The economic rationale for greater collaboration has clearly helped to push longstanding political differences aside. India’s Prime Minister, Manmohan Singh, admitted as much with his recent statement that, “ultimately, foreign policy is the outcome of economic policy”. Both sides have recently begun to talk warmly and optimistically about India-China relations. China’s rise as a global economic power is being watched with envy in India. But India is being taken seriously too as a rising power, particularly in the IT, outsourcing and services industry. Both see strong benefits in seeking to leverage off each other’s strengths by increasing trade, investment and joint technology projects.

One of the most ambitious ideas is the Chinese proposal of a Free Trade Agreement between the two countries, which, if concluded, would form the biggest free trade area in the world. This has not however elicited much enthusiasm from India, which, fearing being overrun with cheaper and better quality Chinese goods, is pushing instead for a Bilateral Investment Promotion and Protection Agreement. Although any such measures would undoubtedly, it is easy to lose sight of the fact that these developments are coming off a very low base. China is much more integrated into the world economy and less reliant on any economic agreements it may sign with India; its bilateral trade with the country accounts for only one per cent of its global trade.

In fact, the true implications of a new India-China nexus for the geo-economic balance of power go beyond any bilateral trade and investment agreements. Their growing willingness to form an effective alliance on matters of common interest or concern on the world stage is giving other nations cause for thought. Most famously, India and China played a leading role in the world trade negotiations in Cancun in 2003 among the new G-22 coalition of emerging powers, which put forward a proactive agenda to oppose the EU-US stance on agriculture. The Sino-Indian alliance was a crucial factor in the eventual collapse of the talks; and it is not difficult to imagine how similar collaboration in the future on key issues of economic governance could impact on the centre of gravity. Already there are increasing calls to involve both countries more deeply into governance institutions by expanding the G-8, reconfiguring its membership, or replacing it with a G-20 or G-22.

India and China have other reasons for collaborating on the international stage. Both countries would like to give a more prominent voice to developing countries; and despite the benefits that they have gained from globalisation, believe that the rules of the international economic and financial system are still skewed in favour of the western hemisphere. As the Indian Finance Minister, P. Chidambaram said on a recent visit to London to attend the G-8 summit of ministers – the first time that India was invited to the event: “The real question is the terms of engagement in globalisation. As of today, the terms are heavily weighted in favour of the developed countries. Millions of people in the developing countries, and in the least developed countries, watch in silence, and with a growing sense of bitterness, that the Age of Prosperity is passing them by”.

The hunger for resources in energy and raw materials to feed their growing economies is another factor motivating the two countries to seek increased ties internationally, from Africa and the Middle East to South America. Both are for the first time emerging as donors providing development aid to poorer countries, setting up a Forum on China-Africa Cooperation and an India-Africa Fund respectively to assist their efforts.

The unconventional approach that both countries have pursued towards economic development – albeit with more success in China than India – is fuelling interest internationally and rekindling old debates. Greater government involvement in the economy, captive banking sectors and less openness mark them out from the paradigm of the Washington Consensus. These policies have nevertheless helped to lift nearly 300 million people out of poverty within a decade. African leaders and state development planners increasingly talk of their interesting an alternative East Asian development paradigm. Through their increased role in global institutions or more directly by example, the combined impact of China and India will be magnified in the world economy.

At the sidelines of the Asean summit in 2004, Wen Jiabao told his Indian counterpart, Manmohan Singh: “The handshake between you and me will catch the attention of the entire world”. If India and China can continue to act in concert on the world economic stage, his words will be proved right.