Monday 24 August 2015

BITTU INDO CHINA


1. Introduction

India and China have a lot in common. Being ancient civilizations reincarnated as modern republics around the same time, both countries have lived through tumultuous times domestically and internationally. Today they have emerged as rising powers in Asia, striving to make this century as the one belonging to Asia. One of the distinctive characteristic of the relation between India and China has been the role played by extraneous actors (read Pakistan, USA and Japan).

The Sino-Indian relationship is multi-dimensional, ranging from the issue of border conflict, economic interdependence, to societal and cultural interactions, all of which can’t be dealt with in the limited space under this research paper. Thus, we will limit our analysis to the economic aspect of this relationship.

In the ensuing chapters we will try to list out the nuances of economic interactions between the two Asian giants. This will be done by underlining the historical evolution of the economic relations. In order to have a better understanding of the topic, we have solicited the help of a case study whereby an attempt is made to compare the emergence and evolution of SEZs (special economic zones), often credited with the reason behind China’s emergence as the manufacturing hub of the world, and their functioning in India and China. In the later sections, we have tried to chart out the present scenario and the contemporary issues on economic front, such as convergence on multilateral platforms like WTO as well as future avenues of cooperation (BICM corridor, Silk Route Economic Belt, Maritime Silk Route etc.)

In the final section, the future course of action for the two countries have been looked into. Whether the 21st century will belong to Asia is contingent on the question that whether the two giants will be able to look beyond their differences, which entails a deeper understanding of each other’s domestic compulsions and state-society relations.

2. Overview
2.1: Historical Legacy

While an individual has the agency to choose his/her friends and enemies, this agency of choice doesn’t translate at the macro level to the nations. A country doesn’t have any control in choosing it's neighbors. The Sino-Indian relations should be analysed in light of the above statement. Both India and China emerged as independent republics at almost the same time but reached this point via different paths- one coming out of the bounds of colonialism while other riding on a communist revolution. The future course of development adopted by the two also differed but since no country can function in isolation, the interactions between the two countries became imminent. Though there are numerous dimensions to this relationship, we will try to limit our analysis to its economic aspect only.

The legacy of relations between India and China began to change in the 1980s, with the opening of both economies. The shift in both countries from an import substitution to an export promotion strategy during the1980s, led the focus to shift gradually to economics. With the onset of the process of globalization, an added impetus was given to enhanced economic cooperation between the two nations.


2.2: Relations under the New Govt.

The Sino-Indian relationship has been infused with fresh energy following the landslide victory of BJP in May last year. The interest shown by Beijing throughout the run-up of the elections and following the announcement of the results are ominous of a new chapter in the bilateral relations. It no doubt has increased the prospects for cooperation but, at closer inspection, an increase in the probable avenues of conflict also become apparent.

China was one of the very first countries to congratulate Mr.Modi for his landslide victory. The increased enthusiasm from the Chinese has been manifested in the visits by the top-brass of the Chinese business and political leadership, including that of President Xi Jinping in September. The images of Mr.Modi and Mr.Xi strolling alongside the banks of Sabarmati river indicate a new found dynamism in the conduct of Indian foreign affairs, and also an attempt to strike a personal rapport between the two leaders.  

Let us now try to explore the reasons that elicited such positive response from Beijing.
     With a strong Centre in power in India, concrete and fast-     track decision-making is set to replace the lax and indefinite approach of the previous government, attributed to the exigencies of coalition politics.

     In light of the protracted relationship of Modi vis-a-vis USA (read Visa issue), China hoped that by bringing India closer it can stall any attempts of containment planned by USA in association with India. However, Chinese hopes seem to be quashed following an increase in the diplomatic interactions between India and USA. The Chinese dejection is reflected in the warning that it issued to India for not to be swayed by the American promises, following the Joint Statement during Obama’s visit to India earlier this year.

     Modi’s pro-business attitude is hidden to none. In his earlier stunt as the Chief Minister of Gujarat, he visited China in 2011 and established close links with the businesses there, providing them incentives to invest in the state. His government’s another flagship program, ‘Make in India’, is another step in that direction.

     China at this point of time considers India as a lesser threat. It seems to be pre-occupied with deterring the problems posed by USA and Japan. Moreover, it is also trying to project itself as the leader of the developing world and in that regard India can assist it considerably at multi-lateral platforms.                                                                                                                  

Thus, in a nutshell, it is safe to say that it is more prudent, not only for India but also China, to coalesce rather than compete against each other. This line of thinking seems to be reflected in the gradual emergence of economics as the determining factor in the Sino-Indian relationship instead of looking to resolve the border issue, for the time being.

2.3: Case Study: Shenzhen SEZ

“As of now China has only 5 SEZ while India has approved 200 and still counting. Export from only Shenzhen has crossed $ 200 Billion in 2010 which accounts for one-seventh of China's total. How come China's SEZ is this effective compared to India.” While browsing through Quora, we once came across this question prompting me to obtain a greater understanding of the issue and playing a factor in me choosing this as our topic for case study.

Anyone studying the economy must have come across the word SEZs (Special Economic Zones). It is often been argued that SEZs were the drivers of the incredible economic growth witnessed in China making it the manufacturing hub of the world. Not many of us would be aware of the fact that the first SEZ (earlier called Export Processing Zone) in Asia was set up in India in Kandla, Gujarat in 1965. However, it failed to capitalize on this relative advantage and China has been more successful in its application and appropriation of the benefits accrued out of it.

With SEZs being indispensable in Chinese case and the inability to produce identical results in India, the study of these SEZs in the Indian and Chinese case can provide a deep insight into the present state of the two economies.

In our analysis we have taken the case of Shenzhen, which is not only the earliest SEZ project in China but one of the largest in terms of geographical area it covers.
Shenzhen, an erstwhile small fishing town on the south-eastern coast of China, bordering Hong Kong, burst onto the world scene in the ‘80s following it being approved as the first SEZ project in China in 1979. Shenzhen heralded the essence and evolution of China’s earlier domestic reforms and global integration.

Socioeconomically, while adventurous individual pioneers searching for private fortune or religious freedom built the boomtowns of the old American West, Shenzhen became an ―”instant city as a result of it having been designated as a SEZ - thus its growth was propelled by a purposeful push from a powerful state. Its boom was sustained by the extended implementation of favorable policies and rapid and continued build-up of large-scale, state-financed infrastructure. Additionally, Shenzhen would not have boomed without the collective toil of many risk-taking migrant laborers.

Shenzhen is one of the largest SEZs in China, covering an expansive area of around 2000 sq. km, two times as much as Hong Kong. The establishment of Shenzhen SEZ should be seen in the light of the promulgation of Joint Venture Law, 1979, and The Regulation on Special Economic Zones, 1980. The concept of SEZs, bearing resemblance to the Export Processing Zone (EPZ) model followed in several other countries at that time, was a bold initiative for a country that perceived itself as upholding socialist ideologies. Market leaders like Huawei and Shenzhen Marine Containers Group (Ltd.) have made use of the growth prospects provided by the virtue of this area being a SEZ. In addition companies of international repute like Toshiba, Ricoh, Epson and Xerox have established high volume manufacturing hubs, that contribute 21% of their world output.

Let us now devote some time dwelling upon the reasons to uncover the success story that is Shenzhen.
     Starting from a modest population of 30,000 in 1979, it has come a long way in the last three decades with its population numbering in excess of 12 million. One important observation can be made here is that it boasts of a huge migrant population, constituting almost 83% of the total population.

     The Central Government has provided special policy environment for Shenzhen SEZ, thus creating “soft environment” to upgrade the industrial competitiveness in the city. This reflects in the special tax regime in place, especially for high-tech industries. Before 2005, the enterprises in Shenzhen SEZ enjoyed preferential revenue tax rate, i.e., 15%.

     Shenzhen is the most active city in the sector of risky investment in China. By the end of 2005, the number of risky investment organizations in Shenzhen accounts for 1/3 of China. In Shenzhen, there are Shenzhen Stock Exchange, Trading Center of Hi-Tech Equity Rights, Shenzhen SME Guarantee Center, etc.

     The infrastructure is well-established in Shenzhen. For example, its harbor ranks No.4 in the global container transportation, and its airport No.4 in terms of passenger flow. All of these conditions have built a favorable logistic environment for the upgrading of the industrial competitiveness in the city.

     Shenzhen neighbors Hong Kong, so the upgrading of the industrial competitiveness benefits from Hong Kong as the international financial center, information center and efficient intermediate service center.

However, one must keep in mind that the picture is not as rosy as it seems at the first look. Shenzhen SEZ, like most of those anywhere else, is fraught with the problems like the issue of integration and equal rights to the migrants, use of this means by private houses to acquire precious agricultural land at throwaway prices, undermining of labor rights, amongst others.

Now we are better endowed to answer the question asked at the beginning of this section – that regarding the comparison of SEZs in India and China.
     The People’s Republic of China began its tryst with SEZs in ‘80s and gained success only in ‘90s, speaking volumes about the gestation period for such initiatives. Whereas India initially started with EPZ and jumped boats only in 2005 after failure of the initial model. Hence, in essence, India being a late entrant needs some time to catch up to China.

     Difference in Size: Chinese SEZ blueprint says, Size Matters for SEZ. Shenzhen is the largest SEZ in China, as is already explained above, and is spread over 493 Sq Kms. (49,300 hectares). While the largest SEZ in India, Reliance - Navi Mumbai and Maha Mumbai SEZ, is mere 14,000 hectares. The minimum area required to set up an SEZ in India is merely 10 hectares. How can self-sustaining infrastructure be developed in such small area?
·         In China the SEZs are fully operated by the state, whereas in India the provision for operations by private enterprise and joint sector is also present.

     In China, the labor laws are relaxed whereas such a flexibility is completely absent in the Indian case.

     In China a lot of careful planning and deliberation has gone into deciding about the location of these SEZs, all located in coastal areas near business hubs like Hong Kong, Macau and Taiwan. In contrast, Indian SEZs are allocated arbitrarily which dissuades the export-oriented businesses from investing in these areas.

     Chinese mantra for success is its focus on ‘quality rather than quantity’. While China has 6 SEZs in total, India has already commissioned more than 200 SEZs with many more in the pipeline.

     Policies in Chinese SEZs are characterized with a degree of experimentation, insulating it from laws in the rest of the country with an eye on attracting investment. In Indian SEZs, the rules are dictated by fiscal sops (standard operating procedures).

     Lastly, but most importantly, Chinese SEZs are based on foreign investment whereas their Indian counterparts have failed to woo in the foreign capital and is essentially driven by local capital. Government’s ‘Make in India’ initiative which underpins a single window clearance for forign capital can go a long way in removing this lacuna.

2.3: Prospects for Cooperation in future

The sixth BRICS summit held at Fortaleza (Brazil) on 15th July provided an important platform or the first ever meeting between PM Modi and President Xi. Alluding to its significance President Xi remarked, “When India and China meet, the whole world watches”. This is no exaggeration if we take cognizance of the economic clout of China and the potential and demographic advantages of India, especially if the two countries decide to work together.

There was much enthusiasm ($100 billion investment package) before the visit of President Xi to India in anticipation of a large Chinese investment package, especially on the heels of successful Japanese visit by Modi which enabled India to secure a $35 billion Japanese investment. Though these hopes were not reciprocated completely fetching a ‘mere’ $20 billion Chinese investment, the economic relations between the two nations received a new fillip.

Let us now invest some energy to list out the avenues for future prospects of cooperation.
     In order to turn the skewed trade imbalance (amounting to almost $40 billion), China will invest into projects focusing on improving manufacturing sector in India. It includes setting up of industrial parks with the help of Chinese capital and a MoU was also signed in that regard. Also, China will modify its economic policies to facilitate Indian export of minerals and pharmaceuticals.

     China has floated the idea for several multi-national economic initiatives in the region, namely, Silk Road Economic Belt, Bangladesh India China Myanmar (BCIM) Corridor and Maritime Silk Route. However, these actions have also been perceived as expansionist tendencies in China, consequently making India a reluctant party to these engagements. For instance, the Chinese attempts to enhance its presence in the Indian Ocean region is looked at critically in India. But one must be considerate that China is doing so to safeguard its energy supplies.

     In order to counter the Western influence in financial institutions like World Bank and IMF, the BRICS nations at the Fortaleza summit New Development Bank and Contingent Reserve Agreement with an initial capital of $100 billion. The bank will be headquartered in Shanghai with India being its first President.

     China and India have continued to cooperate at the platform of WTO. Both have joined hands in unequivocally criticizing the West for following protectionist policies in the context of import of Indian and Chinese goods.

     Both India and China are proficient in the fields of services and manufacturing respectively. Thus, if the two countries can combine forces with India providing the software expertise and China supplying the hardware, their amalgamation will result into world class products.
3. Conclusion

On the whole, the complex India-China relations are undergoing a churning process. The rise of a strong nationalist party under the dynamic leadership of Prime Minister Narendra Modi, who is determined to give a big push to India’s economy through infrastructure development, will certainly resonate in the narrative of the relationship between the two countries. China seems to be an important partner in Modi’s scheme of things. India’s bonding with Japan and USA will also play out in the complex India-China relationship.

Notwithstanding the asymmetry between the two countries, China has to take into account the rising profile of India’s economy, its demographic dividend and global standing. India on its part has been very respectful to China. The goodwill and affection that PM Modi extended to President Xi during his visit to India seems to point at the establishment of an enduring personal rapport between the two.

India only stand to gain by being friendly towards its northern neighbors, not otherwise. India has neither the necessity nor capability nor even the inclination to pick up a quarrel with China. PM Modi, however knows well that while dealing with China, India cannot demand respect, but can only command respect which comes from a position of strength, and not weakness or vulnerability. The way forward for the two countries should be to promote their economic relations in the hindsight with border issue being resolved amicably through discussions, dialogues and deliberations, not letting it hinder the benefits that can be accrued though economic cooperation. A win-win relation between the countries is not an option, but the only choice.

4. References

     David M. Malone, ‘Does the Elephant Dance: Contemporary Indian Foreign Policy’
     Dr. Rup Narayan Das, ‘India-China Relations 2014: Engagement amidst Security Dilemma’, World Focus (December 2014)
     Dr. Guo Wanda, ‘Improve Industrial Competitiveness Based on SEZ Advantages: With Shenzhen SEZ as a Case Study’, China Development Institute
     Xiangming Chen and Tomas de’Medici, ‘The “Instant City” Coming of Age: China’s Shenzhen Special Economic Zone in Thirty Years’, Center for Urban and Global Studies: Trinity College, Hartford, Connecticut
     Quora, ‘What's the difference between India & China's SEZ policies?’, http://www.quora.com/Whats-the-difference-between-India-Chinas-SEZ-policies#
     K. G. Mallikarjuna, ‘A Comparative Study on Indo-China SEZs’
Mathew Southerland, ‘China-India Relations: Tensions Persist Despite Growing Cooperation’, U.S.-China Economic and Security Review Commission Staff Report December 22, 2014

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