Why China must invest in India

At the third round of the India-China Strategic Economic Dialogue in Beijing held on March 18, it was evident that the changing demographics of both the Asian giants will dictate future collaborations. It has also revealed why China, its military assertiveness notwithstanding, is so keen to invest big in India and especially in its unique capabilities of creating affordable, appropriate, market-based products and services that work for large, poor populations.

For a while now, it has been Advantage China. China’s apparent steaming ahead of India in economic and development terms over the past two decades can be largely attributed to the country’s ability to exploit its demographic dividend. In other words, over the last 20 years, China’s workforce has been large and young, and each worker had a minimum number of dependents. In contrast, India had an older workforce during this period, with the additional burden of more dependents per worker.

This demographic profile is now shifting, as China ages and India increasingly adds young workers to its labour pool. The change is also indicated by China’s loss of more than 2 million workers last year, during which time India gained 7 million workers.

However, in China, as the population ages and wages increase, a new middle class is concurrently emerging. While both countries have a middle class population of about 250 million each, China’s improving economics has ensured that its middle class is rapidly growing, unlike India’s. The numbers in the Indian middle class segment will remain static for the foreseeable future, while China’s middle class is set to reach 600 million over the next seven years. This is equivalent to adding a new middle class consumer base of 58 million each year – the size of the entire population of the UK.

This is, of course, good news for manufacturers everywhere, including Indian manufacturers who are interested in access to the vast Chinese market.

But the changing demographics also create problems for the Chinese state. With no meaningful social welfare structure to fall back on, China has to rely on family ties among the young to support its aging population.

The Chinese middle class and middle-age-to-elderly population of 600 million will also want access to affordable, quality products and services across several markets, from healthcare to autos to utensils. An inability to meet these demands can create dissent in China. But domestic manufacturing costs are increasing, so China has to look elsewhere for the supply of such commodities.

An obvious answer is India, whose population dividend – a new, young and inexpensive labour force right at China’s doorstep – is almost tailor-made for the task. But India’s continuing struggles to adequately invest in its outdated or non-existent infrastructure, is going to be a roadblock. Building the necessary infrastructure in India will cost an estimated $1 trillion. China, meanwhile, has devised a solution – financing as much as 30% of this total requirement in India. The spate of high-profile visits of Chinese leadership and businesses to India starting from 2013, is evidence of Beijing’s serious intent.

Accordingly, the Strategic Dialogue focuses on areas where assistance from China can best be utilised. Five working groups have been established within the dialogue, and talks have concentrated on infrastructure upgrades in India. This includes operational agreements for service centres to be set up in India for Chinese power equipment, environment and resources protection, water management and policy coordination, collaboration on planning and urbanisation, and cooperation in high technology, including in the information technology sector. The two sides are also discussing collaboration on improving heavy haul transportation and redeveloping railway stations.

China’s new strategy of funding in India comes from practical and political necessity. China needs India’s workforce, and its capabilities for innovative, affordable products and services which can also be deployed in China. Without it, the Chinese middle class will become disenchanted.

So, if China was, until recently, the workforce for the globalising world, India may now become the shop-floor for the new Chinese consumerism. It may well bring the Indian economy back to a 7%-8% growth rate, just as China slows down.

Chris Devonshire is Founding Partner, Dezan Shira & Associates.

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