The gloves are off. India and China are battling it out. No longer is India prepared to play second fiddle to China’s economic might. In the last decade the trade surplus in China’s favour has shrunk from US$ 20 billion to a tenth of that.

This remarkable challenge by India of China’s economic dominance relies on higher value-added production, rather than just low-cost manufacturing. India was quick to focus on high-tech processes like generic drugs, sophisticated software and nanotech materials.

China has seen its low-cost advantage declining, as the growing affluence of workers saw them raising wage demands, while neighboring territories like Vietnam and Cambodia became the new lowest cost Asian suppliers. Both China and India have a surplus of engineers and biochemists, and are knocking heads ever more frequently in patent development and microprocessor design.

India also has a purely business based advantage. With the largest number of MBAs in the world, all of whom speak English, India is fast becoming the global hub for consulting and deal broking. Indian expertise provides a gateway into China’s daunting environment.

For all their rivalry, India and China quietly collaborate in many aspects of leading technology, with India providing software for Chinese computers, while China churns out components for India’s booming automotive and chemical sectors.

Ultimately it will be the country that best exploits innovation in new technologies that will forge ahead. Leading this race are Tata and Huwawei, brands that have become synonymous with Asian ingenuity and resourcefulness.

ANALYSIS >> SYNTHESIS: How this scenario came to be

The tussle between China and India
Increasing pressure on wages from workers, as well as the Chinese government’s drive to reduce the country’s dependence on exports, is slowly changing its identity as a low-cost manufacturing base. At the same time India is experiencing a boom as a manufacturing base.
Previously everyone spoke of the potentially powerful combination of India’s expertise in software and services and China’s capabilities in manufacturing, reports Knowledge@Wharton. Now there’s a twist. “China has been upping its strength in the former and India has a newfound confidence in the latter.”
The growth of Indian manufacturing at China’s expense is not only a low-cost phenomenon. Many Western companies head to India for outsourcing manufactured parts and sub-assemblies because China lacks the required expertise.
A wave of export manufacturers, big and small, are moving from China’s coastal manufacturing regions to cheaper inland provinces or out of the country altogether, in a clear sign that southern China’s days as a low-cost manufacturing powerhouse are numbered, reports Associated Press.
The potential worldwide consequences of local trends make it impossible for policymakers to ignore the Chinese labour market and its links to the global economy, writes the Financial Times. “Now that Chinese products are so important, domestic inflation in advanced economies is no longer immune from events in China,” it comments.