The China-India Conflict Highlights The Urgency For Modi To Do More To Harness India’s Advantages

Trinh D. Nguyen (Natixis) | The only country that is comparable in size to China is India, as one has 1.40bn people and the other 1.33bn people, respectively. Combined, they are home to 36 percent of the world’s population. From May until the recent truce engineered in Moscow, the China-India border dispute has threatened to fracture efforts to foster bilateral ties between the two economies, such as the India banning of Chinese apps in response to the conflict.

The tension over the summer revealed not just the growing and asymmetric role of China in India’s trade and investment but also the uneasiness of India over China’s ascent in global economic and geopolitical influence while the two started about the same spot only decades ago. In 1993, both India and China were equally poor with GDP at USD377 per capita. Fast forward to 2019, India GDP per capita rose to USD2,104 while China fast-tracked to USD10,261.

India economic underperformance is not just relative to China but its own potential, thanks to inward economic policy that favors protection of domestic firms and workers over participating more in global value chain. Within Asia, despite having a young demographic profile and relatively cheap labor, India has the lowest share of GDP in merchandise export exposure, with gross exports peaking in USD337bn in 2013. India’s participation in value chain has also weakened since 2013.

But the future can belong to India, should it choose to capture. By 2050, India population is expected to rise to 1.64bn while China to remain at 1.40bn. India’s more youthful future means its market is amongst the most lucrative in the world, as evidenced by a rise of investment by US tech firms during Covid-19 even as the economy recorded the worst GDP in Asia. Debt wise, private sector leverage in the system remains low. If anything, India has deleveraged in recent years versus China’s rising debt pile. Additionally, India is not in the crossfire of the US-China strategic competition and can gain from it should it position itself to attract investment.

Once more, we are reminded that India will need to do more to remove its own roadblocks to prosperity. The persistently high inflation despite ample food supply shows the challenges of distribution in India’s over impacted infrastructure. Whether it’s freeing the economy from protective actions to safeguard workers but diminishes job growth, Modi needs to do more to unshackle the Indian economy through more liberalization of labor and land reforms. If the China-India conflict has a silver lining, then it is India’s choice that the future is for India to capture or miss.