India-China trade: a long road ahead
Industry and policy makers need to go beyond cheering the numbers for bilateral trade and look to address the underlying fundamentals that are in need of transformation.
INDIAN INDUSTRY is gearing up to flex its muscles in the heart of China, with the fourth Made in India Show being held in Beijing from September 8 to 11. Organised by the Confederation of Indian Industry (CII) in partnership with the Indian Embassy in Beijing, the multi-sectoral exhibition will open amidst a backdrop of booming bilateral trade.
Recently released statistics from China's customs authorities reveal that Sino-Indian trade in the first seven months of 2006 has reached $13.6 billion, up 27 per cent from the same period the previous year. It is thus widely expected that the trade target set during Chinese Premier Wen Jiabao's visit to India in April 2005, of $20 billion by 2008, will be met by the end of this year itself.
Indeed, since the start of the new century, every ambitious target set for bilateral trade has proved not to be ambitious enough, the statistics zooming ever upwards with a momentum seemingly of their own.
In 2005, India-China trade increased by 37 per cent over 2004 to touch $18.7 billion. Just three years earlier in 2002 the total volume of bilateral trade was a paltry $5 billion. China replaced Japan as India's top trade partner in North East Asia a few years ago and is now on track to overtake the United States to become India's number one trading partner within the next few years. Indo-U.S. trade stands at about $30 billion.
Last year, more than 100 bilateral trade delegations crossed the Himalayas to seek out opportunities for trade and investment. Over 80 Indian companies have opened shop in China and some 45 Chinese firms now have operations in India. On the surface, this is a veritable economic renaissance providing evidence for the emergence of an economic colossus, `Chindia,' that brings together the might of two of the world's fastest growing economies.
But scratching the surface reveals any celebration of `Chindia' to be chimerical. Serious, continuing flaws in the structural composition of trade and a disappointingly low investment engagement mean that there are many miles to go before the Sino-Indian economic relationship can have the kind of significance that exists in China's relations with its truly weighty trading partners.
Moreover, despite considerable improvement in political ties the lack of a final settlement on the boundary dispute between the two neighbours makes it difficult to totally dispel the mutual suspicion that has characterised bilateral ties for long. While burgeoning trade has helped provide momentum to the sweetening of previously sour relations on the political front, economic engagement can never be truly unfettered until full normalisation of political ties is complete. In 2005, China's total trade volume was worth $1.4 trillion. Sino-U.S. bilateral trade reached $204.7 billion and Sino-Japanese trade $189.4 billion. India was merely the 16th largest exporting nation to China in 2005, a drop of one place compared to 2004 and the 13th biggest importer of Chinese products. In the first seven months of this year, India accounted for only 1.47 per cent of China's total imports and 1.46 per cent of China's aggregate exports.
Longer-term commitments are even less impressive. Indian investment in China currently stands at $130 million. By contrast, by the end of 2005, U.S. businesses had actually invested $51.1 billion in China and set up 49,000 enterprises in the country. Last year alone, China's total FDI inflows were worth $72 billion.
Chinese investments in India are not much cause for celebration either. According to the Indian Government, FDI inflows to India from China between August 1991 and October 2005 worked out to a grand total of $2.03 million. Chinese statistics put the figure considerably higher at about $47.35 million but given that India's total inward FDI for the same period stood at $36.2 billion, even this number is distinctly unimposing.
On the trade front, the major continuing worry is the composition of the trade basket. India's exports to China are overwhelmingly dominated by low-value, primary products with a huge reliance on iron ore. In 2005, ores, slag, and ash comprised 56 per cent of India's exports to China with a year-on-year growth rate of 28 per cent.
Despite Indian trade officials having repeatedly expressed concern over the lopsided nature of this export composition, in the first seven months of this year iron ore continued to dominate exports to China and comprised some 50 per cent of total exports.
Undue reliance on a single commodity is far from ideal. If the iron and steel industry in China were to experience a new direction it would dramatically impact on Indian exports. China's ongoing construction boom cannot be expected to last forever. Driven by fears of overheating, the authorities in Beijing have in fact been trying to tighten growth at the macro-level for the last several months.
The impact of these measures on Indian exports is already being felt. In the first six months of 2006 Indian exports of iron ore thus decreased for the first time in years, by almost 16 per cent (in contrast iron ore exports had exploded by almost 233 per cent in 2004). As a result, despite a sharp increase in exports of some commodities like raw cotton, overall Indian exports to China declined by 1.16 per cent in the first half of this year compared to the same period during 2005.
Bucking the trend of the last few years, India has thus developed a trade deficit with China of $858.5 million. Last year India's trade surplus with China stood at $843.2 million, itself a decline from the $1.74 billion surplus in 2004.
The fact that primary products such as iron ore and raw cotton dominate India's exports also means that the benefits of value addition including increased employment, higher profitability, technological upgradation, and so on are lost. By contrast China's top exports to India include electrical machinery and machinery. These together accounted for 43.9 per cent of total Indian imports from China in 2005.
Trade associations such as CII and the Indian Embassy in Beijing have identified certain sectors they believe have strong potential for growth in trade including dairy products, machine tools, power and energy sector ancillaries, and certain segments of apparel. The upcoming Made in India Show will feature products from some of these sectors.
However, trade alone cannot provide long-term stability to a bilateral economic relationship, given that it is affected by a gamut of short-term circumstances and can as a result prove fickle. The example of iron ore is a case in point. Mutual investments are thus crucial to a truly sustainable economic engagement.
Indian companies have begun to be attracted by the opportunities China offers in recent years. Its high volume, low-cost investment environment, connectivity to global markets, productive labour force, and the presence on Chinese shores of large numbers of multinational clients have lured a small but steady stream of Indian investors in diverse sectors including IT, pharmaceuticals, banking, wind farm equipment, auto components, and tyre manufacturing.
Yet the majority of these investors in both the manufacturing and services sectors either sell to MNCs in China or export their products out of China to their traditional buyers. The meaty Chinese domestic market remains an imposing Great Wall that few Indian firms have been able to scale so far.
Even the much-hyped synergies between India's software prowess and China's hardware might have failed to materialise. All the big Indian IT companies such as TCS, Wipro, Infosys, and Satyam have invested in China. However, despite predictions that Indian companies could come to account for up to 40 per cent of the $30 billion domestic Chinese market for software, so far none of India's IT heavyweights has been able to make a dent in this market.
Foreign-owned companies continue to be kept out of the really large, multimillion dollar IT deals at the state-owned enterprises and Indian companies have found barriers like language and culture more challenging to overcome than expected.
Conversely, low levels of Chinese investments in India are explained by Sujan Chinoy, former Indian Consul General in Shanghai, as there simply "being very few commercial reasons for them [the Chinese] to invest until such time as India acquires the importance of a high-value market to them with the attendant weightage that a large bilateral economic engagement brings."
In addition, Chinese investments in Indian infrastructure projects continue to repeatedly be blocked due to "security" concerns. For example, New Delhi has reportedly decided that it does not want any Chinese companies investing in or managing any Indian ports. Chinese telecom companies such as Huawei have also been refused permission for investments in India in the recent past, out of fears of Chinese espionage. Such fears underline the continuing vein of mistrust that lies deep in Sino-Indian ties even as Beijing and New Delhi attempt to forge a new "strategic partnership."
From running scared of China, there does seem to be an increasing willingness to engage with it on the part of India Inc. The fact that the upcoming Made in India Show is taking place in China for the fourth year running is evidence. But both industry and policy makers need to go beyond cheering the numbers for bilateral trade and look to address the underlying fundamentals that are in need of transformation if India and China are to develop the kind of economic linkages that would give real depth to their bilateral ties and forge the type of formidable partnership that advocates of `Chindia' hope for.
Source: The Hindu