India and China

The international financial crisis is shaking up and reshaping many economic relationships. One at the top of that list should certainly be economic relations between India and China.

The complementarity of the two countries in the present international financial situation is evident. India has naturally been affected by the international financial crisis but its economy is still continuing to perform strongly compared to almost all other countries - while GDP growth is almost certain to have decelerated from the 7.6% year on year year increase recorded in the third quarter, India will continue to be one of the few major economies experiencing economic growth this year and India's industrial production in December was down only 2.0% year on year, which is far superior to current performance in most countries. India's macro-economic fundamentals, particularly its high savings and investment rates, continue to be strong. China continues to register economic growth and its savings and investment rates are the highest in the world.

In short, India and China will be the world's two best performing major economies in 2009 and therefore able to offer more favourable markets for each other than almost any other combination of countries.

The Indian government, however, is quite open about the fact that India cannot finance alone all the infrastructure investment it requires to sustain its rapid economic growth at present – short term and medium term project requirements by themselves amount to over $250 billion. Meanwhile India's budget deficit of 6% of GDP limits the room for manoeuvre of the government in publicly funded infrastructure development.

China, however, is not only very strong financially but also has highly experienced companies capable of leading infrastructure projects. Simultaneously India has areas of great strengths where it has achieved leads over China – in a number of service sectors led, of course, by software in which China can benefit from Indian expertise. The two economies, in short, have developed significant complementarities. Discussions between India and China governments on economic issues would therefore seem to be a high priority.

The main obstacle to this at present would seem to be circles in the US which are seeking to create tensions between India and China for political purposes and some short sighted figures in India who are prepared to go along with such an agenda. The US is, however, in no position to aid India economically or to undertake the scale of infrastructure and other economic development which India requires to sustain its growth rate. Tension between India and China therefore damages India even more than China.

Economic relations between the world's two most rapidly growing major economies will therefore be a matter of great interest during the current financial turmoil.

* * *

This article appeared on the blog Key Trends in Globalisation.