It need not be Japan or China for India.

Mohan Guruswamy

September 1, 2014

It need not be Japan or China for India.

The Prime Minister is now in Japan, having what is evidently a good visit. His Japanese counterpart, Shinzo Abe, has left no stone unturned to make Narendra Modi feel most welcome. Later this month the Chinese President, Xi Jinping will call on Narendra Modi and make a determined effort to take India-China relations to a new level. After an economic and political drift lasting a few years, it would seem that India is once again seen as the economic opportunity not to miss and the political friend to have.

In recent months there has been a determined effort by Japan, and its many friends resident in India to bring these two Asian giants closer, to close ranks against the third and increasingly assertive giant. There is however a big difference. While China and Japan can afford to be fierce Kabuki warriors, their conflict is still mostly theater. A deep sea separates them and the USA’s great military presence ensures that Japan’s security is assured.

India on the other hand has over a quarter of a million heavily armed troops and a huge and modern air force deployed against an equally powerful PLA. At many places the forces are eyeball to eyeball. War is a hair trigger away and this is no Kabuki play. The big question for India is whether it wants any part in this drama?

The scars that blight Japan and China relations are old and deep ones, and even they’re being close economic partners have not erased them. India will do well to skirt away from this conflict and focus on serving its own interest.

It took a climactic ending of WW2 to force change upon Japan and make it a near pacifist country almost entirely dependent on the USA for its security. It was the USA that brought China out of its isolation to create a new flank against the Soviet Union. It was the US’s economic engagement with China that turned it into an economic power.

But as China’s assertiveness rises and the USA gradually has to withdraw from its self-assumed role as the world’s policeman and with global interests, Japan is beginning to bear the brunt of this assertiveness. Japan is hence seeking new friends and emphasizing common interests’ as India alone in Asia has the heft and size to balance Chinese power.

In 2010 China’s GDP went past Japan, but Japan’s per capita GDP is ten times more than Japan’s and China’s population is ten times greater than Japan’s. In 2013 India’s PPP GDP also surpassed that of Japan, but like China, India too is many times poorer than Japan in per capita terms. While Japan seems to have reached the limits of GDP growth with an aging population and a concomitant decrease in consumption, Japan needs to make investments abroad to ensure an income stream. Much like a retiree lives on pension fund incomes. It is thus actively seeking investments that will pay to sustain its high living standard. At the core of Japanese soft power are its need and the ability to invest and to provide technology to India, like it did in China a few decades ago.

For two countries that so distrust each other, they sure do a lot of business together. Total trade between China and Japan was almost $334 billion in 2012 and still growing. By contrast Indo-Japanese bilateral trade is a little under $18 billion. China imports more from Japan than any other country, and many of those goods are indispensable to China’s economic advance — high-tech components to fuel its export machine and capital equipment for its expanding industries. Since 2000 the total Japanese FDI has been almost $ One trillion of which $122.4 billion was in China. During the same period the total Japanese FDI in India was about $20.2 billion with $2.8 billion in 2012-13.

India has a propitious demographic window from now till about 2060 when it must transform itself into a modern and prosperous nation. After that the demographic situation will start turning adverse with an aging population and an increasing dependency ratio. So not only is time money, but money is also time. The time is now and ours. But we need to look for credit to build our nation.

Right now the only countries with the cash reserves to be bankers to India’s plans are China and Japan. China has reserves amounting almost $4 trillion and Japan has a little more than $1 trillion. India has to turn to both or either. Only they can lead to the fruition of our plans. The kind of investment India needs to build its infrastructure are huge and of a very long-term nature. Private sector investments are much smaller. It is therefore the governments of both the countries India needs as an economic partner.

It would seem that India has to make a choice between China and Japan? But that’s not quite so. Much as they would like to believe there is little altruism and more realism in Japan’s turn towards India. Japan needs India’s hunger for technology and investment to sustain an aging Japan, while the youthful and fast expanding Indian economy is in dire need of investment and technology to make it more productive and competitive.

Both, China and Japan, made it big by accessing the US market with their competitive advantage. They exported cheap and earned great wealth. India is hamstrung with archaic labor laws and a relatively unproductive labor ethos. And it hobbles along as a high cost producer. It cannot become an economy built by trade surpluses. It still needs huge infusions of capital to transform it into a middle class society.

In the present scheme of things, the USA is too broke to provide us with capital. It offers us a “partnership” high on rhetoric and low on substance. India needs partners who can put money where their mouths are. Only China and Japan can provide the partnerships India needs. We need not make a this-or-that choice. We can offer both of them investment destinations for their huge reserves, which at present earn them very little.

The Manmohan Singh government kept veering towards the USA. Narendra Modi starts off with the advantage that he has no cause for a special ideological or cultural affinity with the USA. Like a good Gujarati he should cut the right deal for India’s benefit. He should look at the emerging geo-politics realistically and not get sucked into having to make a choice between China and Japan. India has enough economic space for both.

Email: mohanguru@gmail.com