The Hindu Business Line : Elephant and dragon: Competing to co-operate

THE recently concluded four-day visit of the Chinese Premier, Mr Wan Jiabao, to India has taken the bilateral relationship between the two countries to a new high as they have agreed to forge a new "strategic co-operative partnership."

The two countries signed a dozen agreements, including one on civil aviation that will immediately see the number of weekly flights between India and China to 14 from the existing two and, eventually, to 42 by 2006.

The guiding principles for settling the decades long boundary dispute between the two countries have been outlined; new Chinese maps show Sikkim as part of India. Among other things, a memorandum of understanding has been signed for the launch of financial dialogue, and a joint Task Force has been set up on regional trading arrangement.

The two countries have agreed to make joint efforts to increase bilateral trade volume to $20 billion or higher by 2008 and to increase it further to $30 billion by 2010. Incidentally, trade and economic co-operation between the two countries have grown rapidly in the past few years. The two say trade last year reached $13.6 billion from just around $l billion in 1994.

The Chinese Premier said that India, with its software, and China, with its hardware potential, could marry each other's strength and also jointly work in areas such as bio-technology, nanotechnology and space research. The two countries also agreed to co-operate in the field of energy security and conservation, including among others, encouraging relevant departments to engage in the survey and exploration of petroleum and natural gas resources in third countries.

Addressing the business leaders in New Delhi, Mr Wen said China's India strategy was still evolving, highlighting a future with an accent on new fields of co-operation — such as agriculture — besides strengthening the old ties in steel, electronics and of late, software and automobiles. "Agricultural co-operation between us, two highly populated developing countries, is very important," he said.

The Chinese Premier also expressed the hope that the two sides will soon begin their feasibility study of establishing a free trade area (FTA) between China and India. It may be recalled that the former Prime Minister, Mr Atal Bihari Vajpayee's historic visit to China in 2003 had helped put political and economic relations between India and China on a new footing. An important landmark of that visit was the signing of the Border Trade Agreement between the two countries and the reopening of the Nathu La pass in Sikkim (the ancient silk route), which was closed for 40 years after the 1962 border conflict.

The new beginning that was made during Mr Vajpayee's vist to China received a tremendous boost during the Chinese Premier's recent visit to India. The focus now is not only on increasing trade between the two countries but also on "strategic and co-operative partnership" in various fields that would not only serve the interests of the two countries, but would help accelerate the process of regional integration in Asia. The two countries are also working together at the WTO to protect the interests of developing countries.

The perception of the Indian business community about China has undergone a dramatic transformation over the past three-four years. The fears about the Chinese dragon invading India with cheap manufactured goods are not only fast receding, more and more Indian companies have been venturing into Chinese turf. Ranbaxy was the first Indian company to enter into a joint venture in China in 1993. The company's sales and marketing force now covers over 2,000 hospitals in 25 provinces in that country. It intends to extend this coverage to 4,000 hospitals in 27 provinces by 2007.

Since 2001, a large number of Indian companies have set up shop in China. Prominent among these include Aurobindo Pharma, Reliance Industries, Tatas and Aditya Birla group, Sundaram Fasteners, Essel Packaging, and Contest2win.

The companies sourcing from China include Videocon, Onida, Tube Investments, Nitco, Apollo Tyres, JK Tyers, Aegis Safety, TVS Motors, L. M. Thapar group, United Phosphorous, Hero Cycles, and Bajaj Electricals.

Major exporters include Bharat Forge, Reliance Industries, Steel Authority of India, Ispat Industries, Indo Rama Synthetics and Mamata group. Major software companies such as Tata Consultancy Services, Infosys, Satyam, Wipro and NIIT have their strong presence in China.

Similarly, China's attitude towards India has also undergone a dramatic change after it joined the WTO in 2001. Unlike earlier, when Chinese businessmen only wanted to talk about trade, now they want to invest in India and explore synergies. They are particularly impressed by India's strides in the IT sector.

The question that often troubles analysts is: "Will India and China co-operate or will they compete". It would be logical to presume that they will do both. While they may co-operate in some areas, they are bound to compete in others. For instance, they will compete for a greater share of the world market in textiles and consumer durables. So long as it is healthy competition, there is nothing wrong in it.

In this context, the observation made by a recent survey by Economist magazine is quite interesting and should make the Indian policy-makers sit up and think. It says: "The reality is that China and India are not rivals in the true sense. Although India may measure its economic growth, global influence, and military might against its neighbour, China compares itself rather to America."

Thus, while the prospects of strategic and co-operative partnership between the two countries are no doubt bright, if India has to truly benefit from the partnership, it will have to do a lot to catch up with China by building up on its strengths and accelerating the reform process. As of now China is way ahead of India in respect of most economic indicators.

Over the past two decades, China's GDP has grown 9.7 per cent a year compared to India's 5.7 per cent. In 2003, China's GDP was 2.5 times that of India's while its per capita income was twice that of India. In terms of purchasing power parity based GDP, China's share in combined global GDP was 12.6 per cent compared to India's 5.7 per cent. China has achieved sustained export-led growth over the past two decades by inviting foreign direct investment (FDI) on a huge scale. No other country in the world attracts as much FDI as China.

China has made great strides in international trade in recent years again, thanks largely to large-scale FDI inflows in its manufacturing sector. In early 1990s, China's share in world exports was 1.9 per cent and imports 1.6 per cent. By 2003, its share in exports increased to 5.8 per cent and imports 5.3 per cent. Last year, its two-way trade overtook Japan and China became the world's third largest trading nation after USA and Germany. In contrast, India's two-way trade still remains less than one per cent of the global total.

A research paper prepared by ICRIER has shown that the highest unexploited potential of India's trade is with China as compared with any/all countries. To ensure that this potential is realised, both countries must jointly identify barriers to trade and make efforts to remove them. At the same time, ICRIER is not enthusiastic about having an FTA with China at this juncture. It agrees with many other economists that with India's current levels of tariffs and competitive strength of Indian industry, FTA with China will result in losses to Indian exporters. May be the country will be ready for FTA after a decade or so.

As the Economist magazine survey cited above says, India has to go a long way to catch up with China. Mr Simon Long, the author of the survey, argues that India's renowned IT prowess and the outsourcing boom is largely irrelevant to the masses since it employs only about one million people and the industry makes up only about 4 per cent of India's GDP. In his view, it is worrying that in Indian manufacturing industry has grown much more slowly than services and has provided so few jobs.

However, the survey points out that India still has the advantages of its well-educated middle-class and the "soft infrastructure" laws, institutions and financial markets. China cannot rival India's supply of technical wizards with fluent English. As against this, in labour-intensive manufacturing, Chinese workers have a big advantage with their better elementary education. Incidentally, China has done much more than India to educate and provide basic health care to its poor.

It is of crucial importance for India to compete with, or at least emulate China in labour-intensive manufacturing for export. For the global trade opportunities are significantly higher in manufacturing than in any other sector. As the Economist survey says, this is the only way that India's economic growth can increase to match the levels achieved in China over the past two decades. The survey further adds that without a second wave of radical reform, India is unlikely to match China's growth rates.

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