India vs China: Will India's democratic dividend pay off?

September 15, 2008, American financial giant, Lehman Brothers, declared itself bankrupt and plunged the world into an economic crisis, marking the onset of a meltdown that would affect almost every part of the world characterized by job cuts and crashing markets, one of the worst financial disasters of the present era. It would take the best to survive this crisis. But the global attention would soon shift towards the two most powerful survivors of this debacle- China and India. With the American economy on shaky grounds, it has given rise to widespread speculation on a shift in the global economic power equation from Chimerica to Chindia.

The 2008 financial melt down has shaken the closely guarded economic supremacy of the United States of America. It also highlighted the economic muscle of the two emerging Asian giants, China and India. As the world comes to term with the new economic order, geo-political equations are being reviewed and reworked. From the idea of Chimerica to Chindia, the axis of power is tilting towards Asia. What will be the challenges for China and India in this new multi polar or multi partner order? Will India's democratic dividend pay off?

In an interview with CNBC-TV18's Executive Editor Shereen Bhan, Raghav Bahl, Author, 'Super Power?' The amazing race between China's hare and India's tortoise, examines these issues.

Below is a verbatim transcript of the exclusive interview on CNBC-TV18. Also watch the accompanying video.

Q: Let me begin by asking you about this new geo-political economic order that we are seeing, especially coming to the fore after 2008 crisis, the fact that India and China are not just emerging as two Asian economic giants, but also as two political giants in that sense.

A: Absolutely. In this new world order that has come about in this 1980s or 1990s, economic strength and your ability to engage with the world in trade in investment flows that has become the bull work of your place in the world geo-politically. Therefore, the kind of weight today that China commands, I know it is five trillion dollar of gross domestic product (GDP) in a 65 trillion dollar world, so it may not sound that large, but China has been growing so heavily in the last decade that it has pulled the centre of gravity towards itself.

India after 2008 the financial crisis has actually been the smartest performing economy in the world, in a sense even smarter performing than China. Therefore, these two forces have pulled geo-politics towards China and India and certainly towards Asia as well.

Q: But let us talk about China, democracy be dammed, its foreign policy has been driven by economic ambition and economic muscle and the world is playing along, isn't it?

A: See China has played its foreign policy cards extremely well up until now. I think off late you may perhaps begin to see some element of over reach, But before that if you see they did in the late 70s and 80s, almost through mid 90s actually, they really had a foreign policy stance which was let us get to engage with the world, let us get capital, let us get technology, let us not try and become a big brother anywhere.

Like De Shaw Ping said make yourself obscure, hide your talent, just do it and get the world in a non-threatening way make it your partner. But ever since China has started getting economic muscle of an extraordinary sense, when I think it became a three trillion dollar economy, you also saw that Chinese assertiveness in foreign policy became a bit more or whether it was Taiwan, whether it was the South China sea, whether it was north Korea, Iran, India, India's neighbours you found that element. So, China has managed its foreign policy in conjunction with economic policy very well. It is used in a very non threatening foreign policy in the initial years to gather a lot of foreign technology, foreign capital, and trade. And then when it started getting muscle, economic muscle, it began to become more assertive about its foreign policy as well.

Q: Let's talk about the idea of Chimerica and the way that the China -America equation has evolved over the years from the 1970s to up until now, Larry Summers calls it the balance of financial terror and you have quoted that in your book as well. America needs China, China needs America, but how do you see the idea of Chimerica evolving?

A: This was a notion that Niall Ferguson in 'The Ascent of Money'. He sort of advocated and it caught on very well because if you see in the 1990s, when this whole idea of Chimerica was very much in vogue, that's the time that there was almost perfect economic co-ordination between China and America. There were small foreign policy hiccups on Taiwan essentially. But leaving out Taiwan everything else seemed to be a well orchestrated sort of partnership if you will because China was not assertive in degree.

China was far more interested in the 100s of billions of dollars of export that it did to the US, and it was far more interested in the billions of dollars of foreign investment that flew in from America. It was very interested in creating infrastructure, it was very interested in getting American dollars to be invested in its industrial infrastructure, and it was very interested in keeping its wages low, its land prices low and creating that economic surplus, which in a very smart move, it actually lent back to America. So, it's about USD 800 billion or USD 900 billion of US treasury bonds that the Chinese hold. This did two or three things. This kept the interest rates so low in America, it fueled American consumption boom, that consumption boom came back to China in terms of higher exports out of China. It was a lovely virtuous cycle at play between the two countries. That led to this build up of USD 800 - USD 900 billion of US treasury. Now, you have a bit of a problem.