India’s trade deficit with China in 2015-16 stands at US$52.69 billion. And
it is expected that this will go up even further this year. This by itself
should not be a cause for worry, as India runs deficits with sixteen out of its
top twenty five trade partners. The fact is that India buys more than it sells
world- wide. But the real problem is that there is no obvious solution in sight as yet
and therefore the question that arises is for how long can this huge deficit
with China be maintained?
India’s trade relations with China have had a checkered history and
unfortunately continue to remain hostage to political developments between the
two countries; albeit much less now than earlier. It is to the enormous credit
of Rajiv Gandhi that he was the first Indian leader to realize that a solution
to the vexed issue of the boundary dispute was not going to be forthcoming in
the near future and therefore to delay normalization and development of trade
and economic relations with China would only be counter-productive. It was
Rajiv Gandhi who took the decision to de-link the two issues. It was also
during his visit to China in December 1988, that for the first time a ‘Joint
Economic Group’ was established. However it must be pointed out that no one in
the Indian leadership at that time paid much attention to this aspect of the
relationship, for no one anticipated that bilateral trade volumes would develop
so fast. And develop they did with bilateral trade in 1991 jumping from a paltry US$ 265m to
mushroom to a healthy US$ 70.73 billion in 2015-16. Of interest is the fact that India’s
current bilateral trade with China is larger than its combined bilateral trade
with Britain, Germany and Japan.
Almost everyone recognizes what the real problem behind this massive
trade deficit is. India’s trade basket consists of cotton, gems and precious
metals, copper and iron ore. All are commodities. China on the other hand,
exports manufactured capital goods mainly for the power and telecom sectors. The
fact is that India just does not produce enough high quality manufactured goods
for exports, let alone for its own billion plus consumers and therefore has to
rely on quality imports from the outside world. There are many experts who feel
that the inordinately high trade deficit between India and China of US$ 52.73b
is not a very serious issue, for a country such as India that is on its way to
establishing an industrial base and seeks high growth rates; a larger import
profile is but unavoidable. Since China is the major source of technology
intensive products that are cost effective, running a high deficit with China
is but inevitable.
However running trade deficits with China may not be necessarily
inevitable as presumed. According to the Chinese, the problems faced by India are
elsewhere and essentially relate to restrictive labor practices, land and tax
laws, rickety infrastructure and inadequate power supply. In addition while
China is a part of the global supply chain, being the last stop of the
manufacturing chain in East Asia; India is no- where near being a part of this global
chain. Both India and China are likely to be among the four largest economies
in the world by 2020 and yet India still does not have a full time trade
negotiator on the lines of the US Trade Representative [USTR]. Trade negotiations with China are therefore only but episodic.
So what can be done? Two things stand out for immediate consideration.
The Chinese say that in the next few years they will import goods worth
US$10 trillion and invest abroad about US$ 500 billion. We need to tap into
this urgently. At present Chinese FDI into India is rather abysmal, with the
total reaching a mere US$ 396m for the period 2000 to 2014. This figure is
about 1 per cent of the total received by India and of this US$251m came in the
last two years. During the visit of the Chinese President Xi Jinping to India
in September 2014, he promised a further Chinese investment of about US$20b.
The Chinese also proposed to set-up Industrial parks in India and every effort
should be made to speedily execute these projects. Take the example of the
manufacture of the iPhone in China. Most of its parts are imported into China
from South Korea and Japan and China is the last stop in the manufacturing chain
in East Asia. China only value adds a small proportion to the full product, but
the important point is that it is a part of the Asian value chain. India needs
to join this chain.
The second point for
consideration is that there is a general lack of awareness in India about
tapping the highly lucrative Chinese foreign tourist market. About 150m Chinese
travel abroad annually and are estimated to spend about US$229b abroad. The
number of Chinese tourists visiting India is abysmally low, but this may also
be due to the visa regime being rather strict due to perceived security
reasons. PM Modi during his last visit to China took a decisive step and introduced
the concept of e-visas for facilitating travel by Chinese tourists, but much
more needs to be done to attract Chinese visitors. The Buddhist circuit based
on Gaya and Nalanda in Bihar needs to be directly air linked to Asian cities
such as Bangkok, Singapore and Shanghai to facilitate travel. It is time for
India to play the Buddhist tourist card.
Ever since 1988 it has been India’s policy to limit our differences with
China, contain them and to narrow the strategic deficit, but at the same time to
enlarge the scope for co-operation and collaboration. Let not the mushrooming
trade deficit become yet another milestone around the neck of Sino-Indian
relations. The time for taking decisive steps is there for the asking.
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