivity catch-up.

The current Great Crisis has markedly accelerated such trends.

Medium-term prospects for China and India are positive, even as they face difficult structural challenges going forward. For China, this would include successfully rebalancing its growth drivers, dealing with resource constraints, meeting the aspirations of an increasingly richer population, and reforming a tightly controlled monetary, financial, and exchange rate system.

With its fiscal and ideological constraints, India is somewhat behind China in terms of urbanization and economic liberalization but faster progress may be possible with the recently elected government. In addition, at the regional level, some states have been markedly more progressive while the rise of a larger middle class may reduce pressures for more populist politics and increase pressure for economic reforms.

Beyond China and India, prospects vary across Asia.

Countries that are more dependent on exports and capital inflows, have less healthy balance sheets, and have significant structural impediments such as political uncertainty will fare less well. By contrast, economies with large potential internal markets and which are also more

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complementary to China and India will benefit. These would include the Greater China and Indochina regions, and Indonesia.

But the shift in economic power to the emerging world will also likely increase geopolitical risks. For one, the emerging economies, especially the BRICs will become key global powers and increasingly demand more say on world affairs. An awkward transition is likely to occur: In terms of military power the US is likely to be dominant for decades to come, and will be called upon to carry out most of the heavy lifting in global trouble spots. However, the US would still be heavily dependent on foreign countries including key emerging geopolitical rivals, to finance its large public debt.

Conflicts could also arise over natural resources. Severe demand supply imbalances could lead to greater and more intense competition among nations for resources such as energy, arable land, and useful commodities. This could lead to higher commodity prices, or conflict, or both.

The future economic environment is thus fraught with higher macroeconomic, policy, and geopolitical risks.

Growth is likely to be lower for a number of years given significant de-leveraging. Deflation risks are high in the near term with inflation risks rising in the longer term. The unprecedented peace-time increase in public debt in the developed countries especially the US and the UK will likely lead to significantly higher real interest rates which could dampen long-term growth. Global growth will recover, but will be skewed towards the emerging countries. The continued rise of emerging markets is positive but will bring increased geopolitical and inflationary risks.

IMPLICATIONS FOR ASIA What does this imply for Asia?

The first important implication is that, particularly for countries with large populations like China and India, Asia’s economic growth model will be re-oriented from depending largely on exports to a more balanced model that is dependent as much on domestic consumption as on export growth. Such rebalancing would be helpful in two ways. First, as growth in the developed world - hitherto underpinned by the US consumer - is expected to remain weak over the next few years, stronger domestic demand may help mitigate some of that weakness. Second, in so far as some of this rebalancing would be done through increased domestic investment, it could help improve productivity and an economy’s productive capacity. A more balanced growth could also help reduce income inequality by improving wage prospects for labour.

A strategy that mainly relies on cheap factors of production - labour and other inputs - is not likely to work as well going forward, especially outside excess labour economies like China, India, Indochina and Indonesia. Instead, the rest of

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Asia will need to look at its own institutions and markets to drive a more sustainable and higher quality growth via strong productivity improvements. In this economic environment, the winners will be those countries that can evolve to be among the world’s leading innovators and designers, rather than countries whose factory floors are buffeted by the volatility of structural change and intensifying competition from large labour surplus economies. Innovation driven economies require supply side nimbleness and strengths: investment in human capital (ie education, healthcare, and research) hard and soft infrastructure including competitive domestic markets; and an environment that will attract and retain talent, as well as foster creativity and entrepreneurship.

Such an environment will not be compatible with low cost, production oriented strategies.

Rebalancing growth drivers will not be an easy process.

China illustrates, on a large scale, the positive aspects of this adjustment as well as some of the difficulties. At one level, China is now drawing on its vast savings to help mitigate the impact of the decline in external demand. Some aspects of its fiscal stimulus such as public infrastructure investment will encourage and strengthen domestic growth. At the same time, short-term concerns over unemployment mean some measures - export rebates, for example - are slowing down adjustments that need to take place for rebalancing to occur. The Chinese authorities are walking a fine line between restructuring the economy for longer-term sustainability and attempts to mitigate shortterm pain. It may be that some slowdown in growth is unavoidable in the short-term.

China also needs to, over time, bring about a better balance between consumption and investment in GDP. The decline in consumption as a share of GDP makes China vulnerable to external shocks. At the same time, growth has become reliant on investment and on markets to absorb excess supply. This cannot be sustained over the long term.

Developing consumption will require more difficult and substantive medium to long term reforms that increase household wage income as a share of GDP and at the same time reduce corporate and household savings. This could include allowing more competition in service industries, recalibrating performance measurement for local officials to include employment and not just GDP growth, and improvements in social safety nets.

Asia will come out of this crisis in a stronger position.

Asia's fundamentals are generally sound, policymakers have lots of flexibility, and the population is hard-working and educated. There will be bumps along the way, perhaps a few crises, but if we learn the right lessons from history, especially those of the recent Great Crisis, we can re-tool and re-orientate ourselves so Asia’s development is more balanced and therefore more sustainable.

This brings me to the second important implication for Asia arising from the economic crisis. Asian financial INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

institutions and markets have been given tremendous opportunities over the next decade. The globalised Western banking system, hampered by capital constraints and re-regulation, will likely not be able to intermediate the massive capital demand needed to finance Asian growth.

This leaves the playing field unusually open for Asian financial institutions and markets, particularly for the next 3-5 years.

Fortunately, Asian banks generally came into this crisis much healthier than their global counterparts given the experience of the Asian Crisis in the 1990s. Capital, liquidity, and nonperforming assets were at healthy levels while exposures to toxic assets were limited. Asian household, business and government sectors are relatively un-leveraged with excess debt. In order to take advantage of this opportunity, however, Asian banks and capital markets will need to develop quickly to step into the breach.

In this context, the coming redesign of the global financial regulatory architecture will be a major and difficult exercise with its share of opportunities and risks. First, a lack of coordination in regulatory architecture and practice, together with the rising global unemployment in coming years, may lead to regional trading and financial blocs or at worst, a retreat to protectionism and nationalism. Second, the swing of the political and policy pendulum towards greater regulation may end up with overregulation which stifles financial sector efficiency, productive financial innovation and helpful market discipline. Regulatory and development authorities in the financial sector in Asia need to cooperate as never before with each other and with financial institutions to develop regional capital markets.

The third important implication for Asia arising from the global financial crisis relates to the issues policy-makers will face as low global interest rates combined with ample liquidity could give rise to volatile capital flows and asset bubbles across Asia. Across the region, we are already beginning to see significant rises in equity and some real estate prices on the back of domestic reflationary policies and some capital inflows. Low global interest rates combined with easy domestic monetary policies could lead to higher speculative asset prices. Like in the early 1990s, managing large capital inflows and prospective bubbles given managed exchange rates will be a major task for policy-makers.

Risks and Challenges The greatest risk to the outlook for Asia is a global economic and financial environment that does not stabilize and recover by 2010. Downside risks remain high, despite signs of stabilization. If the US economy turns out to be worse than expected, requirements for banks' capital will be higher and the US administration might need to go back to Congress to ask for additional funding.

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A second risk is that US consumption fundamentals have deteriorated. Nominal incomes are contracting and the savings rate is rising. Income and spending are being supported now by tax rebates, benefits and transfer payments but it is not clear how sustainable these would be.

Hence, weak demand and deflation risk are still significant problems.

Sustained deflation could cause private consumption and investment to contract further due to higher real interest rates and real debt burdens. The US could relapse into recession and losses and capital needs escalate again.

A third risk is protectionism. In developed countries, chronically higher unemployment and a more receptive political leadership will increase pressures to protect domestic industries from Asian exporters. Policies such as subsidies to protect ailing industries could contravene world trade rules, potentially heightening trade tensions.

But protectionism is not just a developed country phenomenon: several developing countries are using import restrictions to mitigate the impact of slowing global demand and weaker current account balances. Clearly there is a danger - probably highest if there is no recovery next year – that protectionism could rise dramatically.

A major challenge going forward is the uncertainty raised by the apparent failure of Western or American models

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which, at the extreme, put financial markets above other sectors of the economy. Will there be a structural change in how savings are mobilized and allocated in the West? Will the state guided models of the East do better? It will take time before we will know the answers to these questions but the balance between private and public sector as the prime economic driver is shifting towards the latter, likely in significant and long-lasting ways.

In conclusion, Asia has experienced a dramatic slowdown but Asia’s fundamentals are strong. As the global economy stabilises, Asian economic growth will recover. China and India will do relatively better but cannot be the drivers for the world economy in the short-term. But over time, China’s and India’s growth will anchor both the region and a global economy that is likely to see more balanced and sustainable growth. The greatest risk to the region is a failure of policies in the developed world and a return to isolationism or protectionism. More generally, however, there are serious unanswered questions on the role of markets and the state, including the appropriate level of regulation and state intervention. In this environment, Asian banks and capital markets will face both a tremendous challenge and opportunity to intermediate huge regional savings to meet massive capital demand from Asian growth and the integration of major Asian emerging economies into the modern global economy.

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

The Global Financial Crisis: Implications beyond Economics The repercussions of the global financial crisis are not confined to economic impacts. The crisis has far-reaching implications on global and regional strategic and security dimensions. These implications are significant for both China and India. The crisis has forced both countries to review their geo-political and strategic perceptions in the context of a realigning world order. Both countries have to approach the changing dynamics of the new world and regional orders in a responsible and constructive manner.

In an exclusive interview, Dr Iftekhar Ahmed Chowdhury, former Foreign Minister of Bangladesh and a renowned expert on regional cooperation, international institutions and strategic affairs, provides key insights on the implications of the crisis in the context of the world’s two most populous nations.

A. What are the strategic implications of the global financial crisis from an Asian perspective? Will the balance of power within Asia undergo changes in terms of emergence of new power centres?

The current financial crisis appears to have left China and India relatively unaffected. While their resilience may be attributable to a variety of economic factors, politically the fact remains that they are both being globally perceived as emerging power centres. Within Asia the balance of power between China and India, in political, economic and military terms, has always been tilted in favour of China.

This is likely to remain so, though the power-gap has in recent times been reduced due to the proximity India has enjoyed with the US since the nuclear deal. This advantage may be somewhat eroded by the efforts of the Obama administration to buttress the Chinese connections.

However, both China and India realize that their new status lends both a special responsibility to navigate the waters of bilateral relations with care and circumspection.

B. How has the crisis impacted India and China's strategic relevances? (In other words, whether the crisis has enhanced or changed the strategic influences of the two countries?)

The crisis per se may not have enhanced or altered the strategic influences of both countries, both of which were already on the rise. This rise has been a process and not an event, whose beginnings have predated the crisis. The crisis may have slowed the pace of the rise of course, which in both cases has been inexorable.

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

About Dr. Iftekhar Ahmed Chowdhury Dr. Iftekhar Ahmed Chowdhury was the Foreign Minister of Bangladesh during 2007-2009. He has also held several distinguished positions at the United Nations including Ambassador and Permanent Representative to the UN. He was President of the UN Commission on Disarmament and an active participator in the UN reforms process. He is presently a Visiting Senior Research Fellow at the Institute of South Asian Studies in the National University of Singapore (NUS).

C. What is the role of China and India in key global forums such as the G-20 and the East Asian Summit (EAS) after the crisis?

One immediate result of the crisis has been a diminished role of G8 and an enhanced role of G 20, of which China and India are members. This will enable the two countries to have a greater voice in the creation of any new global financial architecture. Their demands for the new power structure to be reflected in decision-making in the Bretton Woods Institutions will grow. The idea of an Asian Monetary Fund, which was originally floated by the Japanese, may be revived, with the growing clout of China and India as new power centres, and now a government in Japan that is likely to want to forge closer links with Asia.

D. Will the crisis encourage greater cooperation between the two countries or will it increase their competition for strategic space? If so, what are the implications of such competition from a South Asian perspective?

It will do both, increase greater cooperation between the two countries, as also competition for strategic space. China and India remain two distinct State-models in Asia, with profound philosophical differences as to political and economic organization, and for that reason will remain protagonists, though not necessarily antagonists. Other South Asian States must not try for accretion of power by building linkages with one or the other, though Pakistan’s China connections will remain a constant in this region’s politics for sometime to come. Bangladesh, Sri Lanka and Nepal will continue to try to benefit from linkages with Beijing, but this is unlikely to be at the cost of their relations with New Delhi. Asia must be reconfigured in a way so as to be able to withstand decent and healthy inter-State competition, if not rivalry.

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E. Does the crisis signal an "Asian renaissance" in the sense of reducing significance of the western economies and greater rise of the Chinese and the Indian economies?

The Asian Renaissance or the new Asian Age is independent of the crisis. It signifies an efflorescence of Asian culture in its varied aspects---political, economic, intellectual, scientific and spiritual. It is a rediscovery by Asia of its inner self, a regeneration of the values that had once made Asia great. It is too soon to tell whether the phenomenon can be translated into new ideas and ideals such as an ‘Asian Home’ but one must remember that several centuries intervened between the European Renaissance and European Union. There can be as much greatness in diversity, as in unity.

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F. Does the crisis create new policy challenges for two of these world's most populous economies in terms of matters of far-reaching political and social consequences such as internal stability, conflict management, climate change, energy security etc?

What creates new policy challenges for these two most populous economies of the world is not just the crisis but a host of other factors that are bringing these two countries to the fore in the global arena. The endeavour must be to try and convert the challenges in all these fields into opportunities by evolving ideas for greater general good than narrow national interests.

Leadership entails sacrifices, without which the new role will not find wider acceptance.

In today’s world power accrues from perceptions of others, and not its exercise over them.

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The Peaceful Rise of India-China Economic Relations: A Constructivist View of India-China Relations -Lim Tai Wei 14 Introduction Stable relations between India and the People’s Republic of China (PRC) are of considerable importance to construct a peaceful post-cold war Asia. China and India are the largest Asian states among the continents together having over a third of the world’s population. Therefore their future prosperity and progress may critically alter the fate of Asia.15 China and India established diplomatic relation in the fifties when Premier Zhou Enlai and Prime Minister Jawaharlal Nehru (in 1954) co-sponsored the five principals of mutual respect (Panchsheel) for sovereignty and territorial integrity, non-aggression, non-interference in each other’s internal affairs, mutual benefit and peaceful coexistence, which have gradually become the internationally acceptable norms of governing state-to-state relations. These principles have become important in establishing a constructive relationship of cooperation between China and India.16 Stable and expanding China-India relations are therefore important both for the two billion people of the two countries and the rest of the region. Their relations entered a phase of detente, confidence building and widening cooperation in the post-Mao years with a series of confidence building measures, high level economic exchanges, rising trade and investments and cooperation in science and technology and with other wider international issues beginning to lay the basis for more stable and comprehensive relationship than in the past.17 Indira Gandhi took the first step to upgrade the diplomatic relations between the two countries. Rajiv Gandhi's visit to Beijing in December 1988 marked a turning point in the evolution of the relations between the two countries

followed by Chinese Premier Li Peng’s visit to India in 1991 and P.V. Narashimha Rao’s visit to China in 1993.

President K.R. Narayanan's visit to China in June 2000 and the visit of Chinese President Jiang Zemin to India for instance are events of great significance as these visits also reflects how the two countries have put the past aside and are now constructing their relations for the mutual interest of both the nations.18 The various initiatives unleashed during the Indian former Prime Minister's visit to China in June 2003 are significant, especially for the opening of the Sikkim land route for two-way trade.19 India and China are among the countries registering the highest economic growth rates in the world and their populations combined comprises one third of the globe’s population. China and India were the star performers in aggregate GDP growth in the 1980s and 1990 as China’s average growth of 10% per year during 1980-2001 had slowed to a range of 7-8% per year during 1998-2002; growth continues to be fueled by a rising ratio of fixed investment to GDP, which is expected to reach 42.2% in 2003 and World Bank notes that this rate of investment exceeded the levels reached in the early 1990s.20 In India, the average annual rate of growth of GDP was close to 6% during 1980-2001, reaching a peak of 7.8% in 1996-97 from the low of 1.3% in the crisis year of 1991-92 and since then, highs of 6.5% in 1998-99.21 India’s performance in the soft infrastructure with its exceptional growth in the IT sector has changed the perception of the Indian economy to a major extent, along with its good legal structure, corporate governance, banking system, financial sector, property rights security, its skilled manpower and young work force, has made it the new economic icon of

14 ICEC Council Academic Member and Invited Associate Scholar at the Centre for Southeast Asian & Pacific Studies Sri Venkateswara University.

15 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.13.

16 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.10-11.

17 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.13.

18 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.12.

19 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.14.

20 Srinivasan, TN,, "China and India: Economic Performance, Competition and Cooperation An Update" in the Yale University website [downloaded on 1 September 2009], available at www.econ.yale.edu/.../C&I%20Economic%20Performance%20Update.pdf, p.2-3.

21 Srinivasan, TN,, "China and India: Economic Performance, Competition and Cooperation An Update" in the Yale University website [downloaded on 1 September 2009], available at www.econ.yale.edu/.../C&I%20Economic%20Performance%20Update.pdf, p.3.

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emerging powers.22 India’s development model is managing to deliver long term economic payoffs at much lower levels of investment and, in an increasingly networked world, India is a brand leader enabling a technologically networked world.23 There are many issues on which China and India may cooperate and coordinate as they share wide-ranging interest on many major international issues, all of them are committed to build a just and fair, new international political and economic order. These issues include advocating the principles of peaceful co-existence and respecting the right of development to change the unfair international trade regime.24 The Chinese Communist Party leader Hu Jintao, confirmed that joint relations move forward with the new generation of Chinese leadership and China's official English journal, Beijing Review has put it in the way that Ancient China pursued a strategy of 'uniting those far away against those next door,' but today's China needs to pursue the policy of being ‘partner to its neighbors’.25 Since the December 1988 summit, India-China relations have entered a phase of confidence building. This change in the bilateral dynamics is of great significance to the two countries as well as to the rest of the world as India-China has increasingly begun to see each other and their relationship as crucial factors in their foreign policies shaping the perception of other states towards these two states.26 India-China relations have already shown considerable improvement during the last two decades and, since 1988 the two countries have been pursuing a proactive policy of strengthening economic ties and addressing sensitive areas of bilateral relations more positively. The factors facilitating the process were the major shifts in the global economic architecture in the early 1990s that had

opened up a conducive environment for deepening the bilateral relations.27 Chinese President Hu Jintao said during his visit to India in November 2006 that China and India could "strengthen their trade and business links" and that there are enormous and manifold opportunities.

A joint study group, established by the heads of both complementarities between India and China in expanded trade and economic cooperation recommended a series of measures to facilitate bilateral trades in good, services, investments etc based complementarities between two countries. 28 The discussions at the Ministerial-level Joint Economic Group in New Delhi on March 16, 2006 showed a determination for further development of the bilateral trade and economic relationship in the next five years. Business leaders in both countries are identifying opportunities for cooperation in many areas, including energy and, on 21 November 2006, India and China agreed to double the trade between two countries to US $40 billion by 2010.29 Economic Complementarity China and India are engaged in economic development and modernization. China is keen to participate in various projects for development of infrastructure in India while Indian goods and services have entered the Chinese market, Chinese goods are also doing well in the Indian market.30 Trade cooperation and integration between China and India may foster outward-oriented development and generate economic and social benefits, which may also be a countervailing measure to withstand the excesses of economic globalization.31 With cross border investments, trade and communication links spreading through the region and creating an increasingly intricate structure of interdependence, India

22 Ummu Salma Bava, India's Role in the Emerging World Order - A Briefing Paper on New Powers in Global Change for Friedrich-Ebert Stiftung (New Delhi: Centre for European Studies School of International Studies Jawaharlal Nehru University), Undated.

23 Ummu Salma Bava, India's Role in the Emerging World Order - A Briefing Paper on New Powers in Global Change for Friedrich-Ebert Stiftung (New Delhi: Centre for European Studies School of International Studies Jawaharlal Nehru University), Undated.

24 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.7.

25 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.10.

26 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, pp. 10-11.

27 Seethi, KM, "Emerging India and China Potentials and Constraints ", Paper Presented at The Mahatma Gandhi-Daisaku Ikeda Peace Research Conference The Rise of China and India: Towards a Harmonious Region?" dated 21 August 2008, p.9.

28 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p. 23.

29 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p. 23.

30 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, pp. 14-15.

31 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.3.

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INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

and China may shape the future evolution of global capitalism. By ensuring the stability and economic growth of the two countries; both developing states can expand friendly and cooperative ties with each other and maintain peace and cooperation to secure prosperity and stability of the East Asian region in the new era.32 Economic relations constitute the most dynamic aspect of bilateral ties between India and China and the trade between the two has grown remarkably well over the last one decade while bilateral trade has expanded at a 50 per cent rate during the last six years and is expected to increase by a further 54 per cent in the coming years; India’s trade with China has doubled in the last two years and the trade target of $20 billion by 2008 was reached two years ahead of schedule with the revised target of $40 billion by 2010 likely to be achieved two years ahead of schedule.33 The trade between the two countries has really been making the most impressive growth surpassing the targets already set with the target of US$20 billion bilateral trade by 2008 surpassed even in 2006 and therefore, the trade target was upgraded for the year 2010 from US$40 to US$60 billion.34 Indo-China trade has been growing very rapidly since mid1990s; in 1994-95. India’s export to China was $254.3 million, which grew to $5344.88 million in 2004-05 registering an exponential growth of 35.60% per annum and the trend of India’s imports from China has shown a similar trend - India’s import from China was $761.04 million in 1994-95, increased to $6768.92 million in 2004-05, showing an annual exponential growth of 24.10%.35 Total trade between India and China touched $18 billion in 2005 and total trade between two countries has been growing at an annual exponential rate of 28.13% between 1994-95 and 2004-05, which is much higher than the rate of growth of India’s overall trade during this period; even India’s exports to China have been growingat much faster rate than its total

trade, which roughly grew by 20% annually in dollar terms in the same period.36 India’s exports to China were $5344.88 million in 2004-05, registering an impressive growth of 80.39% compared to 2003-04, when it registered growth of 49.60% over previous year. This shows that India’s exports to China have been growing very rapidly and significantly while India’s imports from China have also been increasing significantly over last ten years (India’s import from China was $6768.92 million in 2004-05 showing a growth of 67% over the previous year while India’s total trade (both exports and imports) to China, it was $12113.8 million in 2004-05, registering a growth of 72.85% over the previous year.37 China’s largest import items from India were ores, slag & ash which were valued at around $4.3 billion in 2004, followed by iron & steel whose import was $602 million.38 Among other items, iron and ore are the single largest items of India’s exports to China in 2004-05, though the trend has been increasing over the years. However, these are the most important items in India’s export basket followed by primary and semi-finished iron and steel, which are the second largest items that India exports to China while other major product/product categories of India’s export basket to China are: plastic & linoleum products, processed minerals, inorganic/organic/agro chemicals, ores and minerals, drugs, pharmaceuticals and fine chemicals, machinery and instruments, residual chemicals & allied products, non-ferrous metals, marine products, cotton yarn, fabrics and make up etc.39 India’s import of principal commodities from China from 1998-99 to 2004-05 and the major import items from China are electronic goods which have been consistently increasing over the years while the second largest imported items are coal, coke and lubricants; for e.g. India imports substantial amount of coal from China, which suddenly

32 Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_3-2004.pdf, p.13.

33 Seethi, KM, "Emerging India and China Potentials and Constraints ", Paper Presented at The Mahatma Gandhi-Daisaku Ikeda Peace Research Conference The Rise of China and India: Towards a Harmonious Region?" dated 21 August 2008, p.9.

34 Muni, SD, "India and China: Towards Slow and Steady Cooperation" dated 18 Jan 2008 in ISAS Brief NO. 45 (ISAS), 2008.

35 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.4.

36 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.4.

37 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.4.

38 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.22.

39 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.4.

40 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.6.

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shot up in 2004-05, though it was modest in the early years.40 Organic chemicals are the third largest import item from China during the last several years and other important import items are: non-electrical machinery, electrical machinery, medical and pharmaceutical products, textile yarn, fabrics and make ups, silk yarn and fabrics, non-ferrous metals, silver, iron and steel, inorganic chemicals, raw silk non-metallic manufactures, manmade filament/spun yarn/waste, metaliferrous ores and metal scrap etc and there are 20 major items in India’s import basket from China which have been identified, covering more than 80% of India’s imports from China.41 Another important feature of trade between India and China has been the composition of items imported by both countries. While India imports basically finished and manufactured products and less of primary and intermediary products, on the contrary, China imports basically primary and intermediary products from India with least of finished products. Again, India’s commodity concentration in imports from China is very high on manufactured goods; on the other hand, China’s commodity concentration of imports from India is very high on primary and intermediary goods.42 The Visit of Manmohan Singh Indian Prime Minister Dr Manmohan Singh’s visit to China from 13 - 15 January 2008 was a step in the direction of keeping the momentum of building incremental and evolutionary cooperation between the Asian giants. The two countries signed 11 documents of mutual understanding and cooperation on subjects ranging from the railways and planning to agriculture and rural development. The most important of these agreements was the vision statement signed by the two prime ministers that promised to build "a harmonious world of durable peace and common prosperity" through the "strategic and cooperative partnership" between their countries.43 During Prime Minister Manmohan Singh’s visit to China in January 2008, it was decided to increase the trade target

from $ 40 billion to $ 60 billion by 2010. It may be noted here that India’s trade with China is greater than that with Japan, the US, or the entire world.44 After similar adjustments, China’s trade with India is only slightly below that with Japan, the US, or the entire world. During Manmohan Singh’s visit, the two countries also signed a document 'Shared Vision for the 21st Century' which reflects not only the common perceptions of India and China but also their desire to purposefully cooperate in the future and to promote global durable peace and common prosperity on the basis of Panchsheel. However, the most important aspect of the document is the favoring of an "open and inclusive international system"45 by the two countries.

In this statement, they have discussed an open, inclusive and democratic (not multipolar) international system based on the famous principles of Panchsheel - about regional integration of Asia; about "an international energy order that is fair, equitable, secure and stable"; about "working together and with the international community"; and also about bilateral matters and the resolution of differences through peaceful negotiations".46 At the "India-China Economic, Trade and Investment Summit" on 14 January 2008, Prime Minister Manmohan Singh encouraged the business community to "acquire insights into each others markets, business customs and management styles".47 Conclusion: 'Chindia' India and China are the two largest and fastest growing economies in Asia. The first step to create a vibrant regional trading bloc between China and India may be to move towards a Preferential Trade Agreement (PTA) with reduced tariffs implemented in a phased manner, covering commonly agreed, selected, and manufactured services and agricultural products before proceeding to a Free Trade Agreements (FTA) with stipulations of a free flow of goods, services, investment, labor, and capital.48 China and India are emerging as major economic powers and for sustainable development of the world and Asian economies, China and

40 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.6.

41 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.6.

42 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.22.

43 Muni, SD, "India and China: Towards Slow and Steady Cooperation" dated 18 Jan 2008 in ISAS Brief NO. 45 (ISAS), 2008.

44 Seethi, KM, "Emerging India and China Potentials and Constraints ", Paper Presented at The Mahatma Gandhi-Daisaku Ikeda Peace Research Conference The Rise of China and India: Towards a Harmonious Region?" dated 21 August 2008, p.9.

45 Seethi, KM, "Emerging India and China Potentials and Constraints ", Paper Presented at The Mahatma Gandhi-Daisaku Ikeda Peace Research Conference The Rise of China and India: Towards a Harmonious Region?" dated 21 August 2008, p.9.

46 Muni, SD, "India and China: Towards Slow and Steady Cooperation" dated 18 Jan 2008 in ISAS Brief NO. 45 (ISAS), 2008.

47 Muni, SD, "India and China: Towards Slow and Steady Cooperation" dated 18 Jan 2008 in ISAS Brief NO. 45 (ISAS), 2008.

48 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.23.

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India may be integrated into the Asian economy and simultaneously with the rest of the world.

Open regionalism and trade cooperation between the world’s two largest developing economies may foster outward-oriented development and intraregional trade based on comparative advantage and complementarities.49 The word "Chindia" is derived from the combination of the two words "China" and "India" and it reflects the idea that India and China are rising and it is possible that they cooperate and their relations may become positive.

According to the Chindia theory, the strengths of both countries are complementary and China is strong on industry, merchandise goods, and infrastructure, whereas India is strong on service sector and information technology (simply put, China is strong on hardware, whereas India is strong on software) and so, in 2006, Prime Minister Wen Jia Bao, declared that Sino-India cooperation may be like two pagodas: one is on hardware and the other is on software.50 The challenges before these nations of 2.5 billion are numerous and formidable, and they may not be addressed without building new coalitions of bargain and negotiation in an increasingly complex interdependent world.51 Both are rising economic powers and they need peace and stability to realise their aspirations.52 Appendix Agreements/MOUs Signed between India and China 1954: Trade Agreement between the Republic of India and the People’s Republic of China.

1984: Trade Agreement between the Government of the Republic of India and the Government of the People’s Republic of China.

1991: Trade Protocol between the Government of the Republic of India and the Government of the People’s Republic of China for the Calendar Year 1992.

1992: Protocol between the Government of the Republic of India and the Government of the People’s Republic of China on Custom Regulation, Banking Arrangements and Related matters for Border Trade.

1992: Memorandum of Understanding on co-operation in Agriculture between the Ministry of Agriculture of the Republic

of India and the Ministry of Agriculture of The People’s Republic of China.

1993: Memorandum of Understanding between the Government of Republic of India and The Government of the People’s Republic of China on co-operation in the Field of Geology and Mineral Resources.

1993: Agreement on Environment Co-operation.

1995: Memorandum of Understanding between Ministry of Metallurgical Industry of the Government of the People’s Republic of China and the Ministry of Steel of the Government of the Republic of India.

2000: Memorandum of Understanding signed during the 6th Joint Economic Group Meeting in Beijing on February 21-22, 2000 on co-operation in the field of steel between India and China.

2000: Memorandum of Understanding on co-operation in the field of Information Technology. (July) 2000: Memorandum of Understanding on co-operation in the field of Labour (Employment services, vocational training and social security). (September) 2002: MOU on the Application of Phytosanitary Measures between the Ministry of Agriculture of the Republic of India and the State General Administration of the People’s Republic of China for Quality Supervision and Inspection and Quarantine (AQSIQ). (January) 2002: MOU between Department of Science and Technology of the Republic of India and the State Administration of Foreign Experts Affairs of People’s Republic of China on Exchange of Personnel between India and China. (January) 2002: MOU between Department of Science and Technology of the Republic of India and the Chinese Academy of Sciences of the People’s Republic of China on Cooperation in Science and Technology. (January) 2002: Agreement between India and China on Cooperation in the field of Tourism. (January) 2002: MOU between the Ministry of Water Resources of India and Ministry of Water Resources of China upon provision of hydrological information of the Yaluzangbu / Brahmaputra river in flood season by China to India

(Source: Kundu, Nivedita Das, "Russia-India-China: Prospects for Trilateral Cooperation" in the Helsinki website [downloaded on 1 Sept 2009], available at www.helsinki.fi/aleksanteri/english/publications/.../ap_ 3-2004.pdf, pp. 43-48.)

49 Bhattacharya, Swapan K. and Biswa N. Bhattacharyay, "Gains and Losses of India-China Trade Cooperation –a gravity model impact analysis" dated April 2007 in the Cesifo Working Paper No. 1970 Category 7: Trade Policy [downloaded on 1 Sept 2009], available at from the SSRN website: www.ssrn.com, from the RePEc website: www.repec.org, from the Cesifo website: www.cesifo-group.de, p.23.

50 Thepchatree, Prapat, "The Rise of China and India and its implications to Southeast Asia: A Thai Perspective", unpublished draft, p.17.

51 Seethi, KM, "Emerging India and China Potentials and Constraints ", Paper Presented at The Mahatma Gandhi-Daisaku Ikeda Peace Research Conference The Rise of China and India: Towards a Harmonious Region?" dated 21 August 2008, p.12.

52 Muni, SD, "India and China: Towards Slow and Steady Cooperation" dated 18 Jan 2008 in ISAS Brief NO. 45 (ISAS), 2008.

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Development Agenda for India and China: Evolving a New Sustainable Model for Inclusive Development -P. S. Deodhar 53 It is amply clear that the development model based on resource-intensive consumption patterns as prevalent in the United States and Europe is ecologically not sustainable.

This is the result of media provoked self-centred lifestyle, largely funded by careless financial credit offered to common people in the West. It is completely unimaginable therefore that 2.5 billon people of India and China can ever hope to have similar lifestyle. Nature has not endowed the world with matching resources. Not only does the world not possess the resources like the fossil fuels to support such dreams, but there is not enough water as well! Just compare the per capita consumption of the fuel and water by the Americans and Asians to understand the gravity of the situation. Indian engineers may develop a Nano but every Indian family owning one is a scary preposition. Today both countries have a sizable population that lives like the Americans and consume and pollute as much. Therefore, even if the leaders of both nations dream of bridging the widening gap between their haves and have-nots and focus on inclusive development, they can succeed only if they seek some alternative development model. In fact today, one realises that both, Dr. Manmohan Singh led India and Hu Jintao led China, in their own ways, are looking for it.

The issue indeed is more fundamental than materialistic aspects of life style that is an integral part of the western model. The western concept of being a developed society and their model of economic development itself has other serious short-comings besides not being sustainable. It is also increasingly being realised that materialistic lifestyle resulting from that model has many undesirable consequences, the most important being the menacingly manifesting global warming. At social level too, many believe that such a life is unnatural and emotionally unhealthy. It has widened the gap between the global rich and the poor. Various studies show that an increasingly large number of people in the developed world are emotionally unsettled, less happy and have psychological problems.

Interestingly both the Indians and the Chinese, on the other hand, have been practicing an alternate lifestyle model which can be roughly described as ‘simple living and high thinking’. Everyone knows that this alternative way of life is nature friendly, healthy and emotionally fulfilling. This has helped their huge population of poor to live tolerantly and peacefully. Those economically weak in both these

countries can bear their deprival of material comforts without the mental misery that the poor in the West are seen to go though. Psychiatric practice is not a rewarding profession in these countries. Teaching of saints in India and Confucian thoughts in China has prevented them from getting hurt. But everyone knows that this disparity and poverty is unjust and caused by their poor productivity.

What is exciting about the western lifestyle, besides vastly improving social order, is the reduced level of stress, safer living conditions and higher personal productivity. The development of science and technology during the last two centuries and its innovative exploitation for comfortable living is a major reason for these benefits. Progressively evolved Industrial revolution from the middle of the 19th century to the middle of the 20th century that was later seamlessly followed by the communication and information revolutions enabled this remarkable transformation. It allowed common citizens to become productive participants and get rewarded. Till the early 70s, the western developmental model looked ideal since per capita consumption was limited and earning differentials between the rich and the poor were justifiable.

But it is now realised that the money-centric modern business culture that evolved from the early 70s out of US business schools has been taking the world by a garden path.

Many are convinced that it is indeed the root cause of current global economic crisis. Businesses overtook their democratic governments with the so-called privatization, and since then the businesses have been brain-washing young men and women to practice mercenary, profitcentred style of management focusing on stock price and earnings. It sponsors a win-at-all costs trading approach with charismatic role modelling, teaching, and coaching with an orientation to be reckless and with a motive to profit by every means.

Eastern life philosophy has its own pitfalls. It may have taught people to face hard life with a smile but denial of basic necessities due to the failure of planners to enhance personal productivity of a large percentage of people in their society is not just unjust but almost inhuman. It is unfortunate that today a large majority of people in both countries is suffering that denial. People in the West on the other hand are also growingly realising the bitter truth that marketing is driving them into miseries. Boundless credit and multimedia luring is hurting them. Many independent

53 President, India China Economic & Cultural (ICEC) Council, New Delhi. The paper was presented in Mumbai on September 7, 2009.

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studies have shown that excessive consumption of food and fun is harming them both in body and mind. On the happiness index, both India and China have masses of contented poor who smile more frequently on an empty stomach than the well fed rich westernised living in their city towers. It is plus for those people but a shame for those who are elected to take care of them. Here one can see that the Chinese leadership did far better than their Indian counterpart, handicapped they may be by the ‘system’.

Careful study of China's spectacular success since it began its transition to a market economy will reveal that they managed it with adaptable strategies and policies: as each set of problems are solved, new problems arise, for which new policies and strategies were devised and this has been going on from year to year. One has to read the annual reviews of the country’s progress by successive Presidents since 1978 to appreciate this policy. It shows that China recognises that it cannot simply transfer economic institutions that had worked in other countries without adapting it to the unique problems confronting China. While it is clear that China has added and will continue adding to the pollution, one can see the series of policy initiatives in this regard. At every level in China, there is a consciousness of environmental limits and the realisation of its perils for its people.

Today Chinese leaders are discussing a "new economic model" even though they know well that their economic strategies largely based on the western model have been a resounding success, producing almost 10 per cent annual growth for 30 years and lifting hundreds of millions of Chinese out of poverty. What is not visible in the economic data like the Gross National Product (GNP) can be seen on the faces of the people as you walk around not just on the streets of Shanghai or Dalian or Wuhan but also in its villages. There one can see tremendous self-esteem and pride in the behaviour of a common person. Some of the areas that we went to were hundred miles away from China’s network of highways but they boasted of stable electricity, paved roads, televisions and even internet.

China in fact is far more internet savvy than India, simply because everything on their network is in Chinese, and entire China can read what is on the net. A lot of these rural communities live on the remittances from family members who had migrated to coastal cities. It is the same like the money orders sent by migrant Indians to their families in Bihar or UP or Kokan. We found even the farmers are better off, with new crops and better seeds. The local government sells on credit high-grade seeds with a guaranteed rate of germination.

Indian leaders too have the same realization as in China that it must change if it is to have inclusive and ecologically sustainable growth. Healthy life for all seems to be China’s agenda. Even in cities one can see carefully planned planed well maintained streets, green areas, parks as well as extensive public transportation systems. While Indian

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leadership in Delhi too has well intended schemes, their corruption infested delivery channels frustrate realisation of any of its noble objectives.

Realisation of the need to move away from the western model and seek another alternative model has become more urgent after the global economic crash and its backlash on India & China. China felt it far more strongly than India due to its over dependence on export trade. They realised that even countries seemingly committed to competitive markets were getting protective and complained of unfair competition. Export led growth model was in danger and maintaining high growth was untenable. That strategic model worked well for China for many ways. It supported technology transfer, helping to close the knowledge gap and rapidly improving the quality of manufactured goods.

Export-led growth meant that China could produce without worrying about developing the domestic market.

But global economic catastrophe changed that quickly.

China realised that it has to change. China has a large portion of its reserves blocked due to its earlier strategy of "vendor finance" by parking its earning in the US. It financed the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell.

In fact, to meet the challenge of restructuring China's economy away from exports and resource-intensive goods, China must stimulate domestic consumption. While the rest of the world struggles to raise savings, China, with a savings rate in excess of 40 per cent, struggles to get its people to consume more. Both Indians and Chinese, especially those who are not economically strong, intuitively don’t trust the government and focus on their ‘rainy days’. Therefore, the Chinese government is now focussing on providing better social services (public health care, education, and nationwide retirement programmes etc) with a hope to move people away from their urge to save. Chinese government is also giving cheaper access to finance for small and medium-sized businesses.

Both countries therefore will have to look for new sources of dynamism in its growing entrepreneurial ranks, which requires a commitment to creating an independent innovation system. China has long invested heavily in higher education and technology and now it is striving to create world-class institutions. India too has to somehow speed up.

Both countries need to stimulate dynamic innovation environment, while resisting pressure by the western governments to adopt the kind of unbalanced intellectual property laws that are being demanded. Instead, it should pursue a balanced intellectual property regime: because knowledge itself is the most important input in the production of knowledge, a badly designed intellectual property regime can stifle innovation - as has been the case in post -70 America in several areas.

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Till the early 70s, business culture in the US too was different. Bright brains those days were in research labs and on shop floors using innovations to create some real wealth.

There evolved a business culture that caused the US to get rich as a society. Significantly that also was an inclusive growth. The real income of an average American had been soaring since the end of the Second World War. Wage ratios between the wealth creating talents and shop floor workers were acceptable to all. The country’s balance of trade was positive and consistently growing. Employment was on the rise. Standard of living was improving democratically year after year. Number of college going students doubled every five years and unlike today getting in was no longer the privilege of the rich and the elite.

During those decades there were major breakthroughs in technology as well. James Watson and Francis Crick won the Nobel Prize for decoding the molecular structure of DNA. Tuberculosis had all but disappeared, and Jonas Salk's vaccine was wiping out polio in the United States.

Many may not know but Dr. Salk had refused to take a patent for his discovery and had said that he invented it to prevent human suffering. That reflects the culture that prevailed then.

During the last four decades, Western technological innovation has focused too little on reducing the adverse environmental impact of growth, and too much on saving labour - something that India and China have in abundance.

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So it makes sense for China to focus its scientific prowess on new technologies that use fewer resources. But it is important to have an innovation system (including an intellectual property regime) that ensures that advances in knowledge are widely used. That may require innovative approaches, quite different from intellectual property regimes based on privatisation and monopolisation of knowledge, with the high prices and restricted benefits that follow.

Too many people think of economics as a zero-sum game, and that China's success is coming at the expense of the rest of the world. Yes, China's rapid growth poses challenges to all including India. Competition however, must make India work harder, to become more efficient and stimulate value addition by focussing on manufacturing and achieving balance between export and domestic business.

In 2008, almost 80% of China’s US$32 billion exports to India was in the form of machinery and finished goods.

This created new wealth of over US$10 billion in China which went to enrich the Chinese. During the same period India’s US$21 billion consisted of nearly 70% of industrial inputs like iron ore and cotton. That not only was like selling family silvers but it also sent US$6 billion or so into the pockets of a few mine owners. This needs to change.

China needs to be forced to buy more from India and that would mean India working smarter.

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"Role of India and China in Addressing the Climate Change Crisis" Climate change is already happening and represents one of the greatest environmental, social and economic threats facing the planet. It has started to threaten food production, increased occurrences of extreme climatic conditions and water stress, flooding of crop fields and coastal settlements and increase in spread of diseases such as malaria.

Specifically, in India and China, increasing greenhouse emissions and rise in temperature have started to impact agricultural production, livelihood, bio-diversity, coastal areas, human health, availability of water resources, rainfall patterns etc. The climate change crisis, therefore, is a part of the larger challenge of sustainable development for India and China and requires constant efforts and initiatives from India and China to tackle the crisis.

With this perspective, India China Economic and Cultural Council in association with Rajiv Gandhi Institute for Contemporary Studies (RGF), New Delhi had organised a brainstorming session, entitled “Role of India and China in addressing the climate change crisis�, on 2nd September 2009 at Rajiv Gandhi Foundation, with the following objectives: l To bring together key players including policy makers, industry leaders and intellectuals from different countries of the world, to discuss about climate change and the possible role of India and China in addressing this global crisis. l To discuss various social and economic policy responses by key players in addressing the global climate change crisis. l To advance understanding on key actions needed to accelerate technology development and transfer in India and China, in accordance with their national needs.

In the welcome address, Dr. P. D. Kaushik from RGICS, highlighted the fact that there are a couple of areas in which India and China can collaborate and learn from each other to solve this crisis. This session is the first attempt to map what policy actions can be taken to curb this menace of climate change and develop a common platform for India and China to work together, Dr Kaushik said. Mr. Tirthankar Mandal from WWF-India, in his background presentation on state of response and key issue to address the crisis, laid emphasis on the various technological, political and financial challenges to address this crisis. He put forward certain issues and questions such as developed countries pressure on classification, the source and scale of finance required to address the crisis and its governance, the need for scaling up of adaptation technologies and overriding principle on IPR etc., for the panel to debate and discuss on.

As a response to the various political issues and questions put forward before the audience, Ms. R V Anuradha from Clauras Law Associates, emphasized on the need to address the differences in stage of development between India and China and the need for India to learn from the already existing domestic policies and initiatives by China to curb climate change. Ms. Aditi Kapoor, from Oxfam India, expressed that a lot of negativity is attached to India’s position on climate change and it is seen as a blocker, which is not the case. She said that given the differences between India and China, more emphasis should be on influencing China to be bold and on side of development. Mr. Ge Song

The brainstorming session was attended by people from the industry, government and nongovernment stakeholders from the Indian Government and from Embassies and High Commissions of various countries, civil societies along with intellectuals and professionals from India and China in the field of climate change. (Please refer to Annexure 1 and 2 for detailed schedule and list of participants).

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Xue, the Chinese Counselor for Science and Technology, highlighted the principle of common but differentiated responsibility and said that India and China do play an important role to address the crisis but not the key role, which is to be played by the developed world with a strong political will to address this crisis. Mr. Robert Donkers, the EC Counselor for Environment, also acknowledged this principle of common but differentiated responsibility and also expressed that responsibilities should change with time and even after US, UK and Russia stop every carbon emission of theirs, the temperature rise will still go beyond 2 degree Celsius, due to emissions from rest of the world.

The need is for countries to develop greener and better production processes and to come forward to take accept their responsibility.

In response to the need for development and diffusion of green technologies, Prof. Patrick Chezaud, the French Counselor for Science and Technology, sees technology as the main solution to address the crisis and highlighted that France is already in the process of technology transfer with various Indian bodies, such as with BEE for smart metering project. He also said that the focus should be not only on technology transfer but on technology exchange and technologies can also be fed back to the north to address the

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crisis. Mr. Donkers of the EC Delegation in New Delhi does not consider IPR as an issue as there is so much green technology available for mass scale deployment and it’s only in case of very recent advanced technology where IPR may be an issue. He mentioned the various joint technology development initiatives of EU with China and also expressed that EU would be happy to develop similar joint technology research initiatives with India, which would also lead to joint IPRs. Mr. Rudolf Rauch, from GTZ Indo-German Energy Programme, along with many other participants, emphasized that development of technology is evolution and market driven and before that there has to right policies and regulatory mechanisms in place to facilitate technology development and exchange.

At the end of the session, Mohd. Saqib from RGICS gave the vote of thanks and expressed that India is always looking forward to work with other developing countries and this session is a step forward to start cooperating and working together with China. He said that this session will be followed by a series of conferences and papers in future, dealing with various aspects and challenges to address the climate crisis and will not only focus on role of India and China but also of other BRIC countries.

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NEWS BRIEFS "Chinese President Makes Proposal for Tackling Global Financial Crisis at BRIC Summit" (July 2009) Chinese President Hu Jintao Tuesday presented a fourpoint proposal for dealing with the ongoing global financial crisis at the first summit meeting of BRIC countries which groups Brazil, Russia, India and China.

system, Hu said. To establish a new international financial order that is fair, equitable, inclusive and well-managed, and provide guarantee for the sustainable development of the global economy in terms of system and mechanism conforms with the trend of the historical development and is in the fundamental interest of all parties, he said.

Third, BRIC countries should commit themselves to implementing the UN Millennium Development Goals (MDGs), the president said. The international community should not overlook development issues and cut the input for development while dealing with global financial crisis, he said.

Instead, it should pay close attention to the impact that the crisis has left on developing countries, especially the least developed ones, he added.

The BRIC countries should call on all parties to continue to implement the MDGs and urge the developed economies to fulfill their commitment to assistance, he added.

Chinese President Hu Jintao (2nd R) poses for a group photo together with Brazilian President Luiz Inacio Lula da Silva (1st L), Russian President Dmitry Medvedev (2nd L), and Indian Prime Minister Manmohan Singh during the first formal meeting of BRIC (Brazil, Russia, India and China) leaders in Yekaterinburg, Russia, on June 16, 2009.

First, BRIC countries should commit themselves to bringing about an early recovery of the world economy and work hard to overcome the difficulties and try to take the lead in recovering from the global financial crisis," he said, adding "This is not only for our own need, but also contributes to world economic recovery."

BRIC countries should solve the long-existing structural problems in their economic development and change their development pattern in an effort to improve the quality and level of their economic development , while striving to resume world economic growth.

He also urged BRIC countries to continue to open their markets, make use of their mutually complementary strength and expand economic and trade cooperation.

Second, BRIC countries should commit themselves to pushing forward the reform of international financial

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Fourth, BRIC countries should commit themselves to ensuring the security of food, energy resource, and public health, he added. He said while tackling the ongoing global financial crisis, efforts should be made to properly handle some outstanding problems that hinder development, such as climate change, food, energy, resource and public health security. A long-term approach and overall plan should be adopted to take all factors into consideration as these issues bear on the wellbeing of all peoples in the world and their overall interests, he added.

He also urged BRIC countries to increase investment in agriculture, develop advanced agricultural technique and curb market speculation. He also called for greater food assistance and closer agricultural and food cooperation.

"We should also accelerate our efforts in developing clean and renewable energy, and establish advanced research and promotion systems in a bid to diversity our energy supply," Hu said.

He urged the four countries to strengthen information exchanges and communication, share the experience on epidemics preventions and control, and work together to develop and share vaccines, and cooperate in pandemic control and prevention.

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

China and India Agree On a Common Platform On Climate Change

Need to Improve On this Climate Change Road Map

"China India Citizen Initiative Blog" Mr Jairam Ramesh, the Indian environment minister was in China last week for the first ever ministerial level talk on climate change. The Chinese side was led by Mr Xie Zhen Hua, vice chairman of China’s National Development Reforms Commission. The two sides explored common grounds as part of their preparation for the upcoming UNFCCC meeting in Copenhagen in December 2009.

Here are the key points from the discussions.

"China India Citizen Initiative Blog" If China and India work together, along with some other countries at the UNFCCC, they will pose formidable challenge to those who want these countries to take immediate action on account of climate change. But there are three areas of serious concerns about these key negotiating strategies being adopted by the Asian neighbors.

l The Indian minister confirmed that there is "total

convergence" in the negotiating positions of the two countries. The two countries have agreed to coordinate their views on climate change before major international meeting. l Both countries are committed to the idea of "common but differentiated responsibilities" of developed and developing countries. l Neither side will agree to legally binding emission norms. l Both want to negotiate for higher levels financial assistance and technology transfer in return for promises to do their best to tackle climate change. l Both sides agreed to oppose trade barriers linked to climate change issues being prosed by developed countries. l The two delegations agreed to undertake jointly mitigation activities to reduce carbon emission.

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1. They would have done well to note that the understanding of the science of climate is limited, and there are substantive flaws in the theories underlying predictions of global warming.

2. While they have consistently refused to accept emission norms, they seem to have not equally strongly emphasized the role of economic development and competitive economic environment in stimulating greater energy efficiency.

3. This may have led to commitment on mitigation, but not so much on adaptation. Although adaptation is likely to have a more immediate beneficial impact on the people, reducing their present vulnerabilities to vagaries of nature.

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Update on Laws in India and China India Unveils New Direct Tax Code The Indian government released a comprehensive discussion paper and draft of the new Direct Tax Code that seeks to revamp and simplify the Direct Tax Law and its administration in the country through several radical changes. The code, which the government plans to enact and implement FY2012 onwards with suitable changes if required, envisages meaningful reduction in the tax rates while simultaneously being revenue neutral for the government. It aims to achieve this by increasing the tax base and rationalising the myriad tax incentives prevalent under the current law. Some of the major proposed changes include, reduction in effective tax rates for individuals, increase in tax deduction limit on savings from Rs. 1 Lakh at present to Rs. 3 Lakh, reduction in the Corporate Tax rate from 33% (including surcharge) to 25% and changes in MAT provisions. The code also provides for some investment-based incentives for various sectors, including Generation, transmission and distribution of Power, Specified infrastructure projects, Hospitals, - Food processing, packaging, cold storage, agricultural warehouse, Oil and Gas and SEZs.

China Drafts Regulation On Monopoly Price China's top economic planner, the National Development and Reform Commission, unveiled on 12th August 2009 a draft regulation to prevent monopoly prices and to endorse fair competition so as to safeguard the interests of consumers and the public. The regulation applies to cases of monopoly prices both inside and outside the country, when monopoly prices outside the country impact the domestic market. Other than deals reached among more

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than two parties for the purpose of monopolizing prices, power abuse of government agencies to eliminate or limit competition is also regarded as violation of the regulation.

Those who violate the regulation would be punished according to stipulations in the country's anti-monopoly law, according to the commission. Individual retailers or producers may face confiscation of illegal earnings and a fine of up to 10 percent of last year's sales, while industry associations are subject to a fine of no more than 500,000 Yuan ($73,529.4) or could be dismissed as an association.

Government agencies that violate the regulation would be ordered by their superiors to correct their actions, and officials held responsible would be disciplined according to relevant laws.

China Passes Draft Regulation to Enforce Environmental Evaluation On Projects China's State Council passed a draft regulation on 12th August 2009, on environmental evaluation over new projects to prevent pollution or ecological destruction from the beginning. Under the regulation, environmental evaluations are required before the planning of development projects could be approved. Such a regulation covers all development activities, from land use and the development of rivers or oceans, to development projects related to industrial, agricultural, husbandry, and forestry sectors as well as energy, water conservation, transportation, urban construction, tourism, and exploration of natural resources. The regulation would be revised and later publicized by the State Council for enforcement.

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

TBT and SPS Notifications by India and China (August-October 2009) SPS/TBT Notification Number

Date

Products Affected

Details

G/TBT/N/CHN/210/ Rev.1

21 August 2009

NCS (new chemical substances) that have not been manufactured, imported, processed or used in China

Notifies revised measures on the Environmental Administration of New Chemical substances (Order of SEPA, No.17) which came into force on Oct.15, 2003. The main revised contents, include: improving the system of screening and identifying the risky part of NCS and adding procedures for low volume notification and scientific research record notification, and setting up prior controlling mechanism for the risky part of NCS.

G/TBT/N/CHN/680

5 October 2009

Powered support for coal mine (ICS: 73.100)

Notifies the mandatory terminology and definitions, classification, requirements, test methods, inspection rules, signs, packing, transportation and storage of hydraulic control system and valve for coal mine hydraulic support.

G/TBT/N/CHN/681

5 October 2009

Flat panel televisions (ICS: 27.010, HS: 8528)

Notifies the mandatory energy efficiency grades, minimum allowable values of energy efficiency, evaluating values of energy conservation, energy efficiency and passive standby power for flat-panel TV.

G/SPS/N/CHN/119

13 August 2009

Food items

On the basis of the Food Safety Law of the People’s Republic of China, this regulation specifies the requirements for application and acceptance, approval and publication procedures and other contents for importing foods that lack national food safety standards.

G/SPS/N/CHN/120

13 August 2009

Materials and products which are directly in contact with food and used in food packages, containers and tools and equipments for producing and managing foods; additives used in food containers and package materials; detergent; disinfectant used in foods.

On the basis of the Food Safety Law of the People’s Republic of China, this regulation specifies the range of administrative license, the requirements for application and acceptance, approval and publication procedures and other contents for new variety of food related products.

G/SPS/N/CHN/121

27 August 2009

Foods; food additives; packaging materials, containers, detergent and disinfectant used for foods; tools and equipments used for food producing or marketing.

The Food Safety Law of the People’s Republic of China was promulgated to ensure food safety, safeguard public health and human life.

This law contains ten Chapters and 104 Articles.

The main contents include general principles; risk monitoring and assessment for food safety; food safety standards; the production and marketing of food; food inspection; food import and export; handling of food safety incidents; supervision and management; legal responsibility and supplementary provisions.

G/SPS/N/CHN/122

27 August 2009

Foods; food additives; packaging materials, containers, detergent and disinfectant used for foods; tools and equipments used for food producing and marketing.

Defines the responsibility of enterprises in food safety management; strengthens the coordination, link, and cooperation among regulatory authorities; provides details for relevant provisions of the Food Safety Law to make them practicable.

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

27

Exhibitions in India and China (October 2009 - January 2010) INDIA S. No.

28

Exhibition

Date

Place

Products / Sectors Covered

1.

The Economic Times ACETECH

Nov 05 - 08, 2009

Bombay Exhibition Centre (BEC), Mumbai

Architecture, Construction, Engineering & Building Materials.

2.

Telecoms World India

Nov 09 - 12, 2009

Hyatt Regency, New Delhi

Telecom Products & Services

3.

Global Auto Expo

Nov 12 - 14, 2009

Palace Grounds, Bengaluru

Automotive Electronics

4.

India Energy 2009

Nov 13 - 15, 2009

Bombay Exhibition Centre(BEC), Mumbai

Latest technology and products and services catering to the Indian Energy sector

5.

Metals Minerals Manufacturing Expo 2009

Nov 14 - 17, 2009

Science City, Kolkata

Products, Services, Technologies on Minerals, Metals, Metallurgy & Materials

6.

India International Trade Fair

Nov 14 - 27, 2009

Pragati Maidan, New Delhi

Multi-product exhibition

7.

China Sourcing Fair: Electronics & Components - India

Nov 20 - 22, 2009

Bombay Exhibition Centre(BEC), Mumbai

Electronics & Components

8.

Annapoorna - World of Food India

Nov 25 - 27, 2009

Bombay Exhibition Centre(BEC), Mumbai

Food & Beverage industry

9.

Excon

Nov 25 - 29, 2009

Bangalore International Exhibition Centre (BIEC), Bengaluru

Construction Equipment & Construction Technology Machinery, machine tools & quality

10.

Machine & Machine Tools Expo

Dec 03 - 05, 2009

Sun N Sand Hotel, Pune

control systems & equipment, accessories, consumables etc.

11.

India Telecom 2009

Dec 03 - 05, 2009

Pragati Maidan, New Delhi

Telecoms related Equipments & Technologies

12.

Facades & Roofing Solutions 2009

Dec 11 - 13, 2009

Koramangala Indoor Stadium, Bengaluru

Roofing & Cladding systems and solutions

13.

EnergyTech

Dec 11 - 14, 2009

Pragati Maidan, New Delhi

Energy Products & Related Items

14.

Auto Expo

Jan 05 - 11, 2010

Pragati Maidan, New Delhi

New generation of vehicles and state-of-the-art components and ancillaries

15.

International Garment Technology Expo

Jan 08 - 11, 2010

NSIC Exhibition Centre, Machinery and services for sectors of New Delhi fabrics, sewing, knitting, dyeing, laundry, fabric and garment printing, finishing, embroidery.

16.

India International Garment Fair

Jan 20 - 22, 2010

Pragati Maidan, New Delhi

Apparel & Clothing

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

CHINA S. No.

Exhibition

Date

Place

Products / Sectors Covered

1.

Industrial Automation Show 2009

November 03 07, 2009

Shanghai New International Expo Center, Shanghai

Production Automation Solutions, Electrical Engineering, Mechanical Engineering, Industrial Software & Engineering and Microtechnology

2.

InfoComm China 2009

November 9 11, 2009

China National Agricultural Exhibition Center, Beijing

Audio Video Products

3.

China (Beijing) International Automobile Manufacturing and Production Facility Exposition

November 11 13, 2009

China International Exhibition Center, Beijing

Product, technology and property rights

4.

China Int'l Trade Fair for Household Products and Accessories

November 11 14, 2009

Shanghai Exhibition Center, Shanghai

Interior & Lifestyle products

5.

Guangzhou Classical Furniture Expo

November 13 15, 2009

China Import and Export Fair Pazhou Complex, Guangzhou

Consumer Articles

6.

Automechanika Shanghai 2009

December 09 11, 2009

Shanghai New Int'l Expo Centre, Shanghai

Automotive Parts, Equipment and Services

7.

China (Shenzhen) International Logistics & Transportation

December 09 11, 2009

Shenzhen Convention & Exhibition Center, Shenzhen, Guangdong, China

Railway, Shipping & Aviation

8.

The 16th Guangzhou International Hotel Equipments and Supply Exhibition

December 10 12, 2009

China Import and Export Fair Pazhou Complex, Guangzhou

Hotel Equipment

9.

China (Guangzhou) International 3G Industry & Mobile Exhibition

December 11 13, 2009

Guangzhou Mart, Guangzhou, Guangdong, China

Mobile and Telecommunication

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

29

Economic Indicators

30

Indicator

India

China

GDP

INR 33,39,375 Crore (2008-2009)

13986200 million Yuan (1-2 Quarter 2009)

GDP Growth Rate

6.7% (2008-2009)

7.1% (1-2 Quarter 2009)

Exports (August 2009)

US$ 14.289 Billion

US$ 103.7 Billion

Imports (August 2009)

US$ 22.661 Billion

US$ 88 Billion

Trade Balance (August 2009)

US$ -8.372 Billion

US$ 15.7 Billion

Foreign Exchange Reserves

US$ 279.910 Billion (As on September 25, 2009)

US$ 2131.606 Billion (June 2009)

Foreign Direct Investment (FDI)

US$ 10.492 Billion (April-July 2009)

US$ 55.86 Billion (January-August 2009)

Number of Wireless Subscribers

456.74 Million (August 2009)

702.651 Million (July 2009)

INDIA-CHINA CHRONICLE Aug - Oct '09 - www.icec-council.org

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