Anil K. Gupta is the Michael Dingman Chair in Strategy and Globalization at the Robert H. Smith School of Business, The University of Maryland at College Park. The author of six books, the most recent being The Silk Road Rediscovered: How Indian and Chinese Companies Are Becoming Stronger by Winning in Each Other’s Markets (Wiley, 2014). He is a member of the World Economic Forum’s Global Agenda Council on Emerging Multinationals and has been ranked by Thinkers50 as one of the “world’s most influential living management thinkers.” The Diplomat’s Justin McDonnell spoke with Gupta recently about the economic relationship between China and India.
How is business, particularly cross border investments, bringing the two most populous nations together—two nations that have divergent histories and cultures? Where do their interests converge?
Over the last twelve years, China and India have been the two fastest growing large economies in the world – with growth rates averaging 10.2 percent and 7.2 percent, respectively. Even assuming a slowdown in both economies, it is a near certainty that, by 2025, China will be the world’s largest economy and India the third or fourth largest. These realities of size and growth rate are the mighty forces that are bringing the two economies together.
During 2000-2012, bilateral trade between China and India grew at an average annual rate of 30 percent, significantly faster than the 19.4 percent and 19.2 percent annual growth rates, respectively, in their individual trades with the rest of the world or the 9.2 percent growth rate in world trade. Importantly, we believe that the China-India economic relationship is at the cusp of a transformational change – from a largely trade-driven relationship to one driven increasingly by investment. The government of Narendra Modi is all but certain to launch a massive infrastructure build-up program resembling what China did from 1996 onwards. This will need large inputs of both capital and capital goods. China can offer both on very competitive terms. We can also expect to see the creation of China-funded special economic zones in India that can serve as bases for Chinese companies to ramp up manufacturing investments in India.
Why haven’t we seen India and China share the world’s largest bilateral trade partnership?
It’ll get there but will take time. Remember, bilateral trade between any two countries depends heavily on their economic scale. Larger economies such as the U.S. have much bigger demand for imports than smaller economies such as India. The U.S. economy is about eight times that of India and the Japanese economy is about three times as big. Thus, it’s to be expected that China-U.S. or China-Japan bilateral trade would be much larger than China-India trade. However, as a direct result of the Indian economy’s much faster growth rate, China-India trade is growing much faster than China’s trade with most other economies including the U.S. and Japan. By 2030, China and India will be the largest and the third largest economies in the world. At that time, China-India trade should also rank among the three or four largest bilateral trade partnerships in the world.
In terms of business practices and consumer preferences, what is China looking for when entering the Indian marketplace and vice versa?
Even though China-made toys are ubiquitous in Indian markets, the vast bulk of Chinese exports to India consist of capital goods rather than consumer goods. Think of companies such as Shanghai Electric exporting power plant equipment to Indian utilities and others such as Huawei and ZTE selling network equipment to Indian telecom operators. On the consumer side, the only big players are Lenovo in PCs (and more recently tablets and smartphones) and Haier in home appliances. Others such as Xiaomi in smartphones are just entering the Indian market.
In general, Chinese companies find the Indian market to be extremely price sensitive, certainly more so than in China. Often, this results in difficult negotiations and increases the risk that, in order to win the contract, the Chinese exporter may cut corners somewhere. It is a widespread – albeit not universal – belief among Indian business people that Chinese products are much lower in quality than those from Japan, the U.S. or Europe. A major reason behind this perception is the fact that Indian importers often go for the lowest price and thus unwittingly end up buying the low-end products.
That said, as the economic ties between both countries become deeper, people on both sides are learning rapidly. Huawei, Lenovo and Haier have made direct investments in India. Many Huawei executives have spent years living and working in India and have even adopted Indian first names. They are getting savvier about the Indian market. On the other side, Indian buyers are learning that, as in other large economies, Chinese companies come in all shapes and sizes – from suppliers of the world’s best-quality products to [suppliers of] the worst-quality ones. Thus, the quality of the product that one gets depends not just the supplier but also on whether the buyer is discriminating enough and what he/she is willing to pay.
The IFC’s Doing Business 2014 report indicates that both India and China are not easy places to do business, with bureaucratic hurdles, corruption, language barriers, and different business customs. What can the two Asian giants do differently to further promote a mutually beneficial partnership that taps into each other country’s growth and growing consumer markets?
I think that differences in language and business customs are relatively easy problems to overcome. That’s the type of blocking-and-tackling that multinational companies have learned well over the years. The really big challenges pertain to the “Doing Business” weaknesses such as bureaucracy, corruption, and policy unpredictability. Unfortunately, this is true of almost all emerging economies. A major reason why emerging economies are not yet rich and are called “emerging” is that they suffer from weak political and governmental institutions. It is remarkable that, despite these hurdles, China-India bilateral trade has grown at a compounded annual rate of 30 percent and now adds up to about $70 billion.
Looking ahead, anything and everything that the two governments can do to reduce red tape, corruption and policy unpredictability will help in accelerating further growth in bilateral ties. The prospects look promising. The Chinese leadership appears to have launched a war on corruption and has also signaled that they’d like the market to play a bigger role than state-owned enterprises. On the Indian side, Narendra Modi has a decade long track-record of policy predictability. Also, some of his most powerful campaign slogans were “red carpet, not red tape” and “minimum government, maximum governance.” There’s every reason to believe that Mr. Modi meant what he said that he intends to act accordingly.
Some would argue that New Delhi and Beijing are not friendly neighbors but geopolitical foes sharply at odds with one another. Friction, including the disputed Himalayan border, Tibet, and the inevitable competition between two rising powers dissuades the development of mutual trust and the building of robust diplomatic and economic relations. What means might they use to navigate their fraught relationship? How might a Modi administration in New Delhi transform that relationship?
The unresolved border issues between India and China are unlikely to get resolved anytime soon. As the Modi administration begins to accelerate India’s economic growth, the geopolitical rivalry between the two countries is also likely to become more intense. Importantly, too, India is solidly aligned with the U.S. and Japan, both economically and in an all-but-formal way militarily.
Notwithstanding these important sources of friction, it is critical to remember that, unlike the China-Japan relationship, the China-India relationship does not suffer from emotional baggage. Relations between the two countries are unlikely to become warm and fuzzy anytime soon. However, they are also unlikely to degenerate into mutual hatred. In short, I’d predict that both sides will continue to look at each other pragmatically. India accepts that China will soon emerge as the world’s largest economy. On its part, China accepts that it can do little to prevent India from emerging as the world’s third largest economy in 10-15 years. Thus, each side looks at the other as one of the biggest and fastest growing markets and investment destinations for its companies. Lenovo’s CEO has bluntly noted that they could never be a world leader without market leadership in India. The same goes for Shanghai Electric, Huawei and other Chinese companies.
China and India share one of the longest borders in the world. Yet, despite territorial disagreements, the guns have been silent on both sides for almost 25 years. Importantly, leaders on both sides have noted repeatedly that they anticipate an eventually peaceful resolution to these disagreements. This is a good foundation for pragmatism and to build economic ties. Interestingly, the fact that Japan is extremely serious about investing in India’s infrastructure build-up will only intensify China’s own desire to not be left out from the India game. In an unexpected (and certainly unplanned) way, India currently enjoys a favorable context. Over the next five years, China’s economy will slow down and India’s will accelerate. Thus, it is a near certainty that, within 3-5 years, India will be growing faster than China. Leaders on both sides know this and will factor these developments into their policies regarding mutual engagement.