Speech by the Chancellor of the University of Queensland, Mr Peter Varghese AO, to the Australia India China Business Forum, Brisbane, 12 October 2016

Acknowledgements

I want to commend the organisers for their choice of theme. We rightly hear a lot about Australia’s relationship with China and India but we rarely consider them together, much less in trilateral terms.

The re-emergence of China and India as major powers and as important bilateral partners for Australia are seminal developments for Australia’s future. It is important that across government, business and the community we have a clear understanding of these relationships and what they mean for our security and prosperity.

We could spend a lot of time discussing the similarities and differences between the growth stories of China and India but one of the points I want to make today is that we need to understand each in their own terms because they are quite distinct narratives.

The China story is one of extraordinary growth. It rests on over three decades of strong economic performance with the big questions being about its future.

India, on the other hand, has always been about potential. Can it find the policies and political will to take full advantage of its demographic and democratic character?

Let me start with India in part because I know it better than China and also because we have many China experts here today, including my friend and former DFAT colleague, Geoff Raby.

India

India is today the fastest growing large economy in the world. The question, ever since India began its economic reforms in the early nineties, is can it put in place the right policies to see sustained high economic growth?

The problem has never been in identifying what those policies should be. India needs to move in the direction of less regulation, more labour market flexibility, land reform, better infrastructure and a more skilled workforce. It is the politics of reform which has always been the hard bit.

The election of the Modi government marked a shift from the politics of welfare to the politics of aspiration. Combined with a more energetic leadership, a willingness to allow more space for state governments to initiate economic reform, and a concerted effort to lift business confidence and foreign investment, Mr Modi should be given a pass grade for economic policies so far.

It seems to me that Mr Modi has chosen the path of incrementalism over radical reform and in the Indian context, where legislation needs to pass an upper house where he does not have a majority, this is sensible. The GST reforms are a good and encouraging example of what can be achieved. It is an important step forward.

India’s economic path will look quite different to the East Asian model. It is anchored in domestic consumption. Its closest historical parallel is probably the US in its industrialising phase, except that the US capital markets were deeper.

“Make in India” is not primarily designed to make for export. It is intended to take advantage of a large domestic market. But over time it will also enhance India’s export performance and provide a larger market for those who wish to export into the Indian market.

For Australia, the opportunities will lie across many areas, including in food processing, niche agriculture, and especially the resources and services sectors, although services will take time to play out. A key area for Australia will be energy resources, especially coal and gas. India has significant domestic energy reserves but the politics of land access and tribal occupancy will restrict the pace at which these resources can be exploited.

Australia is well positioned to take advantage of the gap between demand and supply in the Indian energy market. But there remains significant barriers to Australia helping to fill this gap as the slow progress in joint ventures on iron ore and coal mining demonstrate. These are some of the areas on which an Australia India FTA needs to focus.

Agriculture will be a hard ask in terms of expanded access. The politics of agriculture is such that India will likely hasten slowly in this area. But here too, as the Indian economy grows and as consumption patterns change, there will be niche opportunities for Australian exporters because with growing wealth comes shifts in consumption patterns.

India’s geopolitical repositioning has gone much further than I expected when I concluded my term as High Commissioner at the end of 2012. I thought then that we would see faster progress on the bilateral economic front than on security cooperation. It has turned out to be the reverse as the Modi government has shown a willingness to move more quickly in pushing India out of its old non-aligned mind set and establishing strategic partnerships with the US, Japan, Australia and others.

None of this however should be seen as a step away from strategic autonomy which, in my view, will remain the fundamental axis around which Indian strategic policy will turn. India is not about to become an ally of the US. But the Modi government does see much more space to expand its strategic relationships with the west while hanging on to its strategic freedom of manoeuvre.

India’s primary strategic frame of reference will remain China and this will create opportunities for India to do more with the US, Japan, Australia and the larger ASEANs such as Indonesia and Vietnam. For the most part this will be an organic process rather than any grand balancing coalition against China.

The India-China relationship will have elements of both economic cooperation and strategic competition, not unlike the way in which those two elements thread their way through China’s relationships with the US and Japan. India will want to maximise its economic relationship with China. But it will also be opposed to any move by China to become the predominant power in the Indo Pacific. And it will be particularly concerned to ensure that China’s expanding interest in the Indian Ocean is not given free reign.

What all this means for the Australia-India relationship is an opportunity to forge a strategic partnership which embraces strong economic complementarities and broadly aligned strategic interests. The trajectory of the relationship is likely to be similar to Australia’s relationship with Japan: anchored in a substantial resources trade, evolving over time into other sectors and underpinned by a mutual willingness to enhance security ties short of an alliance. The investment relationship with India, while it will grow, is however unlikely to match that which we have with Japan, at least not in the medium term. On the other hand, unlike Japan, our relationship with India now has a substantial and growing diaspora which will be an important element in the relationship.

Australian business should take heart in these broader trends which will bring our two countries closer together. But we should also be realistic about the difficulties inherent in operating in the Indian market. India ranks low in terms of ease of doing business. The Modi government is keen to change this but it will take time and structural reforms. So anyone interested in doing business with India, and especially anyone interested in doing business in India, needs large wellsprings of patience. India punishes impatience.

An FTA with India will help in terms of better market access and an easier path to investment. But the absence of an FTA is not the largest obstacle in the path of a stronger trade and investment relationship. Making it easier to do business in India requires better infrastructure, less and more consistently applied regulation, addressing corruption and giving Indian courts the resources to deal with its huge backlog of cases.

China

One of India’s great strengths is that it has a settled political system based on liberal democracy and the rule of law. The same cannot be said of China.

The biggest question about China is what will be its political and strategic settling point. How will the Chinese leadership hold on to its monopoly of political power ­– which it is determined to do – while also putting in place the far reaching economic reforms it has itself identified as essential if the Chinese economy is to continue to grow? How do you give the market a greater role in the allocation of resources while maintaining a tight grip on political control?

It is here, at the intersection of politics and economics, that the hardest challenges for China’s leaders will lie.

I had always thought that the tensions between an economy which was opening up and a polity which was tightly controlled could be managed in the Chinese context for a very long time. That may well remain the case but it seems to me that it is becoming harder to achieve. We must all hope that the Chinese leadership can nevertheless manage it because no one gains if China fails.

Much has been said of the challenges Australia will face as it manages its relationship with China and the US respectively. I do not subscribe to the view that Australia will have to make a binary choice between the US and China. But as strategic competition between the US and China sharpens, and if China continues to be dismissive of its international legal obligations in the South China Sea, it will inevitably become harder for Australia simultaneously to pursue our economic interests with China and our strategic interests with the US and in a rules based international system.

We do not know how all this is going to play out. Australia has next to no capacity to influence the direction of Chinese politics. We must continue to pursue policies designed to avoid invidious choices. But we also need to have a clear eyed understanding of our core interests, both economic and strategic. We want to see China succeed in its economic reforms and to play a constructive role in the region and the world. But we also want to see a strategic system in the Indo Pacific which is anchored in the rule of law and which recognises the stability which US strategic engagement brings to the region.

We will not know for some time whether these objectives can be achieved and it would be foolhardy to conclude now that they cannot. In the meantime we need to continue to build a close and comprehensive partnership with China which will not quickly lose its position as our largest trading partner.

This means taking maximum advantage of the opportunities opened up by the China Australia FTA. It means working hard on our domestic economic reforms so that our international competitiveness is stronger. And it means being open to investment from China because our standard of living depends on our capacity to attract foreign investment.

We have all heard about the rapidly expanding Asian middle class and the opportunities that presents for our services exports. If these projections are accurate they will over the longer term transform our trading relationships with China, India and other Asian economies such as Indonesia and Vietnam. But this will only happen if Australia is internationally competitive as a services exporter.

We know that we are internationally competitive in agriculture and resources. But our capacity in services exports, beyond education and tourism, is largely untested.

International Education

Let me now turn to China and India as markets for international education.

The budget pressures faced by Australian universities is leading all of them to put even more emphasis on attracting international students which already account for about one in four students at Australian universities.

If we are to continue to be a world leader in the export of education we will have to ensure that we maintain the high quality of Australian universities, do better at marketing to highlight our unique quality so that we are not seen as a second or third choice destination, do not lower entry standards to attract more students, offer a safe and stimulating environment for international students, provide more practical experience such as internships and placement programs, ensure our visa processes are as simple as possible and continue to recognise the linkages between international students and potential skilled migrants.

These factors apply across the board. China is of course already a very well developed market and the largest source of international students in Australia. We want to continue to nurture this market and where possible grow it including through more joint research and stronger institutional linkages through the establishment of joint research centres in areas of global importance.

But an effective international student strategy should also spread risk and not be too dependent on one source country. This is where India is important.

India faces a huge education upskilling challenge if it is to have the skills base to underpin sustained strong economic growth. So there are many opportunities for us to support this growth and meet the skills gap by providing the training needed and increasing the number of Indian students studying in Australia, not just at the undergraduate level but also in postgraduate courses. And like China we should be looking at more joint research and closer institutional linkages.

There is also enormous scope to enhance our vocational education links with India because India’s deficit in vocational education is so much larger than China’s. But here we need to find the right model for India’s needs. That is likely to be not so much study in Australia as study in India based on Australian standards and curricula.

Australia is a world leader in vocational education but we need to invert our traditional model if we are to engage more closely with India. We need to move from a low volume, high cost model to a high volume, low cost model delivered through a partnership between Australian institutions and Indian partners.

Conclusion

The re-emergence of China and India as major economies and major powers is the defining feature of our region. Their paths will be different but the consequences of their rise will be profound.

Neither will follow a linear trajectory. China’s future is perhaps more uncertain because it has yet to find its settling point as a strategic power and a political system. India’s challenge will be to translate potential into achievement.

Both China and India offer large opportunities for Australia and China’s economic growth has already been a boon to the Australian economy: perhaps the largest single contributor to the rise in Australian living standards over the last decade. India is not yet in the same league but it is the only Asian economy with the scale to match China and both have a civilizational pedigree which will add heft to their broader influence.

Australia is well placed to take advantage of the opportunities in both China and India. In both cases there are significant economic complementarities. The diasporas of each provide a bridge to business and community. And we share the challenges of ensuring that the Indo Pacific remains economically strong and strategically stable.

Getting these two relationships right will be crucial to our future.