23 minute read
Strategic Patience: How India can rise to the China challenge
Dr Ganesh Natarajan: We all know that by May 2020, after Doklam and the Chinese incursions in Ladakh, India’s strong military defence was followed by an economic response. Chinese apps were banned. There was an emotional boycott of Chinese goods.
Six of us—Gautam Bambawale, Vijay Kelkar, Raghunath Mashelkar, Ajit Ranade, Ajay Shah and I—decided that India needed a more strategic longterm response and got together as a Pune International Centre Policy group. The result is the research paper titled, “Strategic Patience and Flexible Policies: How India Can Rise to the China Challenge,” published by the Pune International Centre. The full paper is available and is being expanded into a book by end of the year.
In essence, we realised that there were deeper questions to be answered:
• What are the forces that shape Chinese behaviour?
• What is the best path for India, in the short and long-term?
• Can we weave together a diplomatic, economic policy and industrial response that best furthers India's interests?
In several aspects, China is significantly ahead of India. Post-Covid, there is a worry about global supply chain disruptions because of the heavy concentration of key production in China. There is also concern about the ‘one belt, one road initiative’ that China is pushing and the ramifications of RCEP.
There is a strong case for India to position itself as a democratic alternative in a “less China” world. If India grows at 8% and China by 4 to 4.5%, in the next 20 years, India’s economy will be $40 Tn by 2041 against China’s $53 Tn. If we extend this further, we can come to near par. That is the opportunity and challenge.
Gautam Bambawale: We all were questioning why China resorted to military coercion in Eastern Ladakh. We realised that there was one fundamental condition due to which they were able to be aggressive: it is the huge asymmetry in economic, military, scientific, technological and comprehensive national power between India and China. In 1980, China was a $305 Bn economy and India, $189 Bn. By 2019, China is $14 Tn and India, $3 Tn.
What could India do to rise to the Chinese challenge? The immediate factor was to move our military might. We need to think of a longer term response.
In the short term, India has to build balancing coalitions with some other countries in the world. There are three groups of countries with which India can have these coalitions:
• Major democracies of the world
• Countries which are on the borders of China like Russia and Vietnam
• Countries which are in India's neighbourhood like Bangladesh and Sri Lanka.
In all these, we have to go beyond government to government interactions. There has to be interactions and exchanges between institutions, people and businessmen of the two countries.
India must undertake domestic economic changes which will help in building deep partnerships with these countries. This is something which we have never done in the past. India’s diplomacy will need to rise to the challenge of China.
We do not advocate a complete decoupling of the Indian economy with the Chinese economy given the nature of globalization and the close connections between our two economies. India can retreat—for the shortterm—from any economic engagement with China.
• We should not permit Chinese government controlled companies to obtain a controlling stake in certain key Indian infrastructure projects.
• We must avoid Chinese technological standards and work with global standards. Just two days ago, DoT (Department of Telecom) in India has spoken about 5G trials where Chinese companies like Huawei have been kept out. We are delighted that the government of India is moving in this direction.
• We must ensure that Chinese surveillance of Indian persons is blocked and it does not happen.
Dr Ajit Ranade: I would like to place certain facts to gain a right perspective:
• Just four days ago, we had an emergency air lifting of 12 cryogenic tanks of liquid oxygen from Tianjin in China to Kolkata. They were taken to Jamshedpur (280 kms) for emergency help to the hospital. China is ready to send more emergency supplies like medicines and PPE. More cryogenic tanks may be coming in from China to India.
• In 2020, China was India's number one trading partner, despite the events of Ladakh. It was ahead of UAE, USA, EU and ASEAN.
• 18% of all imports of India, even today come from China. One of our major imports is crude oil and not a drop of it comes from China. If you take away crude oil, China's contribution of merchandise imports continues to be around 40 or 50%.
• The trade relationship between India and China in the last three years has been moving in a satisfactory direction. India's exports to China have been increasing to an amount of $16 billion. China's exports to India have been decreasing and are less than $50 billion now. The trade deficit has been narrowing. This is a three-year trend.
China has a fantastic export-led growth story; it is an export juggernaut. India is also one of its destination countries. Back in 2001, India was its destination number 19, but in just 10 to 12 years, India became its destination number five or six and it is rapidly rising. So India's consumer market is of great relevance to China.
After what happened in Dokhlam and Ladakh last year, there’s been an irreversible change. The status quo has been changed by the Chinese side and not by India. There was a time when it was possible to keep trade, commerce and investment relationships between the two countries in a separate compartment and geopolitical issues and border disputes in a separate compartment. The border issue is more than 50 years old. There have been eyeball-to-eyeball confrontations but never any killing and death of soldiers. There were always ways to de-escalate or diffuse the situation from the ground through phone calls between armed forces commanders or government -to-government interactions, but something has changed. The responsibility lies with China.
Less China, not China Less
We have to acknowledge that China is far ahead in economic, scientific, military and human quality of life indices. Its economy is five times bigger than ours. Our import dependency is substantial. In pharmaceutical intermediates, which are required for India's success as a global exporter of generic drugs or bulk drugs, 69% come from China. We cannot meet our own domestic demand for penicillin. We have to import it from China. In automotive parts and specialty chemicals, our dependence is quite high.
So we have to go to less China and we cannot become China less. For this, we have to focus on a domestic agenda of having high and sustained inclusive economic growth for a long period of time. Our structural factors are still in our favour. There is the spirit of entrepreneurship. The pandemic is just an episodic setback. Unfortunately, we will have lost two years, but if we focus on the domestic agenda, we will be able to narrow the gap.
We have to improve the investment climate and our institutions of governance. Industries and investors want predictability, continuity, stability and the rule of law. There are areas where we can become more self-reliant. Atmanirbhar doesn't mean a closed economy. We also need Atmavishwas —Self-confidence.
We have to raise the scale of domestic competitiveness to global scale and standards of quality. India has to become a base for global manufacturing. The world is looking at a China plus one strategy because of geopolitical issues. The Biden administration also looks like it is going to continue with the same stance that the Trump administration had vis-a-vis China. We are in the middle of a new tech world war. We have to take cognizance of those geopolitical realities and play along.
Incidentally, in the next few months, India will be hosting the 13th BRICS summit. (Brazil, Russia, India, China and South Africa). The objective of this summit is cooperation for continuity, consolidation and consensus. If the pandemic allows, President of China, Xi Jinping might attend and India may be hosting him. We still need to doggedly follow patience as a strategy.
China’s Vulnerabilities
China looms large in India's mind much more than India looms large on China's mind. China is worrying about the US. Our understanding of China is poor. Our scholarship on China and Chinese history should be substantially upgraded. Let us recognize that China is not infallible. It has lot of vulnerabilities which are developing and some of which are:
• It is an aging society. The labour force has stopped growing and its population may soon reach zero growth and start declining. That has implications for the macro economy.
• It is a slowing down economy. They cannot sustain 6% growth and they have formally acknowledged this in their 14th five-year plan, which was just unveiled.
• Jobs and economic growth are no longer the source of legitimacy for the government. It is a one party state and the government has legitimacy not because of the electoral process but because they generated jobs for millions of people who went from rural areas to urban areas. That is not going to be possible anymore, especially in times of exploding social media as we have seen with Hong Kong. They have been struggling to cap that, which is completely led by the youth.
• They have friction with almost every neighbour—Philippines, Japan, South Korea and India.
• And finally, we see a new phenomenon where the government of China seems to be very uncomfortable with the private sector. They have abruptly pulled out of the IPO of Ant Financial, which is the part of the Alibaba group. It does not bode well for private sector investors in China.
Ganesh Natarajan: In Industry, we need to look at three responses depending on the relative positioning of India and China in each segment. The first could be just reduced dependence, the second self-sufficiency or “atmanirbhar” and the third global competitiveness.
In terms of reducing dependence on China, the first sector that comes to mind is rare earth. When US President Biden took over in the oval office, one of his first comments was that the US has to reduce rare earth dependence on China, for the simple reason that rare earths go into too many fundamental instruments. There is a huge deposit of rare earths in China which gives them a natural advantage. We have a more positive opportunity in telecom. Initially, there was monopoly of telecom in China but later they allowed multiple companies to come in and proliferate. They have really dominated the space. Moving from copper to optic fibre is an opportunity for us to leap frog. Reliance has shown that we can really build scale. With the rise of Reliance JIO and the possibilities being explored to keep China out of 5G, India can become a significant player.
Core ICT, Agriculture, Chemicals and Pharma
In India, there is a glimmer of good signs. The demand for connectivity is going to substantially increase. PM Modi in the Independence Day speech talked about the national optic fibre network (NOFN). The last mile connectivity has not happened. The last of our 640,000 villages must enjoy 100Mbps WiFi.
This opens huge opportunity for electronics and for design elements in Core ICT later. The IT services industry has reached $190 Bn from scratch over a four decade period. In that process, we have left behind the entire core ICT layer—Information, communication, telecom, and microprocessors. Today, there are 13 or 14 countries that are very dominant in this space, including China, Taiwan and Thailand. If we do our investments right in that area in the next 10 years, we could be $200 billion in the ICT layer too.
Consumer electronics, hardware and semiconductors are all possibilities. In the automotive sector, the big opportunity of the future is the autonomous, connected, electric (ACE) and shared vehicle mobility. The bigger constraints are in the charging ecosystem. Lithium-ion battery is again a Chinese dominant area. We need to look at alternatives like hydrogen.
In agriculture, we cannot be a rice and paddy economy forever because our godowns are overflowing and produce is getting wasted. We have opportunities in organic farming, grains, flowers and fruits. In chemicals, China's dominance is amazing. They have set up special economic zones and make it extremely easy for any large chemical production facility. The infrastructure, logistics and everything are in play for them, but chemicals are clearly an opportunity and a challenge for us. Finally, over the last one year, we have demonstrated superiority over China in pharma. The efficacy of Covaxin is much superior to Sinovac or other vaccines being made in China. But we need to do it at scale.
The government's response so far is encouraging. There has been a good set of announcements in what is called the Productivity Linked Incentive scheme. We are chasing champion companies both within India and abroad to come in and invest. Apple computer has been one of the first to say that they will come and do manufacturing in India.
It is not about the most sophisticated technology or capital intensive units. Even if we can create assembly units all over the country, we create millions of jobs. Azim Premji University has just released a report which says that post-Covid, 220 million Indians have gone into poverty. Clearly we need to create a lot of semiskilled or low skilled jobs and do it at scale all over the country.
Prof Ajay Shah: We should not think that the game is about mobilizing troops in Ladakh. This is just the beginning. Why should we assume that the story ends here? There could be more territorial conflicts. What about the Indian Ocean? How would the Chinese state be able to interact with our neighbours like Bangladesh and Sri Lanka and make them more hostile towards us? We have to think strategically. Being more bellicose or trumpeting nationalism does not make the answer better. What we need is a cold, rational, evidence-based strategy. We need to play on high amounts of force, space and time.
We have had conflicts with Pakistan but the Indian GDP has always been five times bigger than Pakistan. So fundamentally it's not difficult to deal with a smaller country. Confrontation with China, which is five times bigger and better than us at most things that we do, is difficult.
The short-term story is that we need to form deep coalitions. We need to step away from nonalignment and strategic autonomy. The next 25 years must form the golden age of foreign policy in India. A prosperous country requires resources and scientific and technological capability. We need to become an advanced country and that will require us going to our foundations. Why did Indian private sector investments peak in 2011 and decline ever since? We have come out with three elements to explain this problem:
• There is too much government interference in the freedom of private people. Only the creativity and energy of private people makes a country great.
• We have got to push back against the administrative state, the excessive concentration of power with officials and the relative withering of the legislative and judicial branches.
• We have to bring back the rule of law. We have to fight for equal treatment of every citizen.
Venky Nagan (Group CEO, Asmara International Ltd, Hong Kong): I would like to list out four points on the Chinese challenge:
• China used to believe that it’s acceptable to have some skirmishes here and there but also continue business as usual. They have done that with Taiwan, Vietnam, Japan and USA. The skirmish with India is not just a minor irritation but it is going to be much more serious and long-term. Therefore, we have to prepare for this.
• Is the conflict irreversible? We interact with a lot of people and companies; the people there are openminded and they are listening. They know what's happening. So we will have to continue to engage with people on the ground through various channels. We need to communicate our policy and vision of the peace.
• One of the reasons why China targets places like Myanmar, Arunachal Pradesh and Nepalis also for the water. They are looking for water for the long-term. We will have to be more careful about these regions.
• I would strongly make a pitch for adding garments made out of manmade fibres as our focus area because China has a huge monopoly there. If we tie up with partners from Taiwan and Korea and set up that ecosystem, it will take us five to seven years and we can gain a lot of business. We can give a lot of jobs. Our clients are interested and looking at India as a serious partner for garment business.
Gautam Bambawale: What started off in May 2020 in eastern Ladakh is a different kettle of fish from the small scale incidents which happened earlier. At one point of time, there were close to50,000 troops on either side. China was the first mover and they have violated many of the agreements which have been signed between India and China on maintaining peace and tranquillity in the India China border areas.
Chinese are signalling to India two things:
• On the tactical side, they are going to move their ground positions to what they think in their mind is their territory and their boundary.
• On the strategic side, they are indicating that we are a much smaller power than China.
We have to reset India-China ties. We cannot accept that military action will be kept separate from the economics of the relationship. India will continue to suffer a $50 billion trade deficit with China. In the longer term, we have to correct our economy. We have to do it for our own sakes and to get off the tail of the Chinese dragon.
V Balaraman (Former MD, Pond’s India): The Galwan clash has unified India as it was an external threat. I have heard from a number of sociologists that whenever there is an external threat, the nation unites. What India lacks is alertness. Even the second wave of Covid hit us because we were not alert.
I run a women's business forum for MMA. Through this, I have been able to unify a lot of people. There are 600 million Indian women who have someone earning their daily bread. They can launch a startup because a startup is a very viable business opportunity unlike large companies that have to go through rigours of bureaucracy. The government is liberalising many things. Globally, credit has been eased. If we motivate women to get into startups, that would be an opportunity for India’s economic growth.
Pankaj Madan (Deputy Head of KAS India): China’s debt-to-GDP ratio really climbed during the COVID. The COVID relief packages are costing the world a packet, but so it does to China. Their debt stands at more than 350% of the GDP.
One of the economists that we recently invited said that the Chinese are not 20 feet tall and that we Indians should not also think that we are four feet short.
You talked about QUAD, BRICS and India’s partnerships with the US and Europe but what is India's own perspective on the ASEAN? Is there an innovative strategy to deal with Myanmar?
Gautam Bambawale: The Myanmar strategy is something that we put into effect about 10 or 12 years ago, which is calling for the return of democracy and rule of law, which we are doing even now. We will also continue to work with whichever power is available in Yangon. India accepts ASEAN centrality. We will continue to work with them in our own ways. I don't think we have to keep talking about RCEP because that is already water under the bridge. India can build its own economic and political relationships with ASEAN and we are doing that.
You mentioned that so far, growth and jobs are the source of legitimacy of the regime. Now we see a slowdown in job, economic and income growth. So what will now be the new source of legitimacy?
Ajit Ranade: There's a new paper out in China, which is authored by President Xi Jinping himself on poverty alleviation. They are not going to stay static. In fact, they are undergoing a five‐way rebalancing of the economy on the below lines:
• To move away from export oriented to domestic drivers as engine of growth.
• To move away from investment to consumption as the bigger component of economy.
• To move away from industry as a dominant growth and employment engine towards services.
• To move away from old economy “dirty” industries like metals, mining and chemicals to modern “clean” sectors such as renewables, electric cars and other green industries.
• To shift from the present to the future, in terms of emphasizing industrialization 4.0, artificial intelligence, space, advanced software and semiconductors.
How much can we trust Russia as an ally given that they are leaning towards China heavily in recent times? Should we focus more on learning Chinese language?
Gautam: In international politics and relations, it's not a question of trust but where our interests intersect. Russia maybe close to China today. Russia will not like to be a junior partner in this. India needs to play the smart game in which we can try to use the fault lines between Russia and China. As Ronald Reagan said, “We need to trust but verify,” rather than verify and trust. I also agree that it is absolutely essential for India to invest much more in studying the Chinese language and culture—to study the way how the Chinese mind works and thinks.
Ganesh: We need to learn Mandarin because if we cannot converse with our friends or enemies in their language, then we are missing something. I have two very close friends who live in Shanghai. They passed out of IIM‐Ahmedabad and IIM‐Bangalore. Both of them spent a year after they moved to Shanghai, singing Chinese songs. One can easily learn a tonal languagelike Mandarin by singing. That is the level of commitment they had to master the language.
What are the forces shaping Chinese behaviour? What is the best path for India in the short term and long term? What went wrong between Narendra Modi and Xi Jinping relations?
Gautam: This is not a question of individuals but a question of two nation states, two sovereign states. This goes far beyond individual incidents or individual personalities. Please do read our paper, and our book which should be coming out in a few months from now.
Two neighbouring civilizations each with a history of 5,000 years interact with each other in the modern 21st century. It is the asymmetry between the nations in terms of comprehensive power which is dictating how China behaves with India. In order to change that behaviour, we need to reduce that asymmetry.
China seems to say that whatever is ours is ours and whatever is yours is negotiable. Why do they do that?
Ajit Ranade: I think you are alluding to what John F Kennedy said on negotiation. When Xi Jinping became President, in one of the first interviews with the press delegation from India, he identified five principles, which would form the basis for future China-India relationship, but almost on every one of those five principles, China has deviated. We need to acknowledge that something has changed. So we have to change the way we have been dealing with them.
China is trying to dominate the Indian Ocean. They want to develop a small island called Feydhoo Finolhu in the Maldives as a resort. Will they support China as bases for future scenarios? On improving our neighbourhood profile, the biggest constraint is the lack of deep pockets to lead alternate funding options to wean away smaller countries from the debt trap diplomacy of China. What are your views on these?
Gautam: When India is a $2.9 trillion economy and China a $14.5 trillion economy, anything that Chinese do looms large on our minds. We have been arguing that we need to take a much more macro approach to reduce the asymmetry between India and China.
We should use some of our coalition partners like Japan, for example, to help us in doing projects in our neighbouring countries. The Afro-Asian growth corridor is something in which India and Japan are working together in Africa. In the longer term, we need to push ourselves to expand the Indian economy.
Has India prepared its labour forces to challenge the Chinese skilled labour force? Can India produce goods and commodities as cheap and durable as Chinese do?
Ajit Ranade: India's labour force is going to increase roughly at 2% per year for the next 20 or 30 years. We'll be adding 200 million people in the next 20 years. China will be losing 50 million people in that period. That's the big difference. We have to get our act together in terms of our competitiveness, global excellence and costs. That is our domestic agenda.
We don't need to do it with reference to only China. We need to do it with reference to global markets. Can we be the global manufacturing hub for a small car, electric car, specialty chemicals, textiles and garments? Can we vastly increase our domestic tourism? We can train paramedical staff because not just China but even the Western countries and America will face a global shortage of workers in the healthcare sector, more so in geriatric care. India can actually provide skilled and semi-skilled workforce in this area.
We have back offices for the world because of English proficiency. Can we also become the back office for China?
Ganesh: That’s way too ambitious. Many Indian companies set up offices in China not only to cater to Chinese customers but also to Japanese customers. Don't forget that the Chinese ability to learn very fluently Japanese is probably better than India. So I think there are areas where probably we should not try to compete. That might end up in a lot of investment and no real returns.
What should be India's move to cut down its state dependency on China? Are we in a position to take any drastic step towards severing our ties with China?
Ajay Shah: Our prime objective should be to make India strong. That's not the same as trying to hit back at China and by having restrictions against Chinese activities. What if hitting back at China makes us weaker? We should be cold. We should think about what is in our interests. The most important of India’s interests is more internationalization. The more we integrate into the world economy, the better it is for us and the stronger we become. China is an absolutely integral part of the world. We should not be retreating from deep engagement with the world.
