Why Indian factories can compete with China only with China’s help

National security adviser Ajit Doval met Chinese foreign minister Wang Yi for the first time since 2019 last month. This get-together was previously an annual affair; but it had not been held since Indian and Chinese soldiers clashed on the border in the summer of 2020.Its resumption is another indication that Prime Minister Narendra Modi and President Xi Jinping seem to have agreed, when they spoke on the sidelines of a BRICS summit in Russia in October, to dial things down a notch.But not too much. The two armies remain entrenched on disputed mountaintops in the depths of a Himalayan winter. Nevertheless, by the standards of the past four years, this counts as a thaw. Such progress could not have been predicted even last year. The two countries had dug themselves into adversarial positions. The Chinese resented India’s increasing closeness to the US, and the Indians were furious that Beijing seemed to be determined to change the status quo on the border to its advantage.A lot has changed since then. Most importantly, both nations are more than a little concerned about how they will revive slowing growth.China’s recovery from its property sector stumbles has not been as strong as its leaders hoped. Ripples from its 2021 crisis in real estate have now spread through its economy. Less demand for new construction has impacted sectors from steel to appliances; slowdowns in these sectors combined with stumbling house prices — which might decline by more than 8% in 2024 — mean that many Chinese consumers are feeling poorer.China has over-invested in its industrial infrastructure; and now, consumer demand seems unable to absorb all that excess output. Exporting the excess is becoming difficult, as well. Some countries in Southeast Asia have enacted anti-dumping provisions targeted at imports from China.As the trade war gains momentum with Donald Trump’s arrival in the White House, economic planners in Beijing will thus be casting their eyes around for new destinations for their goods. India’s attempts to cut economic ties with China will have been identified as a problem that needs solving.India imports vast amounts of Chinese goods already; but attempts to wean itself off them intensified sharply after the border erupted in 2020. Regulatory action focused on imports for the mainland, including those being repackaged in Southeast Asia, with which India has a free trade agreement. Chinese investment into India was banned as well. Visas for Chinese citizens to visit India dried up. medium116913546But that strategy didn’t seem to be working as planned. Indian policymakers noticed that the trade deficit continued to rise. Oddly, India was importing more from China in precisely those sectors — such as electronics — where it also seemed to be improving its own competitiveness, and exporting more to the West.They should have expected that. It was a sign of success, not failure. The iPhones that Apple now builds in India will naturally have an extended supply chain that includes companies in China. The government has struggled to create new, high-quality employment for millions of young people, a problem worsened by economic growth that is at its lowest for almost two years. If these new jobs in electronics exports need India to share supply chains with China, that might be a price worth paying.Some in the government have now begun to realise that breaking free of China — by growing domestic competitiveness and finding export markets of our own — won’t happen unless we enter supply chains that our northern neighbour currently dominates.In other words, an India that manages to compete with China will only do so with China’s help. Chinese businesses may have to invest in India’s manufacturing ecosystem if it is to emerge as an effective substitute for the factories those same businesses operate on the mainland. Chinese goods will need to serve as inputs for this emerging ecosystem. Chinese businessmen will have to be able to go back and forth.None of that could happen while the border was ready to explode at any moment. And thus both countries began, tentatively, to repair their grievously damaged relationship. We are still some distance from, say, New Delhi rolling out the red carpet for a Chinese state visit. But their growth slowdown gives both sides a solid reason to strive for the return of some sort of normalcy.Yet the fundamental problem remains: Both also want different things from this thaw. The Indians want Chinese investment, inputs and for them to stop pushing on the border. The Chinese want another market, and hope they can get the Indians to be less enthusiastic participants in a future Trump administration’s attempts to isolate China politically and economically.New Delhi knows about this mismatch, and so does Beijing. But both countries’ economies are in such a hole that they are willing to overlook it — for now.