The visit of the Chinese premier to India earlier this week has rekindled interest in India’s largest neighbour and once again brought to the fore the important issues that have hindered the cooperation between the two Asian giants. However, it must be said to the credit of the political leadership that despite the various irritants, the two sides have decided to forge greater economic cooperation and not let the disputed issues take the centre stage.
One reason for this is that the two economies are too large to be ignored. While the Chinese economy is more than three times that of India, the difference in per capita income is not so large. And with populations almost equally big, the potential for synergies is large, especially given that both economies are growing at more than two to three times the pace of developed countries.
To add to the advantages, the Indian and Chinese economy are differently structured, which ensures greater potential for cooperation. While the Indian economy is dominated by services, which account for more than half of the economy, the Chinese economy is dominated by industry. There are also major differences in the structure of manufacturing and trade, which also ensures complementarties.
One of India’s major strengths is that its economy is not overtly dependent on external trade like that of China. However, the size of the Chinese market and its need for resources have ensured substantially higher inflows and outflows of foreign investments, and helped it develop its capital markets much faster than India. Perhaps a key factor that has contributed to corporate sector growth is the tax regime, which ensures that highest corporate tax rates are substantially lower than those for income taxes. Whatever be the actual reasons, the real issue is whether both countries can learn from each others’ success stories and replicate them in their own economies.