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China willing, India
shy
By Indrajit Basu
Even as Chinese Premier Wen Jiabao kept
insisting during his four-day visit to India -
which ended on Tuesday - on a "strategic and
cooperative partnership" between Indian and
Chinese businesses, India Inc is worried that any
free or preferential trade agreement with China
would do India more harm than good. Allowing China
unbridled access to the Indian markets, it fears,
could result in local markets getting swamped with
Chinese products, the impact of which would far
outweigh the benefits accruing to India as a
result of its access to China's huge market.
"We are glad that instead of entering into
agreements right away, India has decided to set up
a joint study group to study the feasibility of
the 12 trade agreements that the two countries
propose," said a spokesperson for industry lobby
Federation of Indian Chambers of Commerce and
Industry (FICCI). "If Indian companies are not
able to cope with increased competition from
Thailand and Sri Lanka, they are not going to
welcome imports from a much larger economy like
China. Any free or liberal trade agreement with
China would then give it more advantages than us."
The FICCI even conducted a survey of
local companies already involved in trade with China
and said in a statement that "economy managers of
the two Asian giants would first have to contend
with and address the concerns of Indian industry
on doing business with China". The local
industry's concern obviously stems from similar liberal
trade pacts with smaller countries such as Thailand and Sri
Lanka over the past two years, which India Inc says
have resulted in a flood of foreign goods in the
local markets with hardly any commensurate
increase in Indian exports. "Take the instance of
the Thailand FTA," said Suhel Nathani, partner of
India-based consulting firm Economic Laws
Practice, "which has allowed as many as 400 items
of trade to be imported into India, while India
can export just one."
Experts say
that instead of rejoicing the fact that the
world's fastest-growing economy is keen to partner
India to herald, as Wen said, "a new Asian
century", India should first make a proper assessment of
the areas in which it has a distinct
comparative advantage in the Chinese market. This is
because trade between the two countries that's growing
at a scorching pace - by more than 12 times since 1990, to
exceed US$14 billion - is already skewed in
China's favor.
According to Biswajit Dhar,
head of World Trade Organization Studies at the
Indian Institute for Foreign Trade, "China has
consistently enjoyed a favorable trade balance
vis-a-vis India, which in 2003-04 was almost 50%
higher than the level recorded in the late 1990s.
Furthermore, the commodity composition of
India-China trade has been such that it is China
which, on balance, stands to benefit."
While China's exports to India have been
dominated by electronic products and organic
chemicals, India's export basket is largely made
up of raw materials and intermediate semi-finished
products, mostly iron and steel, and ores. "You
could say therefore that China is buying metals
and other raw materials from us and selling it
back to us after value addition," said Nathani.
Tarun Das, former director general of
industry lobby Confederation of India Industry and
now its chief mentor, points to another problem.
"While Indian industry's global competitiveness is
not in question," Das writes in his paper on the
India-China trade relationship, "China is still
ahead in manufacturing and there could be cause
for concern if the FTA was to come tomorrow
morning or even 2-3 years from now." This fear is
valid if the experience of India's toy and home
appliances industry is anything to go by.
According to Nathani, when India
opened up bilateral trade with China, it reserved
the local toy industry for the smaller
manufacturers. "But now visit any toy shop in the country and
you will struggle to find anything made in
India," said Nathani. However, according to
R Ramachandran, president and chief operating officer
of Bajaj Electricals, India's top
electrical-home-appliances company, although that segment has been
flooded too with Chinese products, India hasn't
really lost much because it has shifted its own
manufacturing to China.
Given a chance,
India Inc is ready to come up with a long list of
reasons justifying why free and liberal trade
pacts with China will be detrimental to Indian
industry's global ambition and "could even harm
the country". Yet, there are also a number of
experts who say that by moving toward a strategic
partnership, India and China can indeed pave the
path together for a broader economic integration
not only within Asia but also globally. They add
that in their fear of Chinese manufacturing
prowess and their aggressive marketing abilities,
India Inc overlooks the benefits that could be
extracted from the growing synergies between the
two economies.
Nagesh Kumar,
director-general of Research and Information
System for Developing Countries, feels such
benefits are significant. "India has emerged as a
leader in software development and other
knowledge-based industries but China, on the other
hand, has become a major base for IT hardware
manufacturing. Mixing India's software capability
and China's hardware strength could produce a
formidable combination. This could be facilitated
by joint ventures among their enterprises,
extending production networks to each other. This
process is already in motion: China's Huawei
Technologies does its chip designs in Bangalore
while Indian firms are taking advantage of cheaper
hardware manufacturing costs in China by shifting
production there."
The other important
benefit of joint cooperation lies in the area of
energy. The booming demand for energy and high
dependence on oil and gas have pushed India and
China to secure oil equity abroad, where very
often the two have to compete for stakes in
overseas oil fields. "A strategy based on
cooperation will help the two countries secure
better terms collectively, besides spreading the
risks. The two countries could also invest
together in building joint pipelines and share the
costs for such infrastructure," said Kumar.
But the most significant benefit from a
liberal bilateral trade pact would arise from
Wen's proposed five-point agenda. The five points
that the Chinese premier underlined to enhance
bilateral trade with India include expanded trade
cooperation and removal of barriers, cooperation
in the field of high technology, encouraging
mutual investment, investing in infrastructure and
cooperating on multilateral issues at the World
Trade Organization. Of these, encouraging mutual
investments and investments in infrastructure has
major implications for the country.
India
attracts just about $4 billion in foreign direct
investment (FDI) - against China's $60 billion a
year. According to Standard & Poor's, much of
that FDI is for projects that are implemented in
both countries "but go to China for obvious
reasons". It hinted that if China starts investing
in India, a fair share of that investment could be
redirected toward India. In other words, India
could succeed in attracting some of the FDI
flowing to China toward its shores. Moreover, to
compete with China in the global market, India
needs to ramp up its infrastructure significantly.
That would need as much as $150 billion over the
next 10 years. Clearly India doesn't have that
kind of money and any investment from China in the
country's infrastructure would be of immense help.
Meanwhile, FTA or not, Wen seems to be
confident that Sino-Indian bilateral trade is
poised for explosive growth. On Monday, the third
day of his visit, Wen said he was targeting to
raise bilateral trade volume to $20 billion by
2008 and to $30 billion by 2010. "The present
trade volume is not even 5% of the potential and
China aims to boost trade with India to $30
billion annually in five years," Wen said at a
meeting with business leaders on Monday. The
question: is India equally keen?
Indrajit Basu is a Kolkata-based
equity-analyst-turned-journalist with more than 12
years of experience in business/finance and
technology journalism. Besides writing for Asia
Times Online, he also writes for US-based
publications, as well as IT companies.
(Copyright 2005 Asia Times Online Ltd.
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