India's new rope trick

Vaughan Yarwood looks at the recent thinking on South Asia's superpower and questions whether being a runner-up to China may yet prove to be to India's advantage in the future.

As the global economy emerged from recession China’s leaders were roundly praised for introducing well-devised economic policies that helped turn the tide. So rapidly applied and effective were these policies — which included cheap credit and stimulus spending on a vast scale — that they were said to have been instrumental in lifting the entire Asian region from the morass caused by the global financial crisis.

China’s response, it seemed, was yet another demonstration of the enormity of the gulf separating the country from its closest economic rival in Asia — India. Comparing the two aspiring superpowers has become a favourite academic pastime, and it is one in which India inevitably comes off second best. Beijing’s new airport and capacious highways show up the creaking infrastructure of big cities on the subcontinent. China’s economy grew by 8.7 percent in 2009, compared with a respectable, yet far from stellar, 6.4 percent India. And now, China’s nimble policy makers put India’s relatively chaotic, fractured and ponderous leadership structure in the shade.

Not everyone sees the competition as quite so one-sided, though. Jim Walker, managing director of Hong Kong-based research company Asianomics, told Time magazine in January 2010 that India’s growth was ‘much more sustainable’ than that of China. His reasoning: India’s stimulus programme was less destabilising, if less glamorous. China’s — ‘the biggest... in global history‘ — involved spending US$585 bn over two years (some 6 percent of GDP), and was underpinned by massive credit, totalling US$1.4 trillion, or almost 30 per cent of GDP. According to investment banker Goldman Sachs, India made do with just US$36 bn, or about 3 per cent of GDP. And it did so without putting its banking sector at risk.

A serious consequence of China’s strategy says Walker is the prospect of a property-price bubble — and as the man who first predicted the 1997 Asian crisis, Walker’s opinion carries weight. Official Chinese data supports his warning. The average price of real estate in Chinese cities leapt by 7.8 per cent in the year to December, 2009.

Another fear is that easy credit will cause a sharp rise in the number of non-performing loans (NPLs). In November 2009, UBS economist Wang Tao calculated that if 20 percent of new lending in 2009 and 10 percent of new lending in 2010 turned bad, the total value of NPLs could reach US$400 bn, or 8 percent of GDP. India’s banking sector is far less exposed — indeed, credit growth was lower in 2009 than in 2008. Nor is its monetary policy likely to result in a property bubble.

India could afford to make a less radical intervention following the financial crisis in part because the country is less exposed to the global economy. Its exports account for only a quarter of GDP, compared with more than a third in the case of China. India has a burgeoning urban middle class, and its economy is sustained by private domestic consumption, which represents 57 percent of GDP. It is, says Walker: ‘a fundamental domestic demand story that doesn’t stall in the time of a global downturn’.

Raywat Deonandan, of the University of Ottawa’s faculty of health sciences, is more forthright in his championing of India, predicting that by the end of the century it may well become the world’s leading nation.

Deonandan is not short on reasons:

• Demographics: China has an ageing population (median age 34.1 years), and so faces the same nightmarish outlook as the West — within a few years workers will be outnumbered by retirees, and so will impose an enormous economic strain on the country. India, by contrast, is a young country (median age 25.1 years), with a large proportion of its population yet to enter the workforce.

• English: More than 1 in 10 Indians (90m) speak English, the international language of commerce. Fewer than 1 percent (10m)  of China’s population is English speaking.

• Judicial system Another fruit of India’s colonial past is a relatively functional, transparent and mostly impartial legal system. China’s, to outsiders at least, is opaque, unpredictable and still evolving towards a system that foreign companies can have faith in.

• Energy: Both economies are energy hungry. China’s, however, is a factory-based, industrial model, reliant on coal-generated power to make low-cost consumer goods for Western markets. India has a more developed ‘weightless’ sector, including call centres, information technology and medical tourism.

• Democracy: This remains ‘probabilistically’ the best political system under which to construct a stable and thriving economy.

Though some of Deonandan’s conclusions are open to debate, there is little doubt that India is headed for a greater role in global affairs. The country’s inclusion in the BRIC grouping (Brazil, Russia, India, China) — a term coined by Goldman Sachs’ staffer Jim O’Neill to define the four largest economies outside the Organisation for Economic Cooperation and Development (OECD) — is tacit admission of the fact. In the words of Brazil’s foreign minister, Celso Amorim, one of the disparate group’s aims is ‘to increase, if only at the margin, the degree of multipolarity in the world’.

India, which for years has tried in vain to win a seat on the UN Security Council, may see BRIC as a viable alternative to traditional multilateral diplomacy — one in keeping with its growing sense of destiny.

Fact box: Clash of the Titans

India and China, the world’s two emerging superpowers, grind against one another with the pent-up energy of techtonic plates. They share a 3,500 km border whose exact location they contest, and which passes through troubled regions: the insurgency-ridden states of India’s northeast and China’s disaffected Tibet and Xinjuang province.

In 1962 they fought a short war in which China took control of Aksai Chin — claimed by India as part of Jammu and Kashmir — and invaded Arunachal Pradesh, which it argued was part of Tibet. In 2009, China attempted to block a US$2.9 bn Asian Development Bank loan to India, claiming that part was earmarked for a flood control project in Arunachal Pradesh.

Since the days of the British Raj, the protectorates and buffer states created to shield India have gone their own ways. In recent years India has witnessed China’s growing influence in South Asia and Myanmar (Burma), various interventions in Afghanistan and Pakistan’s alliances with Washington and Beijing.

Raja Mohan, strategic affairs editor of the Indian Express, suggests that, despite such tensions, India might be encouraged to rethink its defence orientation by taking cues from history.

Among them:

• Under the British Raj, India was the main peacekeeper in the Indian Ocean and beyond

• In World War I, Some 950,000 Indian troops served overseas

• By the end of World War II, India had an army of 2.5 million — the largest all-volunteer army ever seen. Some 700,000 Indian soldiers fought in Southeast Asia alone to oust the Japanese

• Almost 40 percent of the world’s peacekeepers come from South Asia

Reviewing India’s track record following the end of the Cold War, Mohan sees evidence of a return to form; of ‘Delhi’s transition from non-alignment and military isolationism to cooperative security engagement with other powers’.

He suggests that, if the United States is willing to deal with India ‘on its own terms‘ — that is, by not imposing its own agenda on nuclear non-proliferation and global warming — it could, in his rather grand phrase, ‘bear the burdens of ordering the Eastern Hemisphere in the 21st century’.

- by Vaughan Yarwood