Chindia, where the world's workshop meetsits office

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Chindia, where the world's workshop meets its office

By 2050, China and India will make up half of the global economy
Randeep Ramesh in Gangtok, Sikkim
Friday September 30, 2005

Guardian
Tracing a route through the folds of the eastern Himalayas,
Motilall Lakhotia is explaining how Indian trade caravans used
to ply the scenic Chumbi valley into Tibet.

"It was a big trade even then. The Tibetans sold us Indians
silver, raw wool and Chinese silk. We had manufactured goods
and cotton. Especially blue cotton, because that is what
everyone wore those days. You remember ... they called them
Mao suits," says the dapper Mr Lakhotia.

The 80-year-old businessman is one of a dying breed of Indians
who traded across the mountains. Many in Gangtok, the capital
of India's Sikkim state, which nestles in the foothills of the
Himalayas, remember a flourishing cross-border trade in wool,
machine parts and tea carried by mules supervised by resident
trade commissioners on either side.

The mountain kingdom of Sikkim was a pit stop on one of Asia's
main arterial routes linking Tibet to the nearest ports on the
Bay of Bengal. Goods were unloaded in Calcutta, driven 370
miles (600km) and then carried over mountain passes into Tibet
before being taken as far again to Lhasa. A small Chinese
community sprang up in Calcutta. Indian businessmen began
buying homes and warehouses in Yadong in China.

In 1962 all this came to an end. The frontier was sealed after
a short, bloody border conflict between Nehru's India and
Mao's China. The Silk Road - or to give it its Chinese name,
the Tea Horse route - which carried three-quarters of
Sino-Indo border trade, worth hundreds of millions of silver
dollars, was closed overnight. "When the war happened, it all
disappeared. It was a good business and everything I had built
up in seven years was gone," said Mr Lakhotia.

The hostility continued until early this decade when business
ties began to ease the wariness between the world's two most
populous nations. The value of the two-way trade has risen
from a few hundred million dollars in the mid-1990s to $13bn
(£7.4bn) last year.

Gangtok is likely to be one of the first beneficiaries of this
rapprochement. By March the first direct trade link between
India and China will be re-opened. Perched at 15,000 ft
(4,500m), Nathu La pass will resume business as the world's
highest customs post.

Huge markets

Karma Gyatso, industrial secretary in Sikkim, points out that
a recent report by the Confederation of Indian Industry said
the potential for cross-border trade could reach $10bn within
a decade. "It will be a big boost to us. We have to tackle
high levels of unemployment in the state and trade will
provide opportunities for a lot of people here."

What's happening in Sikkim is only part of what is now being
called the "Chindia effect", a phrase that has gained currency
as it dawned on analysts that if the current growth rate
persists in China and India, by 2050 the two nations will
account for roughly half of global output. The "Chindia"
region's potential of huge domestic markets - encompassing a
third of humanity - cheap highly skilled labour and
governments pursuing capital-friendly policies have led many
to conclude that the world is at a tipping point in history.

In Mapping the Global Future, a report by the National
Intelligence Council, a division of the CIA, analysts
concluded: "In the same way that commentators refer to the
1900s as the 'American Century,' the 21st century may be seen
as the time when Asia, led by China and India, comes into its
own."

Such prophecies will only be made real if both nations can
co-operate and compete peacefully. The extent to which
historic differences are now being edged aside by growing
economic links can be judged by the rising trade figures.
Trade is projected to rise to $20bn by 2008 and shoot up to
$30bn two years later. Sun Yuxi, China's ambassador to India,
told a conference recently that in the first four months this
year trade exceeded $6bn. "If it continues, we will hit our
targets ahead of schedule," he said.

At the same conference earlier this month, a trade delegation
from Jiangsu province made it clear that what interested them
most was India's software industries. "We have come to learn
from the Indian masters," Li Yuanchao, chairman of the Jiangsu
People's Congress and in effect the local party boss, told a
startled audience of Indian businessmen. Information
technology has been India's most remarkable success story. The
sector now contributes 4% of the nation's GDP and the
industry's revenues are growing by 38% a year. Analysts
predict it will have sales of $70bn by 2008.

Despite its reputation as a software superpower, India's
exports have been driven by the export of one item: iron ore.
Last year the country shipped 60m tonnes of iron ore to China,
whose voracious construction industry is gobbling up the
world's raw materials. Chinese officials have long insisted
that if their country is the workshop of the world then India
is the globe's office. The logic is that both can work
together to corner markets. Many Indian IT firms already
employ hundreds of programmers in China.

Tata Consultancy Services, one of India's biggest IT firms,
signed up with Microsoft and the Chinese government in June to
develop a global software company based in China. "We decided
to come here because of the talent," said Girija Pande, TCS's
Asia-Pacific head. "China now produces more computer science
graduates than India and we want to tap into the domestic
market, which is growing at 20% a year."

'Reform or perish'

To many experts, China offers India a role model. Indian
information technology companies made a mark because the
government avoided stifling them with regulation. Software and
outsourcing companies are exempt from restrictive labour laws
and they have been allowed to receive foreign direct
investment, which is banned in, for example, retailing.

The lesson has not been lost on India's leaders. Hardly a day
passes that its government does not invoke the "Chinese model"
to justify rolling back the state. Whether trying to usher in
flexible labour laws or setting up special economic zones to
attract foreign direct investment, officials usually back up
their policies with Chinese examples. Even leading communists
in West Bengal, who have been in power in the state for 28
years, have taken to telling comrades that everyone must
"reform or perish".

India and China are non-identical conjoined twins, joined at
the Himalayas. China's success is built on high literacy rates
and low poverty rates, ensuring that there are workers to fill
positions in the country's labour-intensive manufacturing
industry. In India, almost every second child under five is
malnourished and half of its female population cannot read.
The result is that India's economy depends on a thin sliver of
its population.

In terms of its economy, China drew on its deep reservoirs of
domestic savings to create world-class infrastructure and
sucked in enormous amounts of foreign capital to build
factories and to acquire the expertise that it required.

India, which began economic reforms a decade later, has taken
a more conventional route. There are institutions to support
private enterprise. There are established stock markets, which
operate with a greater transparency than China's. It also has
a decent legal system, albeit one that works better in theory
than practice.

"The result is that with just a 25% savings rate, we have
grown at 7%," says Jairam Ramesh, the economist and Indian MP
who coined the term "Chindia". "The Chinese have a savings
rate of 40% and managed 9% growth. It is that efficiency and
our market economy that will help us in the future to catch up
with China."
Guardian Unlimited © Guardian Newspapers Limited 2005