China & India Face Off at Key Geopolitical Intersections in the Month of July

The “mere one-decade lag” between the two Asian economies has now become a “fifteen-year lead” for China.

China and India’s destinies converged, for a fleeting moment in history, in the late 1940s.

Image: Erum Gour/The Quint 

The First of July, Two Thousand and Twenty-One (1 July 2021), is a seminal date for China and India. One hundred years ago, the Chinese Communist Party was formed in Shanghai. Thirty years ago, India threw off its socialist yolk to embrace a free-market economy.

I borrow heavily from earlier writings and muse about key geopolitical intersections for these giant, truculent Asian neighbours.

China’s Expansionism, India’s Pacifism, Their Different Economic Destinies

China and India’s destinies converged, for a fleeting moment in history, in the late 1940s. The British parliament passed the Indian Independence Act, 1947, and royal assent was granted to free India from colonial rule on 15 August 1947. Barely over two years later, on 1 October 1949, Mao founded the People’s Republic of China at a massive rally in Beijing.

But history’s tangential moment was all too brief. China became a totalitarian state. India became a parliamentary democracy. Once again, these ancient civilisations were flung apart. The British would often pompously describe their rule as one which ‘civilised’ India. In contrast, China’s colonial history was far more turbulent under several rapacious rulers, without an ‘institutional osmosis’.

Did centuries of wars and strife make China’s leaders (and segments of the population) vengeful and expansionist? As against this, did the largely non-violent character of India’s independence movement reinforce pacifism? Did such contrarian impulses also permeate and influence their economic destinies?

China’s “Escape Velocity” Into Superpower Orbit

Tomes have been written about how Deng transformed China’s economy. In my book Superpower? The Amazing Race Between China’s Hare and India’s Tortoise (Penguin Allen Lane, 2010), I have postulated the “escape velocity” model, boosted by two engines borrowed from Soviet Union and Japan. I shall attempt to summarise my theory in a few lines. Using the extortion power of communism, China extracted massive surpluses through the 1970s-90s:

• From farmers, by expropriating their land at throwaway prices

• From workers, by keeping wages at sub-human levels

• From consumers, by keeping the yuan artificially low against the US dollar

This surplus extraction was on a scale as epic as Stalinist Russia. But then Deng sprung a twist in the tale. Unlike the Soviets, he borrowed a leaf from the Japanese economic revolution, throwing China open to foreign trade and investment. Deng used his “communist surplus” to invest in physical assets and social infrastructure on a scale hitherto unknown to mankind.

At one stage, China was investing nearly half – I will say that again – almost 50 percent of its GDP in infrastructure. He also used a good part of the surplus to woo foreign investors with cheap land, labour, and currency to become the “factory of the world”. The more the westerners exported from China, the greater the surplus they accumulated in the mainland because of the artificially depreciated yuan.

That, in a nutshell, is how Deng Xiaoping created China’s “escape velocity”, riding on twin Soviet-Japanese engines, roaring its way to prosperity and awesome power.

India’s Crisis-Induced Trade & Investment Reforms

In 1991, Saddam Hussain invaded Kuwait and triggered a debilitating “oil crisis” for India. We had to pledge 67 tonnes of gold to stave off a default on sovereign debt. Our bonds were downgraded to junk status. We had almost run out of foreign exchange to pay for critical imports.

Then the usually restrained Finance Minister Dr Manmohan Singh did a “hop, skip, and jump” (which is what the “reckless” operation was code-named). On Monday, 1 July 1991, India’s pegged rupee was devalued nine percent by a government order. It was a straw-clutching move to stop a run on rapidly dwindling foreign currency reserves. But a nervous market began to panic even more. So, two days later, on 3 July 1991, the rupee was devalued another 11 percent, with a promise to stop. That calmed the market and stanched the outflow.

Eventually, two years later, India put its tightly controlled currency on a “managed float”. As economic shocks go, this one had turned out to be bold and beautiful.

Alas, India has Fallen Behind China by Another Half-Decade

Buoyed by India’s “jump-start liberalisation” in the early 1990s, I wrote how we were “merely lagging China by a decade”. To amplify, China had become a trillion-dollar economy in 1998, and India hit that mark in 2007. Even more remarkably, India had begun to grow faster than China on a key parameter—remember, in those go-go years of high inflation and high growth, our nominal GDP was tearing away at 13-15 percent, while a debt-laden China was staring at single digits.

My hypothesis was simple (and rather “simplistic” in hindsight): India would reform aggressively to become productive, tame inflation, and streak ahead of China in real terms too.

However, that never happened. We never repaired banks’ balance sheets groaning under bad assets, hardly did anything to improve productivity, and got trapped in rent-seeking state policies.

So now, if we re-calibrate our “inter-se time lag”, China crossed 3 trillion dollars in 2006, while we would have (without covid-19) done it this year – unfortunately, the “mere one-decade lag” has now become a “fifteen-year lead” for China. Clearly, they’ve raced ahead of us by another half-decade, while we have been standing still (on a relative scale). Worse, China’s lead is accelerating since we are lumbering behind on both nominal and real GDP growth now.

India’s “Two Pulverisations” Vs China

Why have we reached such an unequal pass against China? The answer lies in “Two Pulverisations” (I am just borrowing the phraseology from two Chinese titans, ie Mao Zedong’s “The Great Leap Forward” and Deng Xiaoping’s “Four Modernisations”).

First, we got pulverised in October 1962, when China shellacked us in a brutal war to wrest Aksai Chin.

Second, from an equal per capita income in 1991, China streaked ahead to become five X—I’ll say it again, five times—our number. Today, their GDP is north of USD 15 trillion, while we are struggling south of USD 3 trillion.

If these are not “Two Pulverisations”, then what is?

But is everything lost forever? No, most certainly not.

If not equal, can we at least regain an honourable near-parity? Yes, we can (thank you, President Obama).

How? By giving up our economic defeatism and revving up to full potential.

How? By studying the big ideas which helped China pull off its economic miracle.

And then, by crafting and zealously implementing our own big ideas, driven by less government, more governance.