Strictly business

Mohan Guruswamy

Sep 02, 2014
http://www.asianage.com/columnists/strictly-business-123

The US is too broke to provide us with capital… India needs partners who can put their money where their mouths are. Only China and Japan can provide the partnerships India needs.

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

In recent months there has been a determined effort by Japan and its friends 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 theatre. A deep sea separates them and the US’ 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 China’s People’s Liberation Army. 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’s relations are old and deep, and even the fact that the two are close economic partners has 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 World War II to force change upon Japan and make it a near pacifist country almost entirely dependent on the US for its security. It was the US that brought China out of its isolation to create a new flank against the Soviet Union. It was the US’ economic engagement with China that turned it into an economic power.
But as China’s assertiveness rises and the US has to gradually withdraw from its self-assumed role as the world’s policeman with global interests, Japan is beginning to bear the brunt of this assertiveness. Japan is hence seeking new friends and emphasising common interests as India alone in Asia has the heft and size to balance Chinese power.

In 2010, China’s gross domestic product went past Japan, but Japan’s per capita GDP is 10 times more than China’s and China’s population is 10 times greater than Japan’s. In 2013, India’s PPP (purchasing power parity) 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 ageing population and a concomitant decrease in consumption, Japan needs to make investments abroad to ensure an income stream, much like a retiree who 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 is its need and ability to invest and provide technology to India, like it did in China a few decades ago.

For two countries that so distrust each other, China and Japan sure do a lot of business together. Total trade between China and Japan was almost $334 billion in 2012 and is 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 $1 trillion, of which $122.4 bn was in China. During the same period, the total Japanese FDI in India was about $20.2 bn with $2.8 bn 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 ageing 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.
The kind of investments India needs to build its infrastructure are huge and long-term. Private sector investments are much smaller. India, therefore, needs countries as economic partners. And right now the only countries with the cash reserves to be bankers to India’s plans are China and Japan. Only they can help bring our plans to fruition. China has reserves amounting almost $4 trillion and Japan has more than $1 trillion.

It would seem that India has to make a choice between China and Japan. But that’s not quite so.

Japan needs India’s hunger for technology and investment to sustain an ageing 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 labour laws and a relatively unproductive labour ethos. And it hobbles along as a high-cost producer. Its economy cannot become as powerful as China’s only on trade surpluses. It needs huge infusions of capital to transform it even into a middle-class society.

In the present scheme of things, the US 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 their 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 US.

Mr Modi starts off with the advantage that he has no cause for a special ideological or cultural affinity with the US. 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.

The writer held senior positions in government and industry, and is a policy analyst studying economic and security issues. He also specialises in the Chinese economy