On the economy, don’t disengage with China
The debate on the future role of China in the economy is now at the forefront of India’s strategic conversation. But the fundamental questions that must inform this assessment have receded into the background. Take the ban on Chinese products. The main impetus was to signal that there are costs for China’s coercion on the border. And if wielded judiciously, this will influence Beijing’s outlook. But, brandishing the economic card cannot be indiscriminate and policymakers must be conscious of the repercussions on domestic livelihoods, India’s modernisation efforts, and geopolitical goals.
More broadly, New Delhi must ask questions around structural trends in the global economy, particularly with respect to the nature of competition between the United States (US) and China, and by implication, on the evolution of globalisation going forward. To what extent will there be US-China decoupling in the near and medium-term? Should we lean to one side in an age of geo-economic competition? Is there an opportunity for India to absorb the manufacturing Foreign Direct Investment (FDI) as well as assume a major role in global production networks?
If we proceed from the premise that India needs more high-tech industrialisation, more quality manufacturing, more employment-generating supply side capacities, and, greater participation in international supply chains, then the disruptions in globalisation need to be leveraged realistically. Added to this is another strategic goal — India’s quest to re-establish its traditional commercial and social networks with Indo-Pacific and Eurasia.
In this backdrop, how should we restructure China’s role in the Indian economy? For the past six years, the National Democratic Alliance (NDA) government’s approach has been to rebalance and broaden economic ties from a trade-dominated to an investment-oriented one. This was to manage the trade deficit and attract Chinese investment and technologies to India. Today, India’s dependence on China for its non-consumption economy remains high as inputs, components, industrial equipment and technology all feed India’s growth and exports to the rest of the world.
Decoupling, therefore, should not be pursued until a deeper assessment is undertaken to determine the cost-benefit calculations and impact, across sectors, and for the economy as a whole. Only after this has yielded credible data should policymakers formulate a plan to develop more interdependence with China in select sectors or lessen it in others by import-substitution and sourcing from elsewhere. It must not be a blanket policy. We first need to articulate a sophisticated industrialisation blueprint and identify where Beijing brings value or can be a catalyst in the way the US was for China’s reform process.
The US-China competition over high technology, particularly in digital sectors, is posing another policy challenge. Here, India’s policymakers need to avoid leaping from one digital superpower to another. After all, both Chinese and US companies bring the same baggage to the table — the risk of compromising data sovereignty, dependence on imported software and hardware, and impact on domestic capabilities. Before handing over the family silver, India needs to support a framework for domestic innovation that promotes a competitive digital ecosystem and one that moves India up the value chain.
India’s future connection with the Indo-Pacific is another theme. The decision on the Regional Comprehensive Economic Partnership (RCEP) suggests India is in no hurry to lock into a trading bloc while its domestic economy remains mired in structural problems. While India gets its domestic act together, the broader regional geo-economic landscape will not necessarily move in tandem with the US-China decoupling, whose contours are still in flux. A slowdown in the China-US economic ties will not undermine the China-Asia interdependence. China is already emerging as a key pillar of the Asian political economy. Last year, the Association of South East Asian Nations (Asean) overtook the US to emerge as China’s second-largest trading partner with $644 billion in two-way commerce. So far, in 2020, Asean has overtaken the European Union (EU) to become China’s largest trading partner. The investment flows that support such commerce are less visible but nevertheless real.
The scenario of China’s economic links with its continental and maritime neighbours deepening is more probable if the US does not re-engage Asia with a more pragmatic economic blueprint. The “America First” impulse is, however, part of the domestic political discourse across both parties. It is unclear how the next president would reconcile the dualism of renewing the US and simultaneously engaging Asia by offering superior terms to states than what China could. In essence, this is what the next great game will be about.
India can benefit from this competition if it plays its cards skillfully. Rather than being tethered to an unpredictable US political dynamic, India should start thinking of more proactive strategies where we keep a foot in the door in the various geo-economic networks and linkages that develop around our region. While the China relationship is likely to remain competitive and complex, if the grand strategic goal is to deepen ties with Asia, then India will have to acquire the ability to conceive geo-economic strategies in the neighbourhood and beyond while recognising that states will not deprive themselves of economic ties with mainland China. Many Asian states, including India’s neighbours, will adopt eclectic strategies of leveraging the US, Chinese, Japanese, and European technologies and capital. By attempting something different, we only risk reducing our competitive advantages and future position in Asia.