The Hindu Business Line : Hindi Chini Buy-Buy

Global financial crisis and unresolved border dispute notwithstanding, the Sino-Indian economic engagement is only getting stronger. According to the latest statistics released by the Chinese authorities, bilateral trade in 2008 grew by over 34 per cent to reach $51.8 billion.

By comparison the volume of trade in 2002 was a mere $5 billion. In the intervening years China has not only replaced Japan as India’s top trade partner in North-East Asia but eventually emerged as India’s number one trading partner globally, unseating the United States.

Since the start of the century, over 100 Indian companies have set up shop in China, including banks and even a law firm. Meanwhile, the volume of Chinese investment in India is also growing steadily.

Chinese government figures put the value of cumulative contractual Chinese investments in projects in India since 2000 at $22 billion. While this is not a particularly weighty number, almost half this investment came 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 Chindian economic engine is humming soundly, it is having trouble going full steam ahead, finding itself held back by many fundamental concerns that have shown little, if any, signs of resolution throughout this period of high growth.

Dragging feet on RTA

The Chinese, complain of the Indians dragging their feet on a proposed regional trade agreement (RTA). Chinese companies, they say, have, on occasion, been prevented from investing in India on the grounds that they pose an ostensible security threat. Further, Beijing wants New Delhi to grant China market economy status.

Both sides continue to complain of insufficient knowledge of the business practices and the regulatory framework of doing business in the other country. Cultural discomfort involving language and even food habits form an additional barrier. The cold fact is that despite being neighbours, the two countries are 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. While in 2004, the balance of trade was in India’s favour to the tune of $1.7 billion, by 2006 this surplus had turned to a deficit of $4.12 billion. Last year the deficit further broadened to $11.2 billion, Indian exports being worth only $20.3 billion compared to $31.5 billion worth of imports from China.

Bilateral issues

Massive trade deficits have already marred China’s relationship with other countries, notably the US. But unlike with the US, India and China lack any serious governmental mechanism via which to manage trade frictions.

In India, lingering insecurities about Indian industry’s competitiveness vis-À-vis the might of China’s manufacturing are coupled with suspicions about the lack of transparency in Chinese pricing and accounting systems.

India is thus reluctant to grant China market economy status (MES), a first step towards the negotiation of the proposed RTA. Currently, India is a leading initiator of anti-dumping cases against China.

Were New Delhi to grant MES to China it would mean that India would compulsorily have to accept the pricing figures supplied by Beijing, a situation it fears may lead to large-scale dumping of Chinese products.

Currently, India and China have a ministerial-level Joint Economic Group (JEG) that is supposed to meet every two years to discuss bilateral issues of an economic nature. The JEG last met in 2006 after a gap of six years. It failed to meet again in 2008.

During Prime Minister Manmohan Sigh’s visit to Beijing in January last year, Indian industry forcefully brought up its concerns during a business summit held at the same time. The Chinese side promised to give the matter serious attention and alluded to the possibility of sending in large-scale buying missions, a strategy it has deployed with the US and EU.

The Chinese Vice-Minister of trade did subsequently undertake a trip to India but the deals signed at the time were worth a less than impressive $100 million in value, hardly enough to redress the deficit in any serious manner.

Moreover, almost no movement has taken place in the removal of non-tariff barriers against Indian products. For example, the Indians believe their agricultural products to have major potential in the Chinese market.

However, despite the fact that under a bilateral agreement signed on China’s accession to the WTO, Beijing had agreed to the import of 17 types of Indian fruits and vegetables, eight years down the line only three items — mangoes, grapes and bitter gourd — have been approved for import from India.

The flip-side of the deficit-coin is that even in the sectors where unrestricted access to Chinese markets is available, Indian businesses are often under-prepared for a tough-sell. Thus, although mangoes were cleared for export to China in 2003, till date this writer has been unable to find any Indian mangoes in Chinese stores.

LITTLE VALUE ADDED

The bald truth is that, given problems with cold storage facilities, logistics and poor infrastructure at the Indian end, exports of fruits to China remain problematic. Producers who are able to overcome these lacunae choose to focus on western markets, with which they are already familiar.

As a result, the Sino-Indian trade story has plateaued. Indian exports to China continue to be overwhelmingly dominated by primary products with little value added. The Chinese, conversely, export to India mainly high-value finished products such as electrical machinery, a situation unchanged over the last several years despite much hand-wringing on the Indian side.

The global economic crisis has now muddied the picture further creating both challenges and opportunities. One the one hand, with China’s demand for steel slumping Indian exports to China are likely to dip drastically, given their reliance on iron ore.

Other signs of the economic downturn include Jet Airways stopping its Shanghai-Mumbai flight in January this year, just a few months after it began, with much fanfare, in June 2008. The Indian embassy in Beijing revealed that visas issued to Chinese nationals in 2008 showed no increase over the numbers granted the previous year, despite the aggressive launch of a campaign to attract more Chinese tourists, including the opening of the first India Tourism office in China early last year.

On the other hand, with major parts of the developed world in recession, China and India are some of the only major economies that will continue to grow, albeit at a slower pace than previously.

This fact is likely to create new opportunities for trade and investment across the Himalayas. Whether or not there is the will and foresight to convert these opportunities into realities is an open question. For the moment, the road to the point when Hindi-Chini Buy-Buy becomes the defining reality of Sino-Indian relationship remains bumpy.

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