China-India: A long march to Asian Century

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More than 20 bilateral government agreements and 26 business deals – roughly valued at a total of $32 billion – concluded during India's Prime Minster Narendra Modi visit to China (May 14-16) took place in a friendly atmosphere highlighting development priorities of two big neighbors and ancient civilizations which have lived in peace and harmony for almost two millennia.

A vast range of areas covered by the proposed investments, going from infrastructure, energy, space technology and industrial parks to education, research centers and a college for yoga studies, shows enormously lucrative complementarities of the two countries which account for a quarter of the world economy and are home to more than a third of humanity.

China has the technology and financial resources that India needs, and India offers a huge and a rapidly growing market for Chinese industries looking for opportunities to expand their international operations. Both countries need peace and space in the global economic and political order to jointly develop their huge economic potential.

Relieve India's supply constraints

India could greatly benefit from China's expertise and resources in the area of infrastructure investments. Better logistics and more efficient farming would unlock India's supply constraints, improve the functioning of its labor and product markets and deliver important results for price stability, employment and economic growth.

Here is a simple example to illustrate the point.

The World Bank estimates that India's logistics costs are three times higher than the world average, and that, due to the congested road traffic, Indian trucks idle 60 percent of the time on their way to the market. As a result of that, the U.N. Food and Agriculture Organization estimates that nearly half of India's fresh produce spoils before reaching the consumer. Similarly, the Indian government calculates that about 21 million metric tons of wheat (equal to Australia's annual wheat production) is wasted each year because of inadequate distribution and storage facilities.

With food accounting for about half of Indian consumer prices, a sustainable progress toward stable inflation cannot be achieved without a more efficient infrastructure to help relieve this particular supply constraint. In the absence of such structural changes, trying to suppress high inflation with excessively tight monetary policies will prove elusive and costly in terms of growth, income and employment.

Read MoreModi wants China to 'Make in India'

China is a uniquely positioned to help. By solving the most acute segments of infrastructure problems, and with half of its 1.25 billion people below the age of 25, India could go back to a prolonged period of a 9-10 percent growth.

Will that happen?

A number of Sino-Indian transportation building and modernization projects are already under way. A feasibility study of a high-speed rail link between Delhi and Nagpur in central India (a distance of more than 1,000 km) is being prepared, and the two countries' action plan for the cooperation in the infrastructure sector has also been established.

China's investments in Indian infrastructure, manufacturing and service industries are part of an attempt to balance out the countries' bilateral trade (estimated at $71 billion in 2014). For Delhi, a $45 billion trade deficit with China is a matter that needs urgent attention. Beijing agrees and promises to work on easier access for Indian software, pharmaceutical, food and textile companies to Chinese markets.

China's leaders have also announced that they would ask their major corporations to step up investments in India. Mr. Modi has responded by assuring Chinese companies of his "personal attention" to their business operations in India during the India-China Business Forum in Shanghai last Saturday (May 16). Companies such as Alibaba (e-commerce), SANY (heavy machinery), Xiomi (electronics) and Harbin Electric (power plant equipment) have expressed interest in Mr. Modi's "Make in India" and "Digital India" projects.

Trust is also an economic variable

But there are still serious hurdles ahead.

Listening to the two countries' leaders, and reading their comments, I was struck by how much they stressed the need for greater trust and confidence in their dealings. That was also emphasized in a more formal language in their joint communiqué, which says that "the process of the two countries pursuing their respective national developmental goals and security interests must unfold in a mutually supportive manner with both sides showing mutual respect and sensitivity to each other's concerns, interests and aspirations (sic)."

Unsolved frontier problems, and assorted administrative issues, are a major irritant to such an extent that Mr. Modi invited China to work toward an early agreement that would determine "the exact location of their 2,200-mile border." That will be tough because not much progress has been achieved in 18 negotiating rounds over more than a decade.

China's close relationship with Pakistan -- a country India considers a major security threat -- is another matter of great concern to Delhi. Mr. Modi says he raised the issue of China's $46 billion worth of investment programs with Islamabad, and seems to have been reassured by Chinese leaders that these infrastructure projects don't signal any strategic shifts that should worry India.

China, for its part, has problems with India because it perceives Delhi's geopolitical leanings as potentially damaging to its security interests.

I believe that China and India will continue to clear things up in the months and years ahead. Both countries have strong leaders that will probably remain in office for the next ten years. They understand that they have to work together in the interest of their own security and economic development. Their bilateral dealings will be reinforced by multilateral consultations within BRICS, Asian Infrastructure Investment Bank (AIIB), the New Development Bank and, later this summer, within the Shanghai Cooperation Organization. India will also be working with China on the Belt and Road project connecting East Asia with Middle East, Europe and North Africa.

Investment thoughts

China and India will take some time to shake off the heavy burden of their post-WWII history. But they could do that sooner than currently expected. They want to clear the way for their economic development and for their joint project of Asian Century.

Both countries remain attractive investment destinations. You can play them directly, or, if you are particularly risk-averse, through Western companies profitably operating in these rapidly growing developing economies.