The Asian Age

Strictly business

- Mo­han Gu­ruswamy

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 hair­trig­ger 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

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.

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

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