Crisis challenge for Sino-Indian trade
By Pallavi Aiyar
BEIJING - The trade momentum built up between India and China over the past few
years has survived the onset of the global financial crisis, with bilateral
trade surging by more than a third last year and China ousting the United
States as India's top trading partner.
Bilateral trade rose 34% in 2008 to US$51.8 billion, according to Chinese data,
a more than 10-fold increase since 2002, when the figure stood at a mere $5
billion.
More than 100 Indian companies have opened up shop in China since 2000,
including banks and even a law firm, while Chinese investment in India is also
growing. Chinese government figures
put the value of cumulative contractual Chinese investments in projects in
India since 2000 at $22 billion, almost half coming in the last year alone.
Between January and October 2008, the value of contractual Chinese investments
in India was $10.5 billion.
However, while the Sino-Indian economic relationship is marching
upwards, fundamental concerns remain that have shown little sign of resolution.
On the Indian side, there is a widening trade deficit, worry over the
composition of exports and concern at the inability of Indian companies with
Chinese operations to break into the domestic Chinese market.
The Chinese complain that India is holding back on a proposed regional trade
agreement and that Chinese companies have on occasion been prevented from
investing in India on the grounds that they pose a security threat.
Both sides also complain of insufficient knowledge of the business practices
and the regulatory framework of the other country. Cultural discomfort
involving language and food habits form an additional barrier - despite being
neighbors, the two countries appear culturally more comfortable doing business
with the West than with each other.
For the Indians, the most ominous sign in the trade relationship is the
emerging trade deficit with China. In 2004, the balance of trade was $1.7
billion in India's favor. By 2006, this surplus had turned to a $4.12 billion
deficit, widening further last year to $11.2 billion, with Indian exports of
$20.3 billion overshadowed by imports from China worth $31.5 billion.
Large trade deficits have already marred China's relationship with other
countries, notably the United States. India and China, however, lack any
serious governmental mechanism through which they can manage trade friction. In
India, lingering insecurities about the competitiveness of the country's
industry compared with the might of China's manufacturing are coupled with
suspicions of the lack of transparency in Chinese pricing and accounting
systems.
India is thus reluctant to grant China market economy status, a first step
towards negotiation of the proposed regional trade agreement. Currently, India
is a leading initiator of anti-dumping cases against China. Were New Delhi to
grant market economy status to China, India would have to accept pricing
figures supplied by Beijing, a situation some fear may lead to large-scale
dumping of Chinese products.
The two countries have a ministerial-level joint economic group that is
supposed to meet every two years to discuss bilateral issues of an economic
nature. It last met in 2006 after a gap of six years, failing to meet again in
2008.
When Prime Minister Manmohan Singh visited Beijing in January last year, Indian
industry leaders brought up its concerns during a business summit that was held
at the same time. The Chinese side promised to give the matter serious
attention and alluded to the possibility of sending large-scale buying
missions, a strategy it has deployed with the US and European Union. The
Chinese vice minister of trade did subsequently undertake a trip to India, but
the deals that were signed at the time were worth less than $100 million in
value, far from being adequate to redress the deficit in any serious manner.
Nor has there been significant movement towards removing non-tariff barriers
erected against Indian products. For example, the Indians believe their is
great potential for their agricultural products. Yet eight years after a
bilateral agreement was signed on China's accession to the World Trade
Organization under which Beijing agreed to the import of 17 types of Indian
fruits and vegetables, only three items - mangoes, grapes and bitter gourd -
have been approved for import from India.
Even there, India businesses appear to lack aggression in making the most of
what is available to them. Thus, although mangoes were cleared for export to
China in 2003, this correspondent has been unable, year after year, to find any
Indian mangoes in Chinese stores. Given problems with cold storage facilities,
logistics and poor infrastructure at the Indian end, exports of the fruit to
China remain problematic. Those producers who are able to overcome these
lacunae choose to focus on Western markets with which they are already
familiar.
As a result, Sino-Indian trade has failed to develop in terms of content.
Indian exports to China continue to be overwhelmingly dominated by primary
products with little value added. In the first 11 months of last year, 71% of
Indian exports to China comprised iron ore, up from 59% in 2007. The Chinese
conversely export to India mainly high-value, finished products such as
electrical machinery, a situation that has remained unchanged over the last
several years despite much hand-wringing on the Indian side.
The global economic crisis has now muddied the picture further. On the one
hand, China's demand for steel slumped towards the end of last year - the China
Steel Industry Association reported a 17% decline in steel production in
October 2008. Shipments in the 10 months ended January fell 1.5%, Bloomberg
reported, citing the Federation of Indian Mineral Industries said.
That decline has since reversed, with India's iron-ore exports rising in
January for the second straight month as China increased purchases following
Beijing's announcement of a US$586 billion economic stimulus plan focused
heavily on infrastructure projects.
The economic downturn also prompted Jet Airways, India's largest domestic
carrier, to halt its Shanghai-Mumbai service in January, barely six months
after it started to much fanfare. The Indian Embassy in Beijing, meanwhile,
said visas issued to Chinese nationals in 2008 did not increase over the the
previous year, despite an aggressive campaign to attract more Chinese tourists,
including the opening of the first India Tourism office in China early last
year.
That Sino-Indian trade should falter when the rest of the world is staring at
recession should not be surprising. Nevertheless, the two countries are almost
alone in continuing to grow, albeit at a slower pace than previously. That is
likely to create new opportunities for trade and investment across the
Himalayas. What is required is the will and foresight to convert these
opportunities into realities.
Pallavi Aiyar is the China correspondent for the Hindu and author of
Smoke and Mirrors: An Experience of China (Harper Collins India, May 2008) . For
a review of the book, see
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