The oft-cited ascent of India and China and their dominance in the emerging markets as global key players seems dramatic, almost cataclysmic, or to put it mildly - rhetorical, given that not long ago the former appeared in the Western imagination as poor and backward, and the latter, a crestfallen victim to the dogmas of an unyielding Communist regime. Still, rarely has the economic ascent of two still relatively poor nations been watched with such a mixture of awe, opportunism, and uncertain apprehension. To be sure, the story of their awakening from their long Asiatic slumber has been retold a countless times with avid journalistic enthusiasm and funk.

Notwithstanding, a quick re-cap of their historical progression in vignettes is suitable.

India's slow and steady approach contrasts China's meteoric rise, and in many ways the two are as opposite as Gandhi and Mao. India is democratic, China is authoritarian. China's strengths are more visible to the world - in its impressive infrastructure or roads, modern buildings and skyscrapers and network of highways, whereas India's less so. China closed its colleges during the Cultural Revolution, and persecuted capitalists, whereas India with its vast army of engineers, doctors, scientists nurtured by its universities had better run businesses by managers who gained experience by battling it out in the local markets. India's invisible human infrastructure is what has today reconnected it to the global economy.[1]

By 1978, China's countryside was impoverished and starving for decades as a result of the communist reforms.[1] On the night of November 24, 1978, farmers of 18 households from Xiaogang, a village in east Anhui Province, signed a secret agreement using their thumb prints. They agreed to divide the land of the local commune into household plots in return for delivering fixed output quotas to the government with the condition of never asking for money or grain from the state. If the cadres went to jail for this proposition, it was agreed that the other villagers would take care of their kids. This household contract responsibility system was strictly forbidden at that time.[6] Today, the Chinese celebrate Xiaogang as the birthplace of China's rural reforms and the beginning of the nation's historic move from a government planned economy towards a modern market economy.

Mao's eventual successor Deng Xiaoping sought to advance China through modest deliberate steps, which were initially mainly experimental, and ranged from forming special economic zones and enticing foreign companies to build factories, to paving farmland into vast industrial parks and not in the least ,to laying down phone lines and IT infrastructure. Gradually, the government itself became the "capitalist roaders" they had sought to persecute a generation ago, and gradually China tiptoed away from communism into a silent economic revolution. Although Deng blew the whistle on Mao's originative ideals, he did so in fact to preserve the Communist party that Mao had brought to power when the leaders recognized the need to modernize the nation after decades of stagnation, even if it meant reversing the very essence of party doctrine and accepting capitalism to achieve it. Democracy and political freedom still remained out of question, as was the case when the government violently repressed the peaceful protest at Tienanmen Square, but China's economic freedom surged as it soared towards a Dragon economy[1].


To deliberately draw a parallel, in 1991, India was flat broke. One hundred and ten million people had been thrown into poverty in just the preceding two years. Inflation had soared to an astounding 17 percent and two in every five Indians lived below the poverty line. The government's finances collapsed and India faced a crisis. Banks had cut off India's borrowings just as they might a defaulter's credit card. India's foreign exchange reserves had fallen to levels of that would pay for only a few weeks worth of oil imports. Following Rajiv Gandhi's assassination that year, Narasimha Rao who was sworn in as prime minister chose Manmohan Singh to be the finance minister. Immediately, upon the recommendations of Mr. Singh, the government rolled out the blueprints containing the basics of political and economic reform containing many of the changes required by outsiders like the IMF, which stood ready to bail out the bankrupt state. The economic crisis finally prompted India to unleash its economy and India's historic reforms began. On Monday, July 1 1991 , Mr. Singh devalued India's currency by more than 9 percent in an effort to boost exports, paid for in much-needed foreign currency. On July 2, Commerce Minister P. Chidambaram announced he would lift long- standing restrictions on imports and make a number of structural reforms designed to further encourage exports. On July 3, the Reserve Bank of India raised interest rates to 11 percent to try to attract deposits. Meanwhile, the rupee was further devalued by 11 percent, a massive 20 percent drop against the US dollar in a span of just 3 days. On July 4, Chidambaram abolished export subsidiaries as part of an effort to trim India's budget deficit. The same day, India received a $2 billion loan from the IMF to avert the immediate crisis. Over the next two years, the government introduced a big structural reform nearly every week. State-owned banking, airline and oil industries were all opened to private investors. Mr. Singh did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors - a move that cut red tape overnight. He lowered income taxes from 56 to 40 percent by 1993. He allowed mutual funds and other institutional investors to buy shares in Indian companies on the BSE. The effect was dramatic. Debt was paid down, foreign exchange reserves built back up, and inflation dropped to manageable levels. The impact of liberalization may be gauged from the fact that total foreign investment in India grew from a minuscule US $132 million in 1991-92 to $5.3 billion in 1995-96.[1]

These reforms dizzyingly tie in to the neatly folded manufacturing and service-oriented niche sectors that China and India have respectively managed to carve out almost monopolistically for themselves, if we were to talk of a simplified world view for a moment.

Consider manufacturing. Contrary to Henry Ford's evolution of the assembly line in the early 20th century in a single factory, manufacturing today is marked by a rush by companies to break up their products into specialized sub-assemblies which they move to anywhere they can find cheap labor close to decent shipping lines. This new "disassembly line", which is the backbone of the globalization drive, lowers overall costs, improves quality and makes it easier for companies to customize products[1]. Today, many different factories are involved in the making of a single product while sophisticated technology tracks the supply-chain logistics of each part that needs to be added. With the prominence of the manufacturing might of China, many American companies have by now concluded that their role is to invent new products or market finished products instead of even attempting to compete in their manufacturing. Apple created created the iPod and markets it, but the chip that powers it was invented by PortalPlayer, a small Indian company in Hyderabad, and the devices are made in China and shipped around the world. Services have also followed the fate of the manufacturing disassembly line, particularly in India, where outsourcing has been expansively enabled by leveraging digital technologies. Alan S. Blinder, a professor of economics at Princeton University, calls this the third Industrial Revolution. The first was the shift of labor from farms to factories. The second was the shift from manufacturing to services. The third is a shift made possible by the information age[5].

No doubt, India's poor still wait for opportunity and justice in an existence fraught with ignorance, penury and disease. But India's goals remain as inspiring as they have hitherto been elusive. Ratan Tata's rear-engined city car "the Nano" and his urban flats for low income groups encapsulates the dreams of millions of Indians groping for a shot at urban prosperity. Ambani wants to build the Wal-Mart of India, creating a chain of stores across the nation to sell food produce and goods, replacing traditional mom-and-pop shops. At the same time, a modern distribution system which would get produce from ports and airports will create additional billion dollar markets for agricultural exports, by his estimates. Pushing this agenda would of course require commitment towards the long neglected transportation infrastructure in India. The Indian government must convince voters that the changes it uses to spur economic development will bring them gains, for instance that building new roads will create hundreds of thousands of construction jobs for the poor, or that allowing new retail stores to compete with traditional mom-and-pop shops will result in both lower prices and more jobs created than lost. And if the government fails to carry those arguments, it must leave it to companies like Ambani's Reliance Industries, Murthy's Infosys and Tata'a Tata group to take the lead on making those changes. To move forward in economic development, India needs to continue aggressively to put in place policies that encourage Indian and foreign companies to hire in India. According to many thought leaders, if it fails to fully unleash its economy today while it has the attention of investors from around the world, it will have a heavy price to pay both now and when its mostly nascent young population comes of age in need of jobs which need to be there to propel hundreds of millions of people out of poverty.

"Much of the elite in India still attach great importance to the village, even though none of them actually lives in one" says Nandan Nilekani, co-chairman of Infosys and chairman of the UID project in India. "In my view they are dangerously wrong. India must urbanize much more rapidly and much better than we have done so far. This is what is happening in China and what has happened in every developed country on the planet. There are fundamental problems with the Indian village. The village is unable to give its people's jobs and it never will, because reform of agriculture will mean mechanization of farming and fewer jobs. The village is a trap for the lower castes. It is a kind of prison",he says.[2]

The Indian government, beset by twenty-four party coalitions, is fragmented and often incoherent; fewer than forty million of India’s citizens have any formal employment and pay any income tax; and three hundred million people live in abject poverty. Edward Luce writes a commendable and far-reaching narrative in his study on modern India in his novel In spite of the gods, where he tackles the contradictions of the country with a mixture of bemusement, respect and exasperation. He offers an Imax view of a nation so enormous that it is seen embracing every possible contradiction and is always teetering on the edge of either greatness or the abyss. He traverses vast amounts of territory, and supplements personal encounters where he meets corrupt officials, aggrieved diplomats, and Hindu-nationalist adherents of “biofuturology”. The resulting book is stunning in its breadth, and refreshingly free of the usual exoticism.[7] India remains a country where one's admiration of the intellectual and entrepreneurial elite can be as genuine as one's dismay over the acute poverty and backwardness of the villages. In the end, Mr. Luce takes a cautiously optimistic view. “India is not on an autopilot to greatness,” he writes. “But it would take an incompetent pilot to crash the plane.”[8]

According to Robyn Meredith - author of The Elephant and the Dragon, as India and China rejoin the global economy, three big issues, besides jobs are at the forefront. First, their appetites for natural resources are skyrocketing as they get more and more industrialized. The volume of this new demand is leading to higher world prices. Their growing thirst for petroleum along with newfound economic strength is causing shifts in political alliances across the world. Secondly, now that they are richer and have new technology, both are quickly modernizing their militaries, causing shifts in geopolitics not seen since the end of the Cold War. Finally, as they industrialize, their already dire pollution is worsening, along with causing a danger to the world's environment.

Robyn further expands on the first point - even though United States remains the biggest consumer of oil by far, Asians are buying more cars and thus consuming more gas, which is helping drive oil prices up all over the world. As both countries are engaged in a desperate race for the resources they need to continue to grow, they have been cutting deals around the world to buy oil, natural gas, and even nuclear reactors. India, whose petroleum needs were met by the Soviet Union before the end of the Cold War and the financial crisis of 1991, has been in petroleum talks with Iran and Venezuela, and has even proposed a natural gas pipeline across arch-rival Pakistan. China's state owned oil companies have spent billions to buy stakes in hundreds of foreign oil companies and exploration rights in foreign oil fields, devotedly courting South American, African and Middle Eastern governments. And both have talked with the US about buying civilian nuclear power plant technology, something that was inconceivable when China was America's Cold War enemy, and unthinkable in India after its 1998 test of nuclear devices in defiance of international proliferation controls. More troublesome for the rest of the world, both India and China have been making deals with pariah states - from Sudan to Iran to Myanmar - to secure supplies of oil and other resources they desperately need to ensure growth. As a result, foreign policies of India and China are increasingly dictated by their energy needs. This drive has caused them to make up with historical enemies and to cozy up to nations led by despots or in otherwise unstable state of affairs. Sixty percent of Sudan's oil is exported to China with the proceeds helping pay for Sudanese terror. Not only has China, with Russia, blocked any UN action to stop the genocide in Sudan, it has built arms factories in Sudan and sold the war-torn nation guns, rocket-propelled grenades, tanks, helicopters and ammunition.[1]

Purportedly, a quiet arms race between the United States and China has already begun , although it is much less overt that that of the US with Russia during the Cold War. The US is racing to maintain its sizable lead, and is determined to contain China as it views it as a potential future military threat. The two are not enemies, but it is hard to imagine they will be allies when both nations see their strategic interests in conflict. Advisers to China today argue that China needs the United States economically more than the US needs China. Beijing needs American exports of technology and needs American consumers to keep buying Chinese made goods. But it is predicted that the two nations should reach parity in a decade or two, and then the US will need China economically as much, at which point China will have much more economic and military clout than it does today. This will mark a decisive shift in the global balance of power. Japan, wary of China's growing power, is rethinking its defense strategy and cozying up to the United States as a powerful military ally.

Because Americans buy more from China than China buys from the US, the Chinese government has the world's largest dollar reserves. It buys dollars, largely in the form of U.S. Treasury bonds, to keep its exchange rate steady against the dollar. China's total dollar reserves have more than quadrupled since 2002. In 2006, it held $1.1 trillion in foreign-currency reserves, more than any other nation. Because bond prices move in the opposite direction as interest rates, when Chinese bond purchases drive up demand - and this, prices for the bonds, they also put pressure on interest rates to stay low. Lower interest rates had helped to sustain this decade's housing boom, and kept credit card bills, car payments and mortgage payments low until the recent recession. American politicians argue that China has set the value of its currency about 40 percent below where it would be if it traded freely. Economists argue that the Chinese currency is undervalued by between 20 and 40 percent, with some insisting it is fairly valued[1]. Undervaluation gives a huge tailwind to Chinese exports, at a price that Wal-Mart simply cannot refuse. Some argue that the US is far too overdependent on China not just for goods but also for finance, with the massive Chinese purchases of US debt. A political spat triggered by say - a political revolt in China, changes in Chinese attitude about the US or an Asian financial crisis, could cause China to dump those huge holdings of US bonds creating a financial tidal wave the economic equivalent of firing a long-range missile at the US. Incidentally, Japan too has enormous holdings of US dollars but has been a longtime American ally with decades of political and economic stability under its belt, and more experience maneuvering a powerful economy in global financial markets, so such an attack from Japan is far less likely.[1]

It is in fact in this that serves the real motivation for Washington's recent decisions to sponsor India's great power ambitions. Because of its sheer size and the nature of its political system, India is seen as the only country that could counterbalance China's rise as a global power. The United States has looked at re-ordering their relationship with India - which today is not only a key ally in the war against terror but a counterbalance in Asia against China's dominance. In 2005, U.S diplomat Robert Blackwill said "Why should the United States want to check India's missile capability in ways that could lead to China's permanent nuclear dominance over democratic India?[9]" In July 2005, Manmohan Singh visited Washington and was offered a nuclear deal that went way beyond New Delhi's expectations. The US offered to accept India's nuclear weapons status, reinstate the export of nuclear fuel for India's civil nuclear program, and lift all remaining restrictions on the export of sensitive technologies to India. In March 2006, George Bush paid a return visit to India, agreeing to pretty much everything Indians wanted. Many in Washington and skeptics such as Australia and Japan wondered why the US had agreed to a deal that would enable India to benefit from all the advantages of belonging to a non-proliferation treaty without paying the full cost. If one ignores Bush's stated reasons for agreeing to the deal( i.e to reward India's nonproliferation record) and looks instead at the administrations underlying motive - that the deal would give India the fuel and cover to accelerate its nuclear weapons program and counterbalance that of China's, things begin to make clearer sense.

As China and India propel themselves towards their historically mammoth roles in the world economy, the global re-balancing of political power also means that they are taking their solid positions at the table of international diplomacy, which marks a new post-Cold War era, one that has decidedly moved past the ideological battle of communism versus capitalism. The tectonic shifts , while imperceptible to most of us, have taken place already. Naturally, countries such as Japan, Russia, Brazil, Germany, France and Britain will also be important players in coming decades. But in a lot of respects the world appears to be a place where relations between the three big players - US, India and China outweighs a lot of the other ties as the century unfolds. The nodal point in the triangle is, of course the United States. India, meanwhile will want to benefit from America's help without jeopardizing is relations with China. There are many possible moves in this triangular dance. And many opportunities to hem and haw.[1]
Note: This essay was compiled from the following sources:

References and readings
1. The Elephant and the Dragon - Robyn Meredith
2. In Spite of the Gods - Edward Luce
3. India after Gandhi - Ramachandra Guha
4. The argumentative Indian - Amartya Sen
5. Planet India - Mira Kamdar