Chindia: Not quite a juggernaut
yet By Pallavi Aiyar
BEIJING - The fourth Made in India Show in
Beijing, the multi-sectoral exhibition organized
by the Confederation of Indian Industry (CII) in
partnership with the Indian Embassy, was held on
September 8-11 amid 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 reached US$13.6 billion, up 27% from the
same period the previous year. It's 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 actually be met by the end
of this year.
Indeed, since the start of
the new century, every ambitious target set for
bilateral trade has been exceeded, the statistics
zooming ever upward with a momentum seemingly of
their own.
In 2005, India-China trade
increased by 37% 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 trading
partner in Northeast Asia a few years ago and is
now on track to overtake the United States to
become India's No 1 trading partner in the world
within the next few years. Indo-US 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. More than 80 Indian companies have set
up 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 has
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 neighbors
makes it difficult to dispel totally the mutual
suspicion that has long characterized bilateral
ties. While burgeoning trade has helped sweeten
the previously sour relations on the political
front, economic engagement can never be truly
unfettered until full normalization of political
ties is complete, including a boundary settlement.
In 2005, China's total trade volume was
worth $1.4 trillion. Sino-US 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 with 2004, and the 13th-biggest
importer of Chinese products. In the first seven
months of this year, India accounted for only
1.47% of China's total imports and 1.46% of its
aggregate exports.
Longer-term commitments
are even less impressive. Indian investment in
China currently stands at a measly $130 million.
By the end of 2005, US businesses had actually
invested $51.1 billion in China and set up 49,000
enterprises in the country. Last year alone,
China's total foreign direct investment (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
unimpressive.
A 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% of India's exports to China, with a
year-on-year growth rate of 28%.
Even
though 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% of total exports.
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 past
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 decreased for the first time in years, by
almost 16% (in contrast, iron-ore exports had
exploded by almost 233% in 2004). As a result and
despite a sharp increase in exports of some
commodities such as raw cotton, overall Indian
exports to China declined by 1.16% in the first
half of this year compared with the same period
during 2005.
Bucking the trend of the past
few years, India has thus developed a trade
deficit with China of $858.5 million so far in
2006. 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 upgrading and so on are lost. By
contrast, China's top exports to India include
electrical machinery and other machinery, which
together accounted for 43.9% of total Indian
imports from the country in 2005.
Trade
associations such as CII and the Indian Embassy in
Beijing have identified certain sectors they
believe have strong potential for growth,
including dairy products, machine tools, power and
energy sector ancillaries, and certain segments of
the apparel industry. The Made in India Show
showcased 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.
In
recent years Indian companies have begun to be
attracted by the opportunities China offers. Its
high-volume, low-cost investment environment,
connectivity to global markets and productive
labor 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 information technology
(IT), pharmaceuticals, banking, wind-farm
equipment, auto components and tire manufacturing.
Yet the majority of these investors in
both the manufacturing and services sectors either
sell to multinational companies in China or export
their products out of China to their traditional
buyers. The meaty Chinese domestic market remains
an imposing Great Wall that so far few Indian
firms have been able to scale.
Even the
much-hyped synergies between India's software
prowess and China's hardware might have failed to
materialize. 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% 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 simply there "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 be blocked because of
"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 to make
investments in India in the recent past, out of
fears of Chinese espionage. Such fears underline
the continuing mistrust that lies deep in
Sino-Indian ties even as Beijing and New Delhi try
to forge a new "strategic partnership".
But there does seem to be an increasing
willingness to engage with China on the part of
India Inc. The fact that the Made in India Show
took place in China for the fourth year running is
evidence. But both industry and policymakers need
to go beyond cheering at the numbers for bilateral
trade and 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 relations
and forge the type of formidable partnership that
advocates of Chindia hope for.
Pallavi Aiyar is the China
correspondent for The Hindu.
