Abstract
In recent years, economic data from Beijing has shown a declining GDP growth rate, high unemployment, rising deflation, and a steady trade surplus, indicating that China faces significant challenges. This article compares China's and India's economic performance using indicators such as GDP growth, unemployment, inflation, and trade balance. It signals that China's economy may not be as troubled as predicted and is not caught in a long-term downward spiral. India can learn from this situation by importing critical raw materials from China during its deflationary phase, which could help reduce India's trade deficit. Additionally, India should reassess its foreign economic policy to engage with China effectively, aiming to tap into its growing consumer market as China shifts from an export-led to a consumption-led growth strategy.
Key Words:India’s Economic Diplomacy, GDP growth rate, Unemployment Rate, Inflation Rate, and Balance of Trade
Introduction
During the 1970s, China faced severe underinvestment in several sectors. To address this issue, Deng Xiaoping introduced reforms that opened up the economy. These reforms encouraged the establishment of rural enterprises and private businesses, as well as liberalized foreign trade and investment. However, the policy focused primarily on supply, rather than demand. As a result, China’s GDP growth was driven by investment and export, rather than domestic consumption (Mishra & Rishi 2023). If China is often presumed to be pursuing power and interest-maximizing aims via its foreign economic and commercial policies and tools, then it is also often assumed that China is highly capable of achieving those aims via its economic statecraft. Two factors are especially important in such assumptions: 1) the overall size and rapid growth of China’s economy that provide ample resources for use in economic statecraft and 2) the Chinese state’s influence over the economy and in particular its control over firms and banks, especially those directly owned by the state (Matt Ferchen & Mikael Mattlin 2023: 981).
China has repeatedly emphasized that the boundary issue is not the sole aspect of China-India relations. It should be viewed in the proper context within bilateral ties and handled accordingly. However, for mercantilist China, business is the real motto. Distinguishing between malevolent and benign mercantilist tactics is crucial for comprehending the full dynamics of mercantilism. This understanding is the key to decoding the nature of Chinese mercantilism, which in turn aids in unravelling the causes of the economic slowdown in China. Malevolent mercantilism involves hostile economic warfare and expansionary policies aimed at expanding territorial or political and economic influence at the expense of other nations. On the other hand, benign mercantilism is more defensive in nature, as it aims to protect the economy against adverse economic and political forces. However, it can be difficult to distinguish between the two when the difference seems to be a matter of degree rather than kind (Balaam and Dillman, 2008:63, Robert Gilpin, 1987:33). The rise of Party-State nationalism in alignment with China indicates that the country's mercantile expansion is well-supported. Any economic deceleration appears to be a temporary reorganisation aimed at moulding the economy to achieve its mercantile objectives. This also reflects the Chinese economy’s ability to adapt, suggesting that the core economic indicators are not susceptible to short-term variations. For instance, the standoff in eastern Ladakh has led to a halt in all aspects of bilateral relations, except trade.
Moreover, China has proposed the Beijing Consensus to play the game of liberal world order using Chinese cards. Beijing Consensus focuses upon managed globalisation, industrial policy, and state capitalism. It was developed to characterise the Chinese development model. It does not claim the existence of any universal value and principle. China’s Belt and Road Initiative (BRI), sometimes referred to as the New Silk Road, seems to be the logical outcome of the Beijing Consensus at multilateral level. The BRI has been based on six principles: (1) policy coordination (2) infrastructure connectivity (3) trade (4) financial integration (5) people-to-people connections, and (6) Industrial cooperation. Basically, through the BRI, China wanted to resolve two major concerns, viz capital surplus and industrial overcapacity (Sachdeva 2023)
Thus, it was the economic might that seems to drive geopolitical narratives. India has reciprocated in kind and leveraged China's dominance in Active Pharmaceutical Ingredients (API) to bolster its pharmaceutical exports. Diplomacy is complex, encompassing various facets that shape the identity of a person or a nation. China’s pivotal role in the global arena presents an opportunity to collaborate and leverage the rise of China, rather than expanding efforts to oppose or undermine it.
Dhaval Joshi of BCA Research pointed out in a report by The Guardian that China has generated 41% of the world’s growth in the past decade, nearly twice the 22% contribution from the U.S., and way more than the 9% contribution from the euro area. This means that China has generated 1.1 percentage points of the 2.6% real growth rate of the world economy. It made up this big chunk of the global growth because its economy was growing at about 8-9% a year. Now that its growth rate is half of that — its contribution would also be halved to about 0.5 points (Larry Elliott 2023). It all shows China’s strategic economic depth and viability to establish itself as the new hub of the world economy. Furthermore, according to Chinese customs data, bilateral trade between India and China in 2021 stood at $125.66 billion US, up 43.3% from $ 87.6 billion US in 2020. The trade deficit between the two countries remained in favour of China at US$69 billion (AIR 2022). From 1995 to 2012, Germany, Europe’s economic powerhouse, enhanced its industrial value by 37%, the largest chunk of which came from the supply chains of China (Gokhale 2020). Recent studies point to Australian GDP decreasing by 0.1 to 0.2% in response to a 1% fall in Chinese GDP (Laurenceson and Zhou 2019). Furthermore, the widely discussed ‘China plus one’ narrative is also there. Contrary to popular belief, it does not imply that companies are relocating their operations from China to another location. Instead, it signifies that they are mitigating risks. 'China plus One' also refers to Chinese firms establishing branches closer to their markets, such as in Egypt and Thailand, among other regions. While the ‘China plus one’ phenomenon represents only a small portion of China's total production and exports, it is nonetheless indicative of a trend where both Chinese and multinational companies are moving away from an exclusive reliance on China-based operations. However, the China-Plus-One strategy is not about Western and global multinationals leaving China, nor is it about relocating their facilities to countries like India. Major multinationals are not significantly moving away from China; in fact, US-China trade is thriving. The essence of China-Plus-One is to seek additional options beyond Beijing. For India, the choice isn’t between import substitution and total reliance on China. Rather, India should implement a China-PlusOne approach for imports to identify alternative sources and achieve diversification.
Moreover, the global pandemic and the Russia-Ukraine conflict have jointly expedited the systemic shift that has been gradually unfolding since the 2008 financial crisis. Domestically, countries are experiencing a weakening of institutional resilience and an increase in socio-economic disparities. Internationally, there is a decline in investment in cooperative practices and institutions, a rise in inflationary competition for limited resources, and a deepening of geostrategic divisions. The shift towards protectionism, decoupling, and the weaponisation of interdependence can be attributed to both domestic political dynamics and strategic imperatives, signalling a system in dire need of upkeep and at risk of fragmentation.
These examples illustrate China’s centrality in global political economy. Moreover, For Adam Smith, ‘there is a great deal of ruin in a nation’. It means that world can ill afford a shrinking economic pie of China. When China’s growth rate rises by 1 percentage point, growth in other countries increases by around 0.3 percentage points (Diego A. Cerdeiro and Sonali Jain-Chandra 2023). China’s centrality in global political economy and limitations of investment and export- led growth strategy due to uncertain global economy might encourage it for long-needed reforms to substitute investment-led to consumption-led growth strategy to avoid the deflationary trends amid rising unemployment. Moreover, Understanding China is crucial as it has emerged as a significant player, posing challenges across all key policy domains. Evaluating Chinese influence shapes our strategies within our immediate and broader neighbourhood, influencing our stance towards other major powers and international institutions. Moreover, “strategic autonomy” and “multi-alignment” have replaced the traditional concepts of “nonalignment” for an ascending India that is poised to be the third-largest economy. An India aspiring to achieve developed nation status by 2047 warrants a fresh strategic vocabulary along with a novel geoeconomic and geopolitical syntax.
MethodologyThe proposed study will use empirical, analytical, and descriptive frameworks to analyse the long-term GDP growth rate, unemployment rate, inflation rate, and balance of trade of China and India, covering both pre-pandemic and post-pandemic periods. The analysis will serve two purposes: first, to compare the performance of these two Asian countries during a global economic slowdown, and second, to present a realistic picture of China's economic slowdown for India's economic diplomacy with China. These indicators are essential in determining the economic fundamentals of a country and justify political correctness. They also illustrate how economic determinants influence foreign economic policies.
The study’s time frame is long-term, allowing for a comparison between the pre-pandemic and post-pandemic periods. The study aims to determine how China and India performed during a global economic slowdown, with a focus on China’s economic slowdown and its implications for India’s foreign economic policy (FEP).
GDP Annual Growth Rate
China’s economy has revolved around 5 to 6% growth rate in these years. After a strong rebound in the first half of 2021, economic activity in China cooled rapidly in the second half of this year. The slowdown reflects less-favourable base effects, diminished support from exports, and the government’s continued deleveraging efforts (The World Bank, China Economic Update - December 2021: 6). As the data from the year 2014 onwards explains no significant diversion from average trend. The national economy continued to recover, and high-quality development was solidly advanced, laying a solid foundation to attain the annual development goals. China posted 4.9% growth in the July to September 2023 quarter from a year earlier, stronger than the median forecast for 4.6% (Clement 2023).
The average annual GDP growth rate in India has been 6 to 8% since 2014. As a result, it has been one of the fastest growing economies of the world. China is the only competitive country with India. There is much similarity in data points on this front. The current economic performance has slowed down, somewhat equally, in both India and China. However, GDP growth rate of India and China during pre-pandemic (FY 2018-2020) has been 5.7% and 6.5%, respectively which turned into 3.5% and 4.6%, respectively, during post-pandemic period (FY 2021- 2023).
The Indian services sector, which includes trade, hotels, transport, communication, financing, insurance, real estate, business, community, social, and personal services, is the country’s most significant and fastest-growing sector, contributing over 60% to its GDP. Agriculture, forestry, and fishing constitute 12% of the output but employ over 50% of the labour force, while manufacturing, construction, and mining, quarrying, electricity, gas, and water supply contribute 15%, 8%, and 5% respectively to the GDP (India GDP Annual Growth Rate (tradingeconomics.com). The labour force employed in agriculture, forestry, and fishing signals shifting of excess labour force to manufacturing and services. India’s FEP can engage China to advance its manufacturing sector as the latter is in the grip of deflationary phase; that can ensure imports of items in India’s import competitive sectors at competitive prices.
Unemployment Rate
China’s average unemployment rate hovers around 4.50 to 5% over the years since 2018. China's surveyed urban unemployment rate declined to 5.5% in December 2022 from November's six-month high of 5.7% amid easing zero-COVID policy restrictions. Around 70% of young people in China now go to university and so expect to get a white-collar job afterwards. They want desk jobs, staring at computers. But that's not possible (China cuts key interest rate as recovery falters - BBC News). The creation of gainful employment for an educated urban population seems to a major challenge for China. However, the theoretical proposition of the Phillips Curve argues that the deflationary trends amid unemployment leave space for increasing the employment rate through monetary and fiscal support as well as accelerated structural reforms.
India's unemployment rate increased to its highest level in over two years in 2023, primarily due to rising joblessness in rural areas, according to data from the Centre for Monitoring Indian Economy Ltd (Bhatia 2023).
In comparison to China, Indian economy has performed badly to create enough employment for its growing labour force. One of the reasons cited is the underdeveloped manufacturing sector that could have been the major source of employment drawing excess labour from agriculture, forestry, and fishing sectors.
Inflation Rate
However, China has been in quite a unique position of deflation and rising unemployment. Unlike India, where average inflation rates hovers around 4-6% over the recent years, China has barely touched an inflation rate of 2%. As such, it does not need to worry about containing inflation. Their problem is increasingly sustaining the momentum of economic growth. Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth and lead to persistent deflation. Chinese households are sitting atop the biggest pool of new savings in history — accumulating $2.6tn of bank deposits last year alone as strict anti-coronavirus policies crushed consumer spending. The anticipation of a wave of pent-up demand, with consumers opening their wallets after China shifted decisively on tackling the pandemic, is underpinning hopes for a global economic recovery (Financial Times 2023). As a measure to ease the pain the Keynesian efforts to pump priming and leveraging the economy to arouse animal spirit and effective demand in the economy are recommended. China’s central bank has cut one of its key interest rates for the second time in three months as the world's second-largest economy struggles to bounce back from the pandemic (China cuts key interest rate as recovery falters - BBC News).
In recent years, China has maintained an average inflation rate of around 2%, while India's inflation rate has ranged between 4 to 6%. However, India has experienced an average annual GDP growth rate between 6 to 8% since 2014. Despite this comfortable inflation rate and significant GDP growth rate, it is important to restructure the Indian economy to create gainful employment opportunities. Unfortunately, consumer prices in India can be volatile due to factors such as dependence on energy imports, the uncertain impact of monsoon rains on the large farm sector, poor roads and infrastructure that make it difficult to transport food to the market, and a high fiscal deficit. Imported inflation in the form of elevated global energy prices has had a large share (The Economic Times 2023). It refers that the base of inflation in India is not structural. This gives space for restructuring of the India’s trading sectors, without worrying any significant inflation rate as a result of restructuring the economy, to reap the advantages of pent-up demand of the Chinese economy.
Balance of Trade
China’s average trade surplus has been more than $50 billion US since 2014. Many countries are highly dependent on China for the imports of critical items. It has ensured China being the epicentre of global political economy. For instance, China supplies more than 90% of India’s Active Pharmaceutical Ingredient (API). Additionally, the trade between India and China touched an all-time high of USD 135.98 billion in 2022, while New Delhi's trade deficit with Beijing crossed the USD 100 billion mark for the first time despite frosty bilateral relations (The Economic Times 2023). However, the API that India imports serves as the raw material for our pharmaceutical industry. Once processed into medicines, its value increases manifold upon usage and export. China’s mercantilist practices are policies that prioritise the country’s economic interests over other countries’ interests. These practices are aimed at promoting exports and limiting imports to protect domestic industries. Consequently, China has amassed a significant trade surplus with its trading partners. For instance, according to Chinese customs data, bilateral trade between India and China in 2021 stood at 125.66 billion USD, up 43.3 per cent from 2020 when bilateral trade was worth USD 87.6 billion.
China displaced India as Bangladesh’s top trading partner in 2015 and imports from China represented 34 % of Bangladesh’s total imports in 2019 (Chengappa 2022). However, China's higher tariffs on textile and clothing discourage the imports from India thereby utilising its comparative advantage in this area. Meanwhile, a protected Chinese textile and clothing industry has led to China becoming the world’s biggest exporter of clothing accounting for 1/3rd of global exports in 2021with $176 billion far ahead of Bangladesh (2nd largest textile exporting country with $34 billion) and India (5th largest textile exporter with &16 billion) (Leading clothing exporters by value worldwide 2021 | Statista).
China’s lower MFN tariffs on raw materials and intermediates favour the development of technically advanced industries. Trade deficits can destabilise the domestic economy but importing raw materials and intermediate goods can raise domestic competitiveness, providing better access to technology and keeping inflation low. China is better suited to exporting both low and high-end manufactured items, raw materials, and minerals to India. It plays an important role in refining strategic minerals, such as nickel, copper, lithium, and cobalt, with percentages ranging from 40% to 73% (Castillo, Rodrigo & Caitlin Purdy 2022: 6-8). China's dominance in key industries raises concerns about India’s dependence and highlights its strong global economic position. According to Biswajit Dhar, there are certain reasons behind India’s widening trade deficit with China. First, the viability and mobility of the Chinese economy to shift either towards the international market or its domestic market at will. Second, China imports a lot of raw materials in the form of iron ores and metals from India and exports a lot of finished or value-added products to India (Krishnakutty 2022). India has been in the sustained trade deficits mainly due to the strong imports growth, particularly of mineral fuels, oils and waxes and bituminous substances and pearls, precious and semi-precious stones and jewellery.
Moreover, despite being the world's fastest-growing economy, India contributes merely about 2% to global merchandise exports. The untapped potential of India's manufacturing sector is a significant factor. In terms of GDP, India ranks as the third-largest economy worldwide. Its growth has primarily been driven by robust domestic demand and an expanding service sector. However, India's low merchandise exports and per-capita income continue due to its weak integration with Global Value Chains (GVCs) in manufacturing, unlike other emerging economies. India's benefits from the evolving global order have been confined mostly to assembly lines, largely because of its comparatively protectionist trade policy, which has hindered its integration into GVCs. Joining GVCs would enable Indian manufacturers to adopt the best technologies and management practices, gradually advancing up the value chain.
Furthermore, the concern and alignment of both territorial and economic securities necessitate authoritarianism and economic nationalism which illustrate mercantilism in the state’s foreign economic policy. For instance, China’s reformed company law of 1993 ordered all companies both domestic and foreign- to allow Communist Party Cells (CPC) to operate within them. On the military front, an increase of 7.2 per cent in defence allocation for 2023 over and above the national economic growth target of around 5 per cent. The increase in allocation is to strengthen the move to build PLA into a world-class military and strengthen its ability to regain the “lost territory” (Kondapalli 2023). China is becoming a mercantilist state, with a rise in Party-State, military spending, and trade surplus with South Asian partners specifically with India.
Conclusion
The current global economic slowdown across the globe signals limitations of investment and export-led growth strategy as the world is caught up with unilateralism, protectionism, decoupling, and the zero-sum game of the competitive world. This study suggests that it is premature to predict a severe, sustained economic slowdown in China. The issue is more of a cyclical problem rather than a structural problem. The recent green shoots of the Chinese economy has been noticed in terms of recovery in annual GDP growth rate and its sustained trade surplus regime. However, its performance on deflation and unemployment fronts are worrisome. As a measure of recovery, China is expected to take measures to stimulate its economy, such as improving household consumption and creating employment opportunities. It aims to shift to consumption-led from export-led growth strategy. This makes China, having a huge population with enough household savings, as one of the largest consumer market.
India needs to re-evaluate its foreign economic policy and find ways to engage with China effectively and productively so as to occupy a competitive niche in its expanding consumer market. Despite China experiencing a deflationary phase, that reduces the cost of imports, and uncertain economic growth, it still maintains a trade surplus with India and holds various comparative advantages. Therefore, it would be beneficial for India to import essential raw materials from China for its importcompetitive industries to reduce its trade deficit.
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