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. All rights reserved. Please contact us for information on sales, syndication and republishing.)
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