International Finance

China’s New Silk Road Strategy and India’s Options: Competitive Cooperation?

Written by IIEP

China and India’s percentage contribution to global GDP has grown drastically since their all-time low in the 1950s, and China is now following the same path that led Japan and South Korea to industrialize. However, as Professor Ajay Chhibber pointed out in his April 17th lecture at the Institute for International Economic Policy, the industrial transition may be more difficult for China than it was for its Asian counterparts. China’s debt has risen very sharply and its recent growth is heavily credit-driven. China is still relying heavily on an investment- and export-driven growth model, whereas it needs to rebalance and rely much more on domestic consumption to drive its future growth. Whether China will be able to maintain its growth remains to be seen. Moody’s downgraded China’s credit rating amidst growing concerns over its rapidly rising debt.

In the past, China successfully borrowed ideas, technology, and capital from abroad to fuel its development, but the One Belt One Road strategy is a major shift in its approach. Rather than look to other countries for a development roadmap as it has in the past, China is now looking to export its own models for growth, said Chhibber. China used the project in 2013 as a development strategy focused on encouraging cooperation between China and surrounding states. Chhibber called the project “a coming out party” for China, “a way to utilize the unused capacity of China externally and better balance China’s development strategy internally.” China has also established several new financial institutions to help finance this new strategy such as the AIIB, the new Development Bank (BRICS Bank), and the Silk Road Fund.

India, the other giant Asian economy, liberalized its economy in 1991 about 13 years after China. In its initial phase, it has had the same success in economic growth as in China with greater outward orientation. Whether India will be able to maintain the momentum remains to be seen. India has signed onto the new financial institutions but has not signed on to the One Belt One Road strategy, as it involves investments in disputed territory in Kashmir. India has agreed to cooperate on specific projects such as the Bangladesh-China-India-Myanmar (BCIM) economic corridor, also known as the Kolkotta-Kunming (K2K) corridor.

A rapidly growing India has also created strong competition between the two states for South Asian influence and influence in Africa and Southeast Asia. China’s growing foreign direct investment in the region would seem to indicate that it is has the lead, but remittances from India to South Asian countries tell a different story. Labor migration indicates that India has much deeper economic and cultural ties to South Asian countries than China.

Chhibber said that for the 21st century to become an Asian century India and China must cooperate with each other. India is a large and growing market for China and China runs a large trade surplus with India. Open confrontations would be disastrous for both states’ economic potential, and Chhibber said the two states need to maintain a long-term perspective focused on cooperation to avoid future conflicts. However, Chhibber said he believes the two states will only act together if they recognize the threat that each could have toward the other’s economy. Chinese FDI must increase to help Make in India and thereby reduce the trade deficit between the two countries. China must also allow Indian companies greater access to Chinese markets.

Chhibber said India needs to demonstrate how much China needs its cooperation if a more cooperative relationship is going to develop. “India has to have enough cards in the game to demonstrate that a confrontation with them would be very costly for China.”

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The Institute for International Economic Policy (IIEP), which is located within the Elliott School of International Affairs, serves as a catalyst for high quality, multi-disciplinary, and non-partisan research on policy issues surrounding economic globalization. The Institute research program helps develop effective policy options and academic analysis in a time of growing controversies about international economic integration in many countries around the world. The institute's work also encompasses policy responses for those who face continued poverty and financial crises despite worldwide economic growth. Affiliated faculty have appointments in the departments of economics, history, and political science as well as the law and business schools.

About the author

IIEP

The Institute for International Economic Policy (IIEP), which is located within the Elliott School of International Affairs, serves as a catalyst for high quality, multi-disciplinary, and non-partisan research on policy issues surrounding economic globalization. The Institute research program helps develop effective policy options and academic analysis in a time of growing controversies about international economic integration in many countries around the world. The institute's work also encompasses policy responses for those who face continued poverty and financial crises despite worldwide economic growth. Affiliated faculty have appointments in the departments of economics, history, and political science as well as the law and business schools.

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