China and India are turning into the key engines for global growth. Although in the West, we still mostly focus on the transatlantic relationship between Europe and the U.S., the relationship between China and India will become key to understanding the future of the global economy. We will soon enter the next phase of their relationship, in which renewed competition could shake up the global order.

Our observations

  • China and India share one of the world’s longest borders. Border disputes have fueled tensions for decades, even leading to a brief war in 1962. In 2017, tensions erupted again, leading to a military stand-off at the Doklam Plateau.
  • The Indian economy is gaining ground on the Chinese economy, but it will take several decades before India catches up. India is expected to surpass the U.S. economy and become the world’s second largest economy by 2030 and India’s GDP growth rate has beaten China’s for several years
  • Besides the economy, India is becoming a great power in its own right. It is becoming a space superpower, strengthening ties with Iran against the will of the U.S. (which sees India as its most important ally to contain the rise of China), launching an alternative to China’s BRI in cooperation with Japan (The Asia-Africa Growth Corridor), and trying to build its own Digital Stack.
  • However, American and Chinese tech firms dominate most layers of the Indian Stack. Whereas American firms are dominant in cloud services, data infrastructure and platforms, Chinese tech firms own India’s smartphone market as well as the Indian app ecosystem. Four of the five top smartphone brands in India are Chinese. Xiaomi is the market leader with 28.9%, besides Vivo (14.2%), OPPO (10.2%), and Transsion (6.4%). Furthermore, as of December 2018, 44 of the top 100 apps in India are Chinese apps. Indeed, although India has the reputation of leapfrogging to digital services and has produced several success stories in digital tech, only about two million people work in IT services (less than 1% of the workforce).
  • The Indian government is considering only keeping Huawei out of vital 5G projects in border areas where India has territorial disputes with its neighbors.

Connecting the dots

During the 20th century, the world looked at the relationship between Europe and the U.S. as the most important bellwether for the global economy. However, increasingly, China and India are the key engines of global economic growth. In the 21st century, understanding the dynamics of their relationship will become much more important. What lies ahead? Some commentators point to their border disputes and expect China and India to remain fierce rivals, while others believe that they will be able to build a mutually beneficial relationship based on connectivity. In reality, the relationship between China and India is more likely to move through several phases, based on their development paths. To understand these shifts, we must first turn to their geography and history.
Unlike China, India has never been part of Eurasia. Both countries are located on the Eurasian landmass, but India is cut off from Eurasia by the Himalayas. Although these mountains have facilitated some cultural exchange (e.g. Buddhism found its way to China via the Himalayas), this is why India has never fully integrated with China. It is also why there has not been much conflict between China and India despite both being great powers. It should be noted that when tensions rose because of border disputes, even leading to a brief war in 1962, China and India were in the same phase of economic development. Contrarily, when China’s economy surged in the 1990s, border tensions eased and the relationship between China and India improved markedly as India aimed to benefit from a rising China. But in the coming years, the tide will turn again. Now that the Indian economy is picking up steam, tensions between India and China are destined to rise. Indeed, it should be no surprise that border conflict returned with a military stand-off in 2017 at the Doklam Plateau. This was not merely an incident. In fact, three geographical routes are bringing China and India closer together than ever before, which will fuel tensions between them as India’s economy is set to become the world’s second largest by 2030.
First, the border area between India and Pakistan. The Khyber Pass through these mountains is the greatest weakness of India’s security, as it facilitated conquests by Alexander the Great and tribes from Central Asia. Currently, this area is highly

contested as military clashes between India and Pakistan take place now and then (such as in the present lead-up to the Indian elections). As such, India is worried by China’s CPEC, a $62 billion infrastructure investment project that runs straight through Kashmir, an area claimed by India.
Second, the border area between India and Myanmar. The impenetrable jungle here has long separated China from India. But forests are being cut down and new infrastructure connects Myanmar to both China and India, bringing all of them closer together. For decades, China has been tightening its grip on Myanmar. Large parts of Myanmar are connected to the Chinese electricity grid, telecommunications and internet. China has also invested massively in Myanmar’s ports and energy industries in recent years. Fearing this tightening grip of China, the regime of Myanmar opened up in 2011, cancelled plans for the Chinese project of the Myitsone Dam, and instead signed a contract with India for the port of Sittwe.
Third, the Indian Ocean. China has traditionally been a continental power as it has been forced to focus on threats coming from the Eurasian landmass. But as China grows stronger, it is building a stronger maritime presence, which will put China at odds with India, traditionally the dominant maritime power in the Indian Ocean. Already, both countries are in a race for dominance in the region. Both are strengthening their military navies and signing deals with island states.
Although these three geographical routes will lead to intensified competition between China and India, their relationship will remain relatively stable during the next decade. That is because India needs China to heavily invest in creating jobs for a burgeoning population, something India cannot do on its own (which will also create massive opportunities for Chinese tech firms in India). However, when India comes closer to overtaking the U.S. economy, it will enter a maritime alliance with the U.S., Japan and Australia. This is when tensions with China will rise considerably. In the meantime, India will take steps to build its own Stack in areas now dominated by American and Chinese firms.

Implications

  • In the coming decade, Chinese firms are likely to gain much more ground in India, as the Indian government has no choice but to build a stronger economic relationship with China in order to create jobs for its burgeoning population. Already, Modi’s failure to create millions of new jobs for India’s young population may be his undoing in the upcoming elections.

  • As a first step in breaking down the dominance of foreign tech firms, the Indian government will push towards data localization. India worries that it is missing an opportunity to develop its own tech firms. Data localization legislation aim to remedy this. Foreign tech platforms which hitherto used servers located all over the world must store data locally, which means they have to build more data centers in India (Microsoft has three, Amazon has two, and Google and Oracle have one) or use local Indian data centers. Obviously, the latter, to boost the development of local Indian data centers (e.g. CtrlS), is the intended goal of data localization law. Indeed, similar data-storage requirements have forced U.S. firms in China to store data on local companies’ servers. As such, state intervention attempts to resolve the vendor lock-in of technological infrastructure.