Let’s start on the trade. India and China are home to the world’s largest and second largest populations respectively. Their combined populations come to about 40 per cent of the people currently living in the world. Most predictions would say that the consumption of this vast shared market will be one of the main sources of growth in the coming decades. Consumption as a proportion of GDP in China is currently around 36 per cent and will have to rise as the whole economy is restructured and continues to modernise. In India, too, there is an emerging Middle Class, though far more extensive and entrenched levels of poverty than in China. For the rest of the world, finding ways to sell and reach these development and expanding markets will be critical pathways to growth.

 

　　Despite this, China and India’s bilateral trade is unbalanced. There is no Free Trade Agreement between both sides, and a current merchandise trade deficit in China’s favour of about USD40 billion. In 2012, India exported largely resources and raw materials to China, up to a value of USD20 billion. It imported machinery and other consumer goods of USD60 billion. The Indian economy is only a third the size of the Chinese one, despite starting at about the same level three decades ago. India lacks the infrastructure of China, and despite having an extensive stock market network fails to attract as much direct investment as its neighbour. In terms of investment between each country, again there is imbalance. In 2012, India had cumulative investment of USD470 million into China, and China about USD half a billion in India. An outsider looking at this would simply say that both sides could do better. Their current trade relationship is underwhelming, and despite having a Strategic and Economic Dialogue set up in 2010 which has already met several times, India only ranks as China’s 15th largest trade partners, and China is India’s seventh largest. In a world where something like 120 countries, from Australia to Germany count China as their largest trading partner that two such close and large emerging economies don’t trade more with each other is a huge anomaly.

 

　　The geopolitics don’t help. India and China share a vast border over some of the world’s most inhospitable terrain. But that doesn’t stop them from still arguing over two large segments of this border. While China has settled land border disputes with Russia, Vietnam and many other neighbours since 1949, the only two outstanding issues remain with India. Despite many discussions in the last few years, there has been little progress. For India, memories die hard. The devastating defeat in 1962 might be over half a century ago, but it left a terrible stain on India’s pride and confidence, with a comprehensive Chinese victory. Since then, while there have been skirmishes, one in 1987, there have been no reengagements in combat. This is a good thing. But despite this, the two sides lack a strong political vision of the relationship with each other, and that means they remain vulnerable to fallings out and arguments.

 

　　For China, there is no doubt that its western land borders are critically important. Robbie Barnett, Professor of Tibet Studies at Columbia University in the US stated in a recent speech in Sydney that in the last century, of all the global wars, 96 per cent had been over land borders. It is land borders where countries seek security and certainty. So the lack of solid political understanding and common ground between India and China is worrying. As a source of resources, of water, of geopolitical security, the Tibetan plateau is of immense importance to China. It is unclear at the moment how Modi might bring fresh thinking to this issue, but despite his immense mandate in the recent elections that brought him to power, he has shown a strong nationalist streak, restoring the use of Hindi language in government communication, and speaking about strengthening India’s national image. This might mean that he has the confidence to address the land border issues in a new way and offering interesting initiatives. But it might also mean he feels emboldened to stand firm and make no concessions or moves at all.

 

　　For Modi, the core issue, like his counterpart in China President Xi Jinping, is to maintain growth. Growth in India in the last few years has been from 3 to 4 per cent. In this context, a richer economic relationship with China would make sense. It is close, it has a vast market, and it already buys some of India’s high technology goods. A more diverse and freer economic relationship would make sense to India, and be a source of dynamism and growth. For Chinese investors, too, with rising labour costs in China, India offers some potential. But surveys of entrepreneurs show that so far, they see bureaucracy, poor infrastructure and a less educated work force as impediments.

 

　　India has looked at the development model China has used to lift so many hundreds of millions of people out of poverty. In a study of India by Nobel Prize winner Amaryta Sen and economic Jean Dreze published in 2013, `An Uncertain Glory: India and its Contradictions’, they show how the country remains full of potential, and how some of its separate have managed to pursue successful poverty reduction and education policies. Health has improved, gender equality in some areas has risen, and education and literacy rates have gone up. But as with China there are big differences across provinces. And as Sen and Dreze make clear, the fundamental issue is that on a per capita basis, amongst the BRICS India remains the poorest, with a level half that of China, a third that of Brazil, and a quarter of Russia. Poverty remains its greatest inhibitor, and it is as a campaigner against poverty that Modi must succeed. Where the relationship with China assists in this, then there will be harmony. This will be the most solid basis for their sustainable, stable relationship.

 

　　Like Xi Jinping, one of Modi’s initial moves has been to pursue a more plain, less wasteful government service image. According to some reports, he has walked around the government buildings in New Delhi commenting on the wastage and bureaucracy and demanding that things be improved. This down to earth image was one of his great assets in his campaign. He is an anti-elitist figure, ranged against his largest opposition, the Indian National Congress Party, the candidate of whom in the last election was from the Gandhi clan. While not yet launching the sort of anti-corruption campaign seen in the last few months in China, corruption has been a target of some of Modi’s public language. As with China, corruption creates immense public anger, and is seen as a drag on more efficient growth.

 

　　There is plenty of room in the international sphere for India and China to do better, but there is also potential for tension, beyond their border argument. Pakistan remains one of China’s most steadfast allies, but has historically very troubled relations with India. Modi’s inauguration ceremony saw the attendance by Pakistan’s president, which bodes a more tranquil future. But this is a relationship that can never be taken for granted.

 

　　India’s relations with the US too under its newly elected leader will be of core concern to China. Back in the later period of George W Bush’ presidency, around 2006 to 2007, there were signs that the US was drawing closer to India in what seemed to some analysts of be a game of triangulation. Economist journalist at the time Bill Emmett wrote a book, `Rivals’, which described the three way dynamics between Japan, China and India and the way that they would shape the future of Asia. For him, India’s liaison with the US created a perfect stranglehold, containing China along its Western border, while the US’s alliances with Japan and South Korea also managed its Eastern sea borders. The US and India underwent a number of top level visits over this period, with President Bush visiting in 2006 perhaps being the most significant. Part of this diplomacy was in recognition of India’s having become a nuclear power and needing extra attention. But it also acknowledged India’s core strategic role in what is sometimes seen as a great geopolitical game around China’s borders. The economic crisis in 2008, and the change in presidency to Obama in 2009 took the intensity out of this, but under Modi there might be increased closeness again. Modi is due to visit the US for the first time as leader later this year, and has stated publicly that as the world’s largest and second largest democracies, there is huge potential for their relationship to grow. The outcome of this visit will be closely watched in Beijing.

 

　　With the creation of a BRICS development fund however, there is a new dynamic to India China relations, and the possibility under Modi of a more nuanced relationship, and one with a greater sense of how to work together more as developing economies who have a lot to offer each other which they have yet to devise good ways to best share. India and China have many different dialogues and have signed a number of governmental memorandum’s of understanding. The main issue now is to give their relationship, under two relatively new leaders, a fresher and more suitable larger framework. There will be risks here. Distrust and cultural misunderstandings on either side are still large. There is a surprising lack of mutual understanding between two such large neighbours. But with a bit of attention, and some more official infrastructure, things could change rapidly. A key state in this process will be the planned state visit by President Xi to India later this year. This will be the opportunity to announce something broader within which to develop the relationship. Prime Minister Modi and President Xi will both see the value in upgrading relations, and they know of the ultimate importance they have for each other. The issue now after many years of dialogue and talks is how to achieve this upgrading, how to define what they both see as their expectations and goals towards each other, and what key outputs they want. This is a touch challenge, but one that neither can walk away from.

 

　　Professor Kerry Brown