India-China growth race

But the idea of mutually supplementary roles is now giving way to new tensions despite attempts by the two states to reinforce their economic ties. For one, the urge to bolster energy security has pitted the two against each other. Attempts to band together and mutually access resources have not been very successful.

Although two decades of sustained high growth have pushed Chinese achievements to the fore, India has not only managed to hold its own but is now seen to be working its way to reverse the trend. A sharp scaling up of per capita income growth to six times the levels in the seventies and the sterling performance of Indian corporates, aided by steadily expanding domestic and external markets, have laid the foundation for new challenges. The global forays by India8217;s own transnational corporations have pushed them far ahead of their Chinese counterparts on many fronts. Closer ties with the US and the growing clout of the Indian diaspora, as well as the continuing success in the software and knowledge sectors have given India a new sheen. The view is slowly gaining ground that India8217;s growth model 8212; one that focuses on soft infrastructure like regulatory frameworks, financial markets and property rights 8212; has the potential for a larger payoff in the long run than the Chinese model that has emphasised growth of hard infrastructure and is now already running close to its limits.

The signals are clear. Despite the gains, imbalanced growth remains China8217;s Achilles8217; heel. Chinese growth is heavily dependent on FDI flows largely concentrated in the coastal regions and account for 50 per cent of exports and 60 per cent of imports. Without these FDI flows, Chinese growth rates could well have slowed down by 3.5 percentage points, to Indian levels. With FDI to China set to plateau and that of India on a roll, there is increasing nervousness in China. India is, in fact, set to give China a run for its money with total factor productivity growth picking up to match that of China.

Developments on the trade and investment fronts have also created new friction. Though bilateral trade has doubled in recent years, the components of the trade basket have been highly imbalanced. Indian exports to China remain largely confined to raw materials while Chinese exports have focused on higher value-added manufactures.

Investment flows from China have also been haphazard. Chinese investments into India in the last one and a half decades until end-2005 was just 2.91 million 8212; lower than Sri Lanka8217;s 8212; and constitutes just 0.01 per cent of total FDI flows. Yet India has emerged as the single largest destination for Chinese FDI, ahead of both Russia and the US. But India8217;s security concerns and regulatory norms have thrown a spanner in the works. The Chinese don8217;t want a replay of the experience in the OECD countries where cross-border buyouts by Chinese companies have been largely unsuccessful primarily on account of the lack of transparency and security concerns. This leaves China even more keen to tap Indian markets. But economic and strategic concerns come in the way of greater cooperation. Only a visionary Chinese leadership that substantially addresses these concerns will be able to break through the current stalemate.

The writer is senior editor, The Financial Express