As Chinese and Indian soldiers face off on the roof of the world, there’s a bigger casualty worth contemplating: the death knell of “Chindia.”
In theory, leaders Xi Jinping of China and Narendra Modi of India could still join forces. The idea of Asia’s No. 1 and No. 3 economies cooperating more than they brawl has been a dream of statesmen dating back to Jawaharlal Nehru, India’s founding prime minister. It got renewed traction in the early 2000s, when China’s Hu Jintao and India’s Manmohan Singh reigned. Chindia was in the air in 2018 when Xi and Modi held extended talks.
Such dreams came crashing down this month after the first deadly clash between to two most populous nations in decades. It left at least 20 Indian soldiers dead (mainland troop losses aren’t known) on the Tibetan plateau, putting governments on a war footing. It also led to a series of moves sure to negatively affect economic links at the worst moment possible.
Even as coronavirus fallout fuels a global recession, the Chinese and Indian governments are one-upping each other with threats of bilateral trade restrictions and higher tariffs. India, for example, just banned the wildly popular TikTok and WeChat apps, along with nearly 60 others. The Bureau of Indian Standards is eyeing sectors from chemicals to electronics to heavy machinery to pharmaceuticals to rubber.
What Modi really should be eyeing, though, is how to limit the long-term damage to India’s economic trajectory.
Modi, an ardent nationalist, is clearly in a tough spot. Anything short of a strenuous response to this India-China standoff could damage support for his Bharatiya Janata Party. But so could shooting the economy in the foot with growth already veering negative. Fitch Ratings expects India to contract 5% this fiscal year as Covid-19 disruptions slam growth, incomes and corporate confidence.
The pandemic found an Indian economy with serious pre-existing conditions—and is exploiting them ruthlessly. One is a weak national balance sheet compounded by a bad-loan reckoning festering in the banking system. Hence Fitch recently adopted a negative outlook for New Delhi, which sits uncomfortably just one notch above junk status.
Another: the failure of Modinomics to raise India’s competitive game.
Prime Minister Modi has indeed hastened India’s reform process. Since 2014, when Modi grabbed the reigns, New Delhi’s ranking in Transparency International’s corruption perceptions index improved to No. 80 from No. 85. India has gained ground in the World Bank’s annual ease-of-doing-business survey. And that’s great.
Far less impressive, though, is India’s progress in becoming a global manufacturing power to rival—or even surpass—China. For more than six years now, Modi has been selling a “Make in India” extravaganza to create tens of millions of jobs. Yet he’s been glacial about seeing through changes to labor, land, legal and tax laws needed to give China a run for its money. And now, Modi’s retaliatory moves create an additional headwind.
How does Modi’s India aim to become an export giant when protectionist instincts rule the day? This latest Xi versus Modi dustup is unfolding against the backdrop of U.S. President Donald Trump’s trade war. Trump’s China tariffs were global headwind enough when the coronavirus began spreading the globe earlier this year. In 2019, remember, China, by far Asia’s biggest economic engine, grew at the slowest pace in 30 years.
This year, both China and India are seen contracting as Covid-19 shocks tank consumption, investment, manufacturing, mergers and acquisitions, tourism, you name it. But moves by Modi’s government to retaliate against Huawei, auto plants and hundreds of goods would take India in the wrong direction, hurting its development more than China’s.
Love it or hate it, TikTok has Facebook, YouTube and Snapchat frantically looking over their shoulders. Is it wise for New Delhi to exclude its Generation Z from the most viral video-sharing social networking platform anywhere?
All too many protectionist currents are coursing through New Delhi officialdom. Modi’s obsession with self-reliance and India’s buying local has a certain populist logic. Yet it runs counter to Modi’s biggest goal, at least officially, to attract thousands of giant factories looking to exit China. In this regard, Vietnam is cleaning up despite a population 13 times smaller than Modi’s.
Nor has Modi managed to harness his bromance with Trump in ways that shield India from what’s to come. Between now and Nov. 3, when Americans vote, expect Trump to double down on his trade war in ways that upend regional stability.
With Trump’s poll numbers tanking, lashing out abroad will surely be his go-to move to get his disastrous Covid-19 response out of the headlines. Steps Trump might take over the next four months: new taxes on Chinese goods; 25% levies on imports of cars and auto parts; banning more mainland companies or forcing some to delist from New York. What if Trump trolled Xi militarily? Sailing aircraft carriers through the South China Sea or near Taiwan would surely enrage Beijing.
As 2020 deteriorates further, Modi might rue the day he punted the really bold reforms into a future now dominated by global depression fears. That’s no reason to compound the problem with protectionist moves that feel good today, but imperil India’s future designs on rivaling China.