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Balancing Sino-Indian economic ties

Posted on December 14, 2010 | Author: Amit Mitra | View 434

During Chinese Prime Minister Wen Jiabao’s visit to India this week, the two countries must find ways to address the trade imbalance and the low volume of investment flows between them.

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Wen Jiabao’s visit to India provides us with a great opportunity to take stock of our growing economic relations, and where these relations with China are headed.
 
On the face of it, one can see an unprecedented growth in trade from $1.82 billion in 1999-2000 to a whopping $42.4 billion in 2009-10.
 
We also note the massive export of vital plant and machinery from China to India and the beginnings of investments into each other’s economy. The Asian giants have begun to tango. 
    
However, underlying these seemingly positive trends, there is one deep concern.
 
Let it be noted that unprecedented growth in trade of this kind can also be a slippery slope.
 
The key concern that is attached to this burgeoning trade is the trade imbalance in favour of China.
 
While India’s exports to China almost doubled between 2005-06 and 2009-10 (from $6.7 billion to $11.6 billion), China’s exports to India during the same period tripled (from $10.8 billion to $30.8 billion).
 
This has left India with a trade deficit of $19.2 billion.
 
To provide a measure of comparison, this deficit is close to the total GDP of a country like Tanzania and well above the total GDP of many countries including Bolivia, Uganda and Ghana. This imbalance will have to be corrected in the years ahead. 
    
Fortunately, it is not only India that recognises this problem.
 
The Chinese leadership too has recognised the problem of unsustainability of our trade relations and is keen to increase the country’s imports from India.
 
 
We, therefore, look forward to some major initiatives on this matter during Premier Wen’s visit.
 
If this were to really happen, year after year, the imbalance could certainly be corrected.
 
But, do we manufacture products in India that could be competitively exported to China to actualise this laudable intent? 
    
Interestingly, Ficci’s research finds that there are a whole host of items purchased by China from across the world that are in fact manufactured in India and successfully exported to highly competitive and regulated markets, but not to China.
 
Targeting the export of these items to China could become the first step towards correcting the trade imbalance. Two such examples would suffice. 
    
Take the case of pharmaceuticals manufactured in India.
 
We are exporting bulk drugs and formulations to over 100 countries in the world, including the stringently regulated markets of the US, Europe, Japan and Australia.
 
However, Indian companies have found it near-impossible to export to China due to the nature of its regulatory practices.
 
Prime Minister Wen’s visit could see the opening up of China’s vast pharma market for Indian products.
 
Our hopes lie in the fact that a major pharma delegation from China will be hosted by Ficci during the VVIP visit.
 
This occasion may well be the starting point for Indian pharma products to find a place in Chinese pharmacies. 
    
Similar is the case of processed meat products which China imports in huge quantities. We know that China is a large importer of bovine meat in particular.
 
 
But, China refuses to import this product from India on the supposed grounds of rinderpest infestation.
 
I am reminded of the ‘fruit-fly’ imbroglio over Indian mangoes by the US, EU and Japan in the past!
 
But, the fact is that Indian livestock has been free of rinderpest for many years now and India is exporting bovine meat to nations across the world, including those with the toughest regulatory structures.
 
This non-tariff barrier could easily be overcome through dialogue during the high-level visit. 
    
Aside from the issue of trade imbalance, the second growing concern relates to the low volume of investment flows between the two fastest-growing economies of the world.
 
With a rising trade relationship between our two great nations, it is most natural that both would be investing into each other’s economies hugely. Unfortunately, this is not the case. 
    
While India is importing a significant amount of power equipment from China, India now expects China to manufacture such equipment through FDI into India.
 
In this context, it is interesting to note that one of the largest global import deals has been inked by Reliance Power for $8.3 billion with the Shanghai Electric Power Company.
 
However, Chinese investments into India in power equipment manufacturing locally and setting up of R&D and after-sale service facilities are yet to take off in any sizeable manner.
 
The criticality of this became evident when a turbine supplied by a Chinese company to the Durgapur power plant malfunctioned and the Chinese asked for it to be taken back to China for repairs. 
    
The time has come for China to move beyond the mere export of equipment to an ‘integrated service model’ with a strong investment component in India.
 
 
China’s competitive advantage in certain class of capital goods and infrastructure-related machinery must now see a place in India’s list of FDI.
 
For the record, China’s FDI into India stands at a mere $52 million.
 
One hopes that Wen’s visit to India could well be the tipping point of major investment flows from China to India. 
    
In the same spirit of partnership, India, too, must raise its investments into China. Data shows that India’s investment into China between 2004-05 and 2010 was a reasonable $879 million.
 
This is 1.2% of India’s total investment of $77 billion across the world.
 
It is time for the two nations to push the envelop on the agenda of two-way FDI flow.
 
Just as we welcomed Huawei and ZTE to India, we wish to see manufacturing companies like L&T and Suzlon expand their operations in China. 
    
Prime Minister Wen’s visit to India comes at a critical phase in China’s own transition.
 
In 2012, Premier Wen Jiabao and President Hu Jintao will hand over the reins of power to the ‘fifth generation’ leaders of the Chinese Communist Party.
 
This visit of Wen could well create the legacy for the next generation leaders of China to build on and carry forward — a relationship engaging one-sixth of humanity. 

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