India - China: Relations And Developments-2

[acharya]

Land of Eastern promise
Nov 19th 2009
From The Economist print edition

India's membership of Asia remains primarily cartographic

Illustration by M. Morgenstern

AN EASY but instructive way to bait an Indian economist is to credit the Chinese economy with coming to Asia’s rescue and arguably the world’s. It is, claims the economist, an example of anti-India bias. Why does India not get equal credit for robust growth? In all the frothy coverage about Asia’s amazing rebound, including in The Economist, where is India? “You’d think”, the economist complains, “that India isn’t even part of Asia.”

To what degree India’s economy is part of a vibrant Asian whole has long been a preoccupation among Indian policymakers. Now the global slowdown has given the debate a keener edge, for it has disproportionately hit the commercial markets in America and Europe to which India traditionally looks. “Look East”, long an avowed tenet of government policy, is in vogue.


There is something to the economist’s complaints. For all the credit that it gets for its recovery, China’s near double-digit show this year is mainly a command-economy extravaganza involving massive state-directed spending. When that show is over, the skew in China’s economy—an undervalued currency, a mercantilist bias in favour of manufactured exports and an obsession with accumulating foreign reserves—remains less the solution to global imbalances than one of the fundamental causes.

By contrast, though India’s annualised growth rate of around 6% this year is below China’s heady levels, it is impressive against a backdrop of global turmoil. What is more, government stimulus plays only a small part in the growth. Levels of capital and infrastructure investment compare favourably with China’s. And, much more than in China, the hot story in India is domestic demand. India is no mercantilist adding to global imbalances. It imports more than it exports, creating much needed global demand. India’s long-run growth will overtake even China’s.

All well and good. But it does not explain how much India is indeed part of Asia. Flows of foreign direct investment (FDI) suggest that the bond is ever tighter. India is now the second-most- popular global destination for FDI, behind only China, and much of this is Asian investment. Total inward investment was $23 billion in 2007 (the latest available figure), up over two-fifths on a year earlier. The target of $30 billion for 2008-09 is unlikely to be met, but inflows into India still defy the global slump.

Moreover, India is playing late catch-up with China, with FDI rising from just a few percent of China’s figure in 2000 to about a quarter today. Much of the increase has come from East Asia. Measured by flows, India is overtaking China as Japan’s biggest destination for foreign investment and, according to a survey by the Japan Bank for International Co-operation, will be the most favoured destination for long-term Japanese investments over the next decade. As for South Korea, consumer-electronics firms are driving a push into India. Cracking the rumbustious market—LG Electronics advertises in a dozen Indian languages—is the kind of offensive that Korea’s shock-troop salesmen relish.

Three years ago the then Japanese government defined a wide “arc of freedom and prosperity”, one end anchored in Japan, that took in India on its path. The new government of the Democratic Party of Japan has dropped the arc in name, but it survives in practice. India and Japan are strengthening economic and security ties. Japan sends 30% of its official aid to India and has promised over $4 billion for a “Delhi-Mumbai industrial corridor”. In South Korea, a finance-ministry bigwig says his urgent priority is to persuade young ministry high-flyers, who invariably apply for an American posting, to go to India instead.

And yet. India’s economic ties with East and South-East Asia fall short. For this columnist flying the free, prosperous arc from Tokyo to Delhi means an 18-hour schlepp via Hong Kong and Bangkok. Direct flights between Delhi and Beijing began only three years ago, and run to only four a week, with the odd supplement provided by Ethiopian Airlines.

And although India is opening some sensitive industries, such as telecoms and retail, to foreign investors, ownership limits remain. The obstacles work both ways. India’s information-technology giants, stars of international outsourcing, bang their heads in Japan and South Korea, where conglomerates’ ingrained habits of managing IT in-house persist. In trade (both goods and services), a welter of impediments persist. For instance, India’s drug companies are shut out of Japan, the world’s second-biggest market for pharmaceuticals. Auditing, advertising, textiles, medicines, you name it: one or other country has objections. Free-trade negotiations between India and Japan have dragged on for years, with no deal in sight.

The missing link
Most glaring of all, India is largely absent from those supply chains in East and South-East Asia that have come to exemplify globalisation itself. Partly that is because by the time India started to open up in the 1990s they were already established. Partly it is because Indian elites have long looked to America and then Europe for their education and business opportunities. But partly it is because of abiding suspicions of China, which happens to lie at the heart of the networks.

Some suspicions are economic. At home, small Indian businesses have lobbied to block the negotiation of a China-India free-trade agreement for fear of Chinese competition. But they are mainly geopolitical. Indeed, China’s preponderance in East Asia seems to provide the rationale for India’s “Look East” policy, and its encouragement by Japan, South Korea and Taiwan, which also seeks closer ties with India. India is welcomed in the region as China’s counterweight. On security grounds, the impetus may be justified. On economic grounds, unless surviving trade impediments are broken down, it makes for pretty lousy policy.