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The Rediff Interview/Dr William T Wilson

May 09, 2005

Dr William T Wilson is a managing director and the chief economist at Keystone India, the Indian arm of the Chicago-based professional services firm LaSalle Consulting. Keystone facilitates cross-border flows of trade and investment between the US and India. From his perch, Dr Wilson tracks economic and political interactions between the two countries.

In an e-mail interview with Senior Editor Ramananda Sengupta, he explains why both India and the US need to worry about over China's rapid economic and military ascendancy, and why despite differences, New Delhi and Washington can work together in the new world order.

Apart from the fact that India started late, what are the reasons for the massive disparity in FDI received by India and China?

China's Communist Party believes that attracting FDI is the quickest way to economic development. The party has ruthlessly suppressed any domestic dissent toward this goal. With its coalition party governments and its historically protected domestic market, India has had to move much more slowly. That said, however, we believe India has reached an 'inflection point' on this very issue and the recent market liberalisation should greatly accelerate FDI to India.

China misses its chance with India

How valid are assertions that Beijing hopes to 'contain' or 'encircle' India strategically by wooing its neighbours?

As China transforms itself from a region to a global power, it will use gamesmanship to 'play off' the United States and the regional Asian powers against each other. This has the effect of neutralising or toning down any criticism or policies that might be detrimental to China's immediate regional ambitions. Take North Korea for example.

While China is obviously concerned about the impact of a refugee crisis in the event of a collapse, it also has provided that rogue state its only lifeline to occupy Washington's focus. With nuclear weapons, the reality is the United States now feels dependent upon China to broker any deal with North Korea.

Naturally, China will use Pakistan against India in the same manner.

Should Indian business, particularly the IT industry, consider China an opportunity or a threat? Why?

Absolutely not. China's nascent IT prowess is overstated. In a need to continue cost cutting, the West will increasingly use India's IT industry for its outsourcing.

India's comparative advantage in this space could only be jeopardised by reversing or slowing the pace of its economic liberalisation. Labour shortages and turnovers, however, could diminish India's cost advantage.

What will help, however, is that Indian technology is clearly moving up the value chain in terms of moving from commodity services to higher tech offerings. Also, it is far more likely that countries in Eastern Europe could emerge as credible threats to India's hegemony over services like call centres or IT driven services, rather than China.

How much of the burgeoning two-way trade between India and China is based on China's hunger for raw materials to fuel its growth?

Bilateral trade has grown from $339 million in 1992 to $13.6 billion in 2004. China is getting the better deal on trade. China's appetite for raw materials is fueling most of this growth. Minerals and raw materials (steel, iron ore, plastic) account for almost the entire rise in Indian exports to China. India's imports from China are more diversified and contain more value-added manufactured products such as electronic goods.

Chinese ogre has giant appetite!

How credible are American attempts to convince India that it can be a dependable partner? In other words, how serious is Washington about the much hyped Next Steps in Strategtic Partnership, and the pledge 'to help India become a major world power in the 21st century'?

I know Indians are sceptical on this new initiative and they have a right to be. On prior commitments, the United States has failed India before. For example, after the 1962 border war with China, the United States formed an alliance with India directed against China but this partnership faded when the US drifted away from India and engaged China in a strategic relationship aimed at containing the Soviet Union. We have now come full circle with both the United States and India worried over China's rapid economic and military ascendancy.

'India and Pakistan have not fought a major war since 1974 when India conducted a nuclear test for the first time because of the perceived nuclear capability of each side.

Nuclear weapons did the same thing for the great powers around the middle of the last century. The cost of going to war becomes too great. But this is not good enough. India and Pakistan must become more economically integrated (through bilateral trade and direct investment) before the idea of war becomes unthinkable.

The US has legal issues to resolve before it can grant India access to certain dual use technology. But why is it denying other members of the nuclear suppliers group, like France and Russia, the right to sell such tech to India?

Some of this is self-interest and some of it reflects the US' superpower responsibility of containing nuclear proliferation. Naturally the United States has a commercial interest in seeing India acquire its nuclear technology as opposed to someone else. But the issue is much more complicated than that. Both France and Russia seem to care little about the geopolitical repercussions of their arms trade.

When push comes to shove, Washington will put India's interests after Pakistan's simply because of the latter's crucial role in the war against terror.

While there is a grain of truth in that statement historically, it is not necessarily true going forward. At current growth rates, India will have the world's third largest economy within a quarter century (behind the United States and China). To ignore India's rising economic might would be foolhardy for the United States.

Much of the recent overtures by the US reflect Washington's awe at India's recent economic successes and reforms. Moreover, it could well be that Washington's future focus (which has a history of changing frequently) could shift from terrorism to containing China. India, not Pakistan, is best suited for that role.

Indian and American interests have often clashed at the UN, for instance over Palestine. How does that affect the Indo-US strategic relationship?

I think both sides are now mature enough to realise that they could work together while maintaining their own positions on certain issues. India has adopted the same tactic with Pakistan. Issues over Kashmir and terrorism do not have to precede any other conversations on trade or other issues. That said, I don't see India supporting Israel on the Palestinian issue anytime soon. At 15 percent, India's Muslim vote is a decisive swing factor that neither party can ignore.

Image: Rahil Shaikh

The Rediff Interviews

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Number of User Comments: 7

Sub: China need not be perceived as a threat.

History has suggested that the United States hardly keeps its promises and pacts. The talk of India and US needing to forge a partnership to ...

Posted by Venkat Narayanan

Sub: INDO - US relationship

Well documented and articulated. The furture of our relationships lies with the fact that it would be of great strategic advantage for USA to let ...

Posted by Kishor Jagirdar

Sub: India China FDI disparity

Your interview with Dr William T Wilson had a question about the FDI disparity between India and China. The naievety of the interviewer in this ...

Posted by Shantanu Basu

Sub: why should india worry about US ignoring India..?

Hello everybody!! Why should India worry about US ignoring India..? We should straighten our backs and look ahead at our own paths to success rather ...

Posted by Manickam

Sub: Nice piece of interview.

Both questions and the answers Dr.William gave were excellent. Of course he was correct that the growth of chinese economy is a big threat for ...

Posted by vinod


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