Sino-Indian relations will not return to normal for a long time. Diplomatic and military efforts to restore status quo ante at the Line of Actual Control (LAC) will continue. But there is a widespread consensus that Sino-Indian rivalry will ultimately be decided in the realm of economics.
China’s economic rise is associated with its export-led growth. This is why every time we have a conflict with China; there are calls for a boycott of Chinese goods. Those championing such ideas believe that our boycott will hurt China economically. Such views are, at best, half-baked. Economic competition between countries, especially ones as big as India and China, is far more nuanced. It requires long-term strategic vision. Foreign trade, at best, can only be one aspect of it. Also, military and diplomatic allies might not be willing to help when it comes to the economy.
Any serious discussion on Sino-Indian economic competition requires looking at the US-China gap and China-India gap. The former is what is driving China’s larger ambitions. The latter matters because it tells us about our ability to catch up.
China might overtake the US in terms of gross domestic product (GDP), but it will not achieve US living standards.
China’s economic growth since the 1980s is unparalleled. Between 1960 and 1980, its share of global GDP increased from 1.1% to 1.2%. By 2018, China’s share of global GDP had increased to 13%. China’s GDP was just 5% of US GDP in 1980. This increased to more than 60% by 2018. India’s gains have been more modest on this front.
The growing convergence in Chinese and American GDP has not translated itself proportionately in terms of living standards. Because China’s population is significantly more than that of the US, Chinese per capita incomes are much lower. Even though China is ranked second in terms of size of GDP, it is not even a high-income country today. The World Bank classifies China as an Upper Middle Income country. High Income countries have a Gross National Income (GNI) per capita of $12,376 or more. Upper-Middle Income countries have a GNI per capita between $3,996 and $12,375. India is among Lower Middle Income countries, which have GNI per capita of between $1,026 and $3,995. Of the 218 countries for which this classification is available, 80 are in the High Income Group. (See Chart 1 and 2)
Demographic shift will force China to recalibrate its economic strategy.
Unlike what is commonly believed in India, high population need not be an unmitigated curse for economic growth. A large population can actually create tail-winds for economic activity. This is because it also brings more working hands. Two factors determine whether this happens or not. One is the age composition of the population. This determines what share of it can actually work. The other is whether or not there are enough resources to work with.
China’s high-growth phase coincides with a favourable age composition of its population. World Bank data shows that the share of population aged between 15 and 64 years started rising sharply in China after the 1980s. This ratio was significantly higher than the US or India. It stagnated at very high levels in the last decade and has finally started declining now.
This ratio followed similar trajectory for China and India until the 1970s. It was only after China announced the One Child Policy in 1980 that the share of population below 15 years started falling and that of the 15-64 age group started rising. The strategy brought gains to China in the past. It had more workers and fewer dependents in its population. But it will extract a cost now. Thanks to the One Child Policy, the Chinese economy has been adding fewer young workers to its economy. This means that there will be more dependents and fewer workers going forward. Because India did not control its birth rates, it has a larger share of young workers and will continue to see a rise in the share of working population ratio. Developed countries like the US have a stable ratio because they are characterized by low birth and low death rates. (See Chart 3)
A falling share of working population means that China will have to keep increasing its value added per worker in order to maintain growth and improve living standards. This will require a move towards more skill-oriented jobs. For example, assembling car parts will entail a lower value added per worker than making a car engine. Where does China stand vis-a-vis the US and India on this count? World Bank gives data on sector-wise value added per worker. Even until 2000, value added per worker in China and India, when compared to the US, was almost similar. China has made rapid advances in manufacturing since then and surged ahead of India. (See Chart 4)
The sharp rise in China’s value added per worker in manufacturing is the biggest evidence of its growing technological prowess. Not all of this has come from scrupulous means. Intellectual Property Right and technology theft-related disputes have emerged as one of the biggest sources of conflict between China and the US today. If China manages to catch up with the innovation curve of the US and other high income countries, it can make rapid economic and strategic advances.
What explains China’s ability to ambush developed countries such as the US on the technology frontier? It has built a robust research and development ecosystem within its country. This can be seen in the sharp rise of patent applications filed in China, which are not only way more than India, but also the US. As can be seen, India is in no position to influence this competition at the moment. Any significant advance on this count will require a big boost to education spending in India. (See Chart 5)
Will ‘Boycott China’ help?
Any strategy to even partly severe trade ties with China must carefully evaluate the pros and cons. Such a move will hurt China by taking away a small share of its export earnings. But it will also require finding alternative sources of such imports, either domestically or internationally. An HT analysis by Vineet Sachdev using World Bank data shows that more than 50% of India’s imports from China are either capital or intermediate goods. Consumer goods, which are more likely to bear a Made in China label, have a share of less than 20%. While public opinion might be driven by the idea of boycotting consumer goods, any knee-jerk reaction can end up disrupting capital goods and intermediate goods supplies and therefore domestic value chains. To be sure, this does not mean that India should not strive for reducing its import dependence on China. However, any such policy should work via a simultaneous development of domestic capabilities which can satisfy the import demand. This will require access to funds, technology as well as export markets.
Can India hope to get the support of the anti-China bloc in such endeavours? Let us take the example of the US. The Indo-US strategic alliance is stronger than ever today. Concerns about China’s growing power have been an important driver of this alliance. This strategic concurrence, however, has not led to a convergence on economic matters. The biggest proof of this is the continuing impasse over an Indo-US trade agreement.
India’s counter-strategising against China will only succeed if we make sure that our bilateral and multilateral reactions to the recent developments maximise our gains while minimising any concessions we make for strategic support. India is a democracy unlike China. Domestic political pressures of achieving quick and radical gains will only complicate the pursuit of this objective