Bugdet Surprises !

Surprise, Surprise !

Finance Minister P Chidambaram

India’s Finance Minister P Chidambaram is a past master of surprises and he certainly lived up to his reputation with his Monday morning interim budget even if it was at the cost of a smart piece of statistical jugglery.

Ignoring MPs trying to shout him down as he read out his 17-page speech, a page shorter than that read out by President Pranab Mukherjee in his interim budget of 2009,   Chidambaram announced he had managed to squeeze Government’s fiscal deficit to 4.6 per cent against a target of 4.8 per cent of GDP, on the back of a successful auction of telecom airwaves and huge spending cuts. “Well below the red line I had drawn last year,” as he glibly told Parliamentarians.

Critics however, point out that what was left unsaid was that the Government would roll-over the fourth quarter oil subsidy bill of around Rs 35,000 crore to the next financial year, in a sleigh of hand described as `routine’ for the past few years, to keep the deficit for this year under a lid. The petroleum subsidy being paid out in 2013-14 is Rs 85,480 crore. If the Rs 35,000 crore bill which has been rolled over to the next financial year is added, the real fuel subsidy bill would have been  Rs 1,20,000 crore !

However, at the same time the finance minister has set a tough target for his successor, of pruning the deficit to 4.1 per cent of GDP for the next fiscal, while drastically reducing the amount of money available as fuel subsidy. In effect, the next Government if it tries to live up to his targets will have to run against popular opinion and cut fuel subsidy drastically or else live beyond its means. The petroleum subsidy allocated for 2014-15 stands at Rs 63,426.95 crore, of which Rs 35,000 crore will be spent on paying back subsidy due this fiscal ! In reality, this will leave the Government with just over Rs 28,000 crore to pay for the fuel subsidy for the whole financial year or about a fourth of what Chidambaram spent in a year on this count.

Stimulus : His and Mine

President Pranab Mukherjee

The finance minister’s other big announcement was of slashing of excise duty or ex-factory taxes on automobiles by a fifth to a third, which could make cars, motorcycles and sports utilities, cheaper. As well as duty cuts on capital and consumer goods from 12 per cent to 10 per cent and a slashing of duty on mobile phones from 6 to 1 per cent, if tax credit for inputs are not sought or 6 per cent with tax credits, was hailed by India’s industrial barons as  a `visionary stimulus’. The duty cuts will be available for a short period till end-June this year, possibly because a new full year budget will have to be presented by a new Government in June this year.

A number of media analysts are now gleefully pointing out that Chidambaram is replicating what his predecessor Pranab Mukherjee, now India’s President, did in 2009 when he cut excise by 4 per cent across the board. Uncomfortable for the finance minister who in the past had slammed “certain decisions that we took during the period 2009 to 2011,” (when Mukherjee was at the helm of affairs in the finance ministry) which he felt pushed the fiscal deficit upwards.

Both were gifting tax-give-aways, in the hope that it would reduce prices, revive demand and in turn bail out a faltering manufacturing sector which has been consistently shrinking for the last eight months.

Populism : Tough to Live Down

Budgets are always as much political statements as they are financial. Chidambaram tried to live up to that maxim with the few sops he announced. But more than that, he also announced sops which may prove to be financial booby-traps for his successor. Chidambaram promised a Rs 2,600 crore interest relief for 9 lakh students who took loans before end-March 2009, with the Government paying interest till end-December 2013. He also promised to to let old soldiers enjoy the benefit of a scheme which calls for `one rank, one pension’.  Some 2.4 million retired defence personnel were paid pension at differing rates depending on when they left service, creating heartburn among older soldiers.  

While this will cost him chicken feed in this financial year (an estimated Rs 500 crore), in coming years this will be a big ticket item in the defence expenditure budget and a source of headaches for Mandarins trying to balance books.

Right-drive Vision

However, the minister did more than lay out fiscal booby-traps for incoming ministers, he also laid out a long term vision for economic development with which his right-wing opponents in the BJP may have few or no quarrels. (Of course India’s Communist parties as well as regional parties would find this vision absolutely unacceptable on many grounds).

Among others, he sought reduction in fiscal deficit to 3 per cent by 2016-2017 obviously through deep subsidy cuts; a policy to encourage foreign investment without too many constraints; a balance in monetary and fiscal policies between price rise-busting and economic growth, which may mean that inflation which hits the poor more should be tolerated to let India grow faster; a slew of fiscal sector reforms which could open up banking and finance to more domestic and foreign investors; a stress on manufacturing and exports with state and central taxes on all exported goods either waived or slashed and tariff walls to incentivise domestic manufactures and most controversially - more centre-state sharing of spending on flagship programmes like job guarantee schemes and literacy. Currently these schemes are almost entirely under-written by the Centre. This move would certainly not win him any brownie points with the likes of Mamata Bannerjee or Nitish Kumar or for that matter even Karunanidhi.

Whether Chidambaram gets a chance to live through with his agenda for the future is however, something which the country would decide in the coming summer. But then the pointers will remain for the next finance minister to wade through.

India’s Defence Budget: The Chinese Challenge

Ask the dragon why she’s crawling with eight legs,

And she says, donno, I’m just doing it.

…

Ask a girl why she’s dancing in the wind,
And this is what she says:

Ask an elephant why he’s raising his trunk,
And he says, donno, I’m just doing it.

…

–      from the lyrics `Ask The Dragon’  by Yoko Ono

Just days after India announced a $ 37.4 billion defence budget for the year 2013-2014, China came out with its own official defence budget figures – at $ 119 billion, some three times its southern neighbour’s.

As late as 2000, India's budget for its armed forces at $15.9 billion more or less matched China’s officially given out figures. However, in reality even then the actual Chinese spending was estimated at three times India’s.

Today, the real Chinese defence budget is believed by many, to be nearer 4-5 times India’s. India’s defence budget rose by just 5 per cent, a sign of the difficult economic times the world and India is going through. India’s $ 1.9 trillion economy grew at its decadal low of 5 per cent, its inflation rate rose worryingly and its current account deficit or the difference between the foreign exchange earned by a country and spent by it, breached self-set limits.

However, the real difference is not just in the money figures which the two Asian rivals have put out, but in the way India and China will be spending that money.

India will continue to spend most of its money on its Army with 99,708 crore or 49 per cent of the defence budget, earmarked for the 1.2 million strong land force. Air force will get the next big chunk of money at Rs 57,503 crore. Navy the smallest service will receive Rs 36,343 crore, while the Defence Research and Development Organisation will get a paltry Rs 10,610  crore and India’s Ordinance Factories complex a tiny Rs 509 crore.

Despite a scandal brewing over purchase of VIP helicopters, the Air Force has become the most favoured wing of the defence ministry – with its share of the defence budget going up from 24.9 per cent to 28.2 per cent. Not only that, its allocation for modernisation has gone up by a whopping 30 per cent from Rs 28,504 crore for 2011-2012 to Rs 37049 crore for 2012-2013.

The Air force of course will be going to town with a huge shopping list and needs that money. Among other things, it needs to sign a contract to buy 126 French Rafale fighters, sometime later this calendar year. It also plans to sign deals to buy heavy lift CH-47F Chinook heavy lift helicopters, Boeing Apache longbow attack helicopters and Airbus tanker transporters.

The favour to the air force has meant the Navy and Army’s modernisation plans have received cuts by 2.8 per cent and 3.5 per cent respectively. Last year, some 31 per cent of the Rs 79,198 crore capital budget for the defence forces had been earmarked for Indian Navy, hitherto the most neglected of India’s armed forces as part of a strategy to build up India’s outreach to partly protect sea lanes used by its merchantmen, especially energy tankers which feed India’s growing appetite for crude oil and partly to counter China’s growing naval presence.

However, the real problem with Indian defence spending is that relies heavily on foreign weapon purchases – compared to the Chinese who depend more on domestic manufacture. This means India gets a) fewer aircraft or tanks or weapons for the money both countries spend. b) Their spares have to be continuously bought and c) there is always a fear of disruption of supplies because of the vagaries of foreign relations.

While India has been busy buying the C 130J Hercules heavy lift aircraft, China has been busy producing its Y-20 heavy lift aircraft, with a maximum payload of 66 tonnes and capable of flying 4,400 km. The aircraft is based on Russia’s workhorse – the Ilyushin series and still uses old Russian engines and is certainly not as sophisticated as the US built  Hercules. However, nevertheless, its functional – does the same job and costs a fraction of Hercules’s price and is paid for in China’s own currency.

C 130 J Hercules being inducted in the IAF

Similarly, while India hankers for Chinook helicopters, the Chinese have come out with the 13.8-ton AC313 heavy lift helicopter. Unveiled last year, this aircraft is a larger and modified version of the 7-ton Zhi-8 medium transport helicopter that is a close copy of the French SA 321 Super Frelon. China had bought 13 of the French helicopters in the 1970s and at least one was reportedly disassembled for study and reverse-engineering.

 India, despite its head-start in aircraft manufacturing, having started making aircraft in the 1940s and jet engines in the 1950s, has proved itself incapable of even reverse engineering the many makes of aircraft it has bought and makes under license.

The story with tanks is no different. Despite grand announcements, the Arjun main battle tank has proven to be a flop story. Just under 50 of them have been built and no regiment equipped with these home-made tanks. India still depends on old Russian T-72s and the slightly `newer’ T-90s.

Despite having bought the 155 mm  Bofors howitzer guns in the late 1980s along with the technology, domestic politics, saw projects to build them locally shelved for decades. This year, at long last the Indian army has placed orders with Ordinance Factory Board to build 114 of them with slight modifications.

Bofors Gun in action at Kargil

Contrast this with the Chinese model. Besides, the heavy lift aircraft, Beijing has succesfully reverse engineered Russia’s Sukhoi aircraft and America’s stealth technology. Its J-20 and J-31 aircraft may be doubted by western analysts, but like most Chinese take-aways these advanced fighter jets are likely to be value for money products, though not as advanced as their western counterparts.

Just one and half decade back, China like India, was a major importer of weapons. However, in the last decade and a half, it very consciously worked to `catch up’. It reverse engineered British missiles, worked on Soviet era fighter jet platforms to work in improvements. It used students and scientists sent abroad on exchange programmes to spy on rival systems, a few of which were openly available, some commercially buyable.  It hired out-of-work Soviet weapons scientists and specialists and restructured its own defence research and production labyrinths. 
The Middle Kingdom has also strategised by coming up with innovative ideas to take on its arch rival – the US – whose military size, strength and spending - dwarfs everyone else. Beijing is believed experimenting with `bugs’ in telecom and power equipment which could cause power and communication systems in client countries to collapse. It has again reportedly trained armies of hackers who can play havoc with computer based command and control systems in a wide range of areas and is perfecting satellite warfare capabilities to take out the communication lines of the enemy. It has also reportedly strategised on using low cost, small yet very fast strike craft to disable enemy fleets including aircraft carrier groups.

China's J-31 stealth fighter

Despite this defence-industrial complex model next door, India’s focus on indigenisation is more than missing in its annual budget. It has yet to fully realise the potential for indigenous manufacture of high tech weapons or for innovating new attack systems which could be cheap or involve less high tech inputs.  Unlike the west, the private sector is hardly involved in manufacturing weapon systems in India. India had allotted just under Rs 90 crore in 2012-2013 for projects under which Indian companies can design and make advanced defence equipment. In the year 2013-14, that amount has been cut down to a measarable Rs 1 crore, possibly because the amount set aside for 2013 has been returned unused!

The private sector too has proved itself as yet, incapable of meeting the challenges required to make quality platforms needed by the armed forces. The Mahindra& Mahindra manufactured `Axe’ jeep touted as India’s answer for a Future Infantry Combat Vehicle failed its test and army officers still swear the best vehicle they have used is the old, fuel-guzzling 1960s Jonga. 

However, this could well change. Indian private industry as lethargic as India’s public sector in doing meaningful research or development, has started using its new found cash reserves to buy up foreign firms in technology areas where India needs to catch up. India’s Tata group whose cars such as Indica and Nano weren’t perceived to be among the best technologically, has in the last decade bought Jaguar-LandRover, giving it access to world class technology. Mahindras have similarly bought Korean car-maker Ssangyong. Its cars are not considered great in terms of design but are grudgingly accepted as value for money, robust vehicles. 

A joint venture Memorandum of understanding inked earlier this year, between France’s Dassault Aviation and Reliance Industries Ltd will build components and eventually assemble Falcon business jets in India. These are signs of what may come about. If India can use this new found confidence in its private sector and builds up on the momentum by getting universities to work in tandem with ordinance factories and the private sector, its defence budget can literally earn more bang for the rupee in the years ahead.

India's Budget bets on Growth

Who will be the PM?

For a man, whom many see as Congress’s possible Prime Ministerial candidate next year, finance minister Palaniappan Chidambaram’s 8th budget was without what markets call the wow factor – nothing to perk up business, nothing much to make the middle class voters happier.

However, as in any pre-election year budgets, Chidambaram’s budget will try to spend its way out of the mess the Indian economy is in, by splurging on an all time record budget of Rs 16.65 lakh crore, a 16.5 per cent increase over the current year’s spending. In dollar terms India’s budget spend of $ 314 billion equals one and a half times’the entire economy of neighbouring Pakistan.

India is expected to grow by 5 per cent this fiscal year, far lower than the 8-9 per cent GDP growth it posted for most of the last ten years. GDP figures released today for the October-December 2012 quarter were a dismal 4.5 per cent, putting pressure on the government to opt for aq tough budget which aims to grow the economy “out of the trough”. Chidambaram in his budget speech, underlined his plan as one of “unhesitatingly embrac(ing) growth as the highest goal” to manage what he termed as “challenged” Indian economy.

India's Rich will have to pay more tax

New taxes including a `Super Rich’ surcharge on individuals earning more than Rs 1 crore ($185,000) a year and firms earning more than Rs 10 crore ($1.85 million), applied in token deference to an idea floated by Left-wing economist Joseph Stiglitz and nearer home by India’s leading philanthropist Azim Premji, and higher revenues churned out by an economy which the government hopes will grow at a faster pace of over 6 per cent are expected to fund the splurge. As also a record borrowing plan which hopes to raise Rs 5.42 lakh crore from the market.

There were however prudent cues to satisfy global credit rating agencies such as Moody’s and Standard & Poor, who had been threatening to downgrade the slowing down Indian economy beset with widening fiscal deficit, widening trade deficit and falling rupee.

India wants more butter now

Subsidies will be pared from Rs 2.31 lakh crore next year from the bloated subsidy bill of Rs 2.57 lakh crore which the government ran up this year, a compression of 10 per cent on what many see as populist spending on subsidising auto-fuels, food and fertilisers. The main axe will be felled on oil subsidies which is being reduced 26.8 per cent. Even the government’s borrowing plan has been kept `modest’ with an increase of about 4 per cent over amount borrowed this year.

Spending on non-economic activities such as defence will be kept down. For the first time in years, increase in defence spending was kept at just 5 per cent. Defence spending went up to Rs 2.03 lakh crore or $ 38 billion (for comparisons, a fifth of Pakistan's economy), from the Rs.1.93 lakh crore outlay for 2012-13.  

However, the lack of any specific spark in the budget and higher taxes on corporates and MNCs left Chidambaram's cheer-boys in India Inc, not so happy, which they made clear in interviews on television channels.  Bombay Stock market's Sensex fell 1.52 per cent or by 290 points. Markets seemed to have been spooked by the finance minister’s clarificatory amendment introduced as part of the budget, that residency would not be enough to get the benefit of double tax avoidance treaties with tax havens like Mauritius to avoid paying tax in India. Businesses and investors in India would also have to prove that beneficiaries of the investment funds were residents of the tax havens. (Something he said would be addressed the very next day, leading to a modest claw-back in the BSE )

Sensex went down after the budget

India’s leading commodity market, MCX, too reacted negatively to a 0.1 per cent Commodity Transaction Tax, re-introduced after being brought in and rolled back 4 years back, on non-farm products. The metals index went down by 0.3 per cent. Interestingly, perhaps fearing calls for a similar roll-back, the finance ministry has however not budgeted for any tax earnings from this score.

Bringing in more taxes home, is very much part of Chidambaram’s growth plan with revenues expected to grow by 19 per cent, with services tax being most buoyant, growing at 35.7 per cent, possibly on the back of a tax amnesty announced for those evading service tax. 

The government is also betting on more disinvestment earnings. Against this year’s Rs 24,000 crore expected to be realised from disinvestment, the government hopes to earn a a specific rs 55,814 crore from share sales this year, including possibly from selling the government’s rump stake in Hindustan Zinc Ltd. Similarly the government has set an ambitious target of raising Rs 40,000 crore from telecom spectrum auctions and one time spectrum fee despite spectrum auctions having been a flop this year. 

Road Eastwards

To spur investment, the Harvard educated, right-wing finance minister announced that plan spending on large public investments on highways, railways, ports, airports, power transmission lines etc., will be raised to Rs 55.5 lakh crore from Rs 42.91 lakh crore spent this year, an increase of some 29 per cent on actual spending. Firms investing more than Rs 100 crore would get 15 per cent extra tax benefits, infrastructure debt funds would be encouraged to fund ambitious long term plans and the World Bank and ADB roped in to help build an expressway linking India’s North east with Myanmar and thence on to Thailand, Malaysia and Singapore, India’s big markets in the Asean. 

Two new industrial corridors or expressways with industrial zones on either sides, one linking Bangalore with Chennai and another Bangalore with Mumbai, and new mega ports at Sagar in West Bengal and Andhra Pradesh were also among projects with which Chidambaram hopes to spur growth.

The bet will however be on growth and if that does not come about then Chidambaram’s gamble of higher revenue earnings could well fall by the way and the man who gave dream budgets to India Inc., some years back could well be the man who scripted a nightmare for the country’s economy already overburdened by high inflation, slack demand and rising debt.

India's Monsoon Strategy

Reproduced below is an atricle by me, which appeared in the Planning Commission's Yojana :

Indian Naval flotilla excercising in the Indian Ocean

Last August, an unidentified Chinese warship confronted an Indian naval ship near the coast of Vietnam and demanded it explain its presence in Chinese waters.

Many in India and elsewhere saw this as an unintended sampler of what the future may hold. As India and China grow, thriving on foreign trade and buying up energy supplies where they can, the two powers quite naturally look towards the sea-lanes which support their outward reach to the rest of the world.
While China earns a hefty 39.5 per cent of its GDP from exports alone, India earns a not insignificant 22 per cent from its sales to the rest of the world. 
Similarly, India depends on imported oil for about 80 percent of its crude oil requirement, needed to drive its $ 1.8 trillion economy. The giant Chinese economy which accounts for roughly 13.5 per cent of the global economy, also depends on foreign crude imports for at least 50 per cent of its needs and this figure is expected to move upwards as China has a mere 1.2 per cent of global proven reserves of oil and gas.
In ancient times, with the Monsoon winds, Indian fleets used to travel westwards to the Arabian peninsula and eastwards to the spice islands of Indo-China. Chola, Pala and much later Mughal fleets used to protect these shippers.  
In much the same way, as vast Indian and Chinese fleets scour the seas for trade and resources, naval fleets of these two nations need to follow to provide security in far flung seas. China is believed to be laying the groundwork for a naval presence along maritime chokepoints in the South China Sea, the Malacca Straits, the Indian Ocean and the Strait of Hormuz in the Persian Gulf through acquisition of naval bases. While India, similarly, gears up to protect routes through which its oil supplies must traverse from the Middle East, Australia, Africa and Russian Siberia’s Sakhalin.
China’s interest in the port of Gwadar in Balochistan and in Arakanese ports in Myanmar along with oil pipelines and roads from these ports to mainland China is but natural. A casual look at the map of the Indian Ocean will show that the Straits of Hormuz, patrolled by the US and the Straits of Malacca, straddled by India’s Andaman Island which boasts of a new integrated command, are the natural choke points for China’s oil supplies. China wants to reduce risks and costs run up by its oil tankers, by offloading Middle Eastern crude at Gwadar and piping it to Sinkiang. Similarly, crude from South East Asia could be piped out from Arakan instead of being brought through the Straits of Malacca and then through the contested South China Seas.
It would be but natural, to expect India to respond to China’s strategy, termed by one writer as `String of Pearls’ (in reference to the far off Ocean ports the giant nation wishes to control) by seeking friendly access to the Vietnamese, Taiwanese and Japanese ports for deploying its Naval assets to protect India’s shipping and trade routes to the Far East and to access its equity oil at Sakhalin.
India’s race to reach out and defend its sea-lanes is supported by its neighbours in South East and East Asia. Asean and Far East powers found themselves increasingly worried about China's maritime claims, which cover about 3 million square km. Most of this is in two areas — the South China Sea, where Beijing's claims overlap mainly with those of Vietnam, the Philippines and Malaysia, and the East China Sea, where its claims are contested by Japan.
Beijing has described its territorial disputes with Japan and Southeast Asian countries as ones involving its "indisputable" or "inalienable" sovereignty. Though it has not ruled out compromise, it has at the same time increased it naval presence in these areas and flexed its muscle from time to time.
No wonder then that some 31 percent of the Rs 79,198 crore capital budget for the defence forces have been earmarked for Indian Navy, hitherto the most neglected of India’s armed forces. The Air Force which wants to buy new French made fighter aircraft to replace ageing jets is slated to spend slightly more with an allocation of over 38 per cent of the capital budget. India’s vast land army with more than 1.2 million soldiers will, by contrast, be getting a relatively lower capital outlay.
Some 89 percent or Rs 66,459.43 crore of the total capital spend has been kept aside for capital acquisition or modernisation. In the case of the navy this represents a huge build up – it has managed to garner a 72 per cent increase in its budget on this count at Rs 24,151 crore. The Air Force’s modernisation budget is pegged at Rs 28,503 crore and Army’s at just Rs 13,804 crore. Navy’s demands for building new ships have been given more priority to the Army’s demand that new guns be bought to replace the more than two decades old Bofor’s 155 mm howitzers.
According to Maritime Research firm AMI, India will spend almost $45 billion over the next 20 years on 103 new warships, including destroyers and nuclear submarines.
China in contrast, will be spending around $25 billion for 135 vessels.
However, unlike Indian Air Force’s buy of Rafael or Army’s purchases of night vision equipment from Israel or search for an artillery gun abroad, the Navy has been depending largely on Indian dockyards to build its fleet.
This obviously gives it more bang for the rupee. Foreign equipment is costly. China realised this long ago and adopted the path of reverse engineering to build its missile forces, jet fighter crafts and assault rifles. Just one and half decade back, China, like India was a major importer of weapons. However, in the last decade and a half, it very consciously worked to `catch up’. It reverse engineered British missiles, worked on Soviet era fighter jet platforms to work in improvements. It used students and scientists sent abroad on exchange programmes to spy on rival systems, a few of which were openly available, some commercially buyable.  It hired out-of-work Soviet weapons scientists and specialists and restructured its own defence research and production labyrinths.
The Middle Kingdom has also strategised by coming up with innovative ideas to take on its arch rival – the US – whose military size, strength and spending - dwarfs everyone else. Beijing is believed experimenting with `bugs’ in telecom and power equipment which could cause power and communication systems in client countries to collapse. It has again reportedly trained armies of hackers who can play havoc with computer based command and control systems in a wide range of areas and is perfecting satellite warfare capabilities to take out the communication lines of the enemy. It has also reportedly strategised on using low cost, small yet very fast strike craft to disable enemy fleets including aircraft carrier groups.
India has yet to fully realise the potentials for indigenous manufacture of high tech weapons or for innovating new attack systems which could be cheap or involve less high tech inputs. Its creaking research and development organisation has been struggling to build a good main battle tank, a fighter jet and even a good assault rifle, even as its best brains have managed to break tech barriers to produce world class missile systems and rockets. Even today, India depends on Bulgarian and other former Soviet Union states to procure assault rifles for its crack commando forces, while successfully building nuclear shields and 3,500 km-range nuclear capable missiles.
This inability to build `nuts and bolts’ while making far more sophisticated weaponry, has meant a huge drain on the treasury and far less `bang’ for the rupee for the Indian armed forces. Attempts are being made to remedy it, partly by introducing the private sector to defence production, partly by letting them rope in foreign partners to build systems and sub-systems for aircraft, armoured carriers and other weapon systems. However, an overhaul of India’s basic defence R&D set-up and more extensive and leveraged use of India’s ordinance factory network are still awaited.
However, in terms of overall defence spending, despite the Chinese depending on low cost indigenous manufacture as opposed to India’s starategy of purchase of equipment from abroad, India’s spending on its armed forces will still be drawfed by China. India’s defence budget this year (2012-2013) will be just $ 40 billion compared to China’s gigantic spend of $ 106 billion for the current year. While India’s spend in rupee terms is 17 per cent more than last year’s, China’s is 11 per cent more in Yuan terms than last year’s.
The natural question which follows any discussion on India’s defence budget and its comparision with China’s is : Will this rise in spending on both sides of the border necessarily fuel an arms race or worse, a conflict between two rising powers? Not necessarily. Both are mature nations and both are aware of their vulnerabilities. It would be wise on the part of both to be ready, and wiser to be even more ready to negotiate points of conflict.