Why China and India Need Each Other

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Witness the recent rumblings regarding import of Chinese telecom equipment and the fact that India now leads the world in filing antidumping cases against China. In the context of this two-steps-forward, one-step-back dance, we put forward four recommendations.

First, the China-India economic relationship is of utmost importance to both sides. China is upgrading the structure of its exports from labor-intensive consumer goods to technology-intensive capital goods. As India's infrastructure and manufacturing revolution continues to gather momentum, it will offer by far the largest market opportunity for Chinese machinery manufacturers. Also, within 15 to 20 years, India will almost certainly become the world's third-largest economy. It will become increasingly difficult for Chinese companies to claim global championships in their respective industries without a sizable presence in India. The same logic applies to Indian companies with global ambitions. Thus it would behoove both countries' political leaders to stay pragmatic and level-headed and not become captive to the extremist rhetoric of nationalists on both sides.

Second, India should cast aside its misguided apprehension about the trade deficit with China. It is short-sighted for the Indian government to become captive to the concerns of domestic machinery suppliers, who in any case are unable to meet the rapidly growing domestic demand. Short of heavenly intervention, there is no way India can hope to become an economic power without aggressively building and upgrading the country's infrastructure. Lower-cost machinery from China can be a massive help to India in accelerating the infrastructure and manufacturing revolution. In fact, if China wants to give the machinery away for free, India should welcome it even more. As India's infrastructure begins to become world-class, it will easily start giving China a run for the money in the very sectors where China presently has the lead—manufactured goods. India's engineering capabilities are second-to-none, and its labor costs are less than half those of China.

The Appeal of Joint Ventures

Third, India should learn from China and push to deal with it in the same way that China deals with Western companies. The message should be: Our doors are open, you are welcome, but we would like you to set up joint ventures and invest in India. Such an approach will expand the scope of economic links between the two countries to dimensions other than trade. It will also enable the flow of Chinese infrastructure capabilities and capital to India. Importantly, investment ties and joint venture partnerships will also accelerate the pace at which entrepreneurs and managers on both sides learn about and become comfortable with each other.

Finally, reliable and trusted bridges must be built to enable Chinese capital (in the $100 billion range) to find its way into India. China is a mountain of capital looking for attractive investment targets. Over the coming decade, with a target of more thatn $1 trillion in needed investment, India's infrastructure projects may provide China with the largest such opportunity.

In short, aside from machinery, Chinese capital could also emerge as India's partner in accelerating the latter's infrastructure revolution. The gulf that needs to be bridged is one of lingering mistrust, but well-established mechanisms do exist to enable parties—who do not trust each other—to do business with each other. One such mechanism is for Chinese capital to go in as a "limited partner" in India-focused infrastructure funds managed by mutually trusted third parties. After all, if China and Japan can learn to engage in a close economic dance, why not China and India, two countries that have led a much more harmonious relationship for more than 2,000 years?

Anil K. Gupta (anil.gupta@insead.edu ) is the Insead Chaired Professor of Strategy at Insead. Haiyan Wang (hwang@chinaindiainstitute.com) is managing partner of the China India Institute and an Adjunct Professor of Strategy at Insead. They are the coauthors of Getting China and India Right (Wiley, 2009) and The Quest for Global Dominance (Wiley, 2008).