At the heart of improvement in relations between India and China lies greater economic cooperation, writes GEETHANJAlI NATARAJ and GARIMA SAHDEV
Where politics disappoints, economics gives hope. The Sino-Indian ties are emblematic of this proposition. Once bitter neighbours, India and China have for years been trying to integrate economic ties to help resolve their territorial dispute, and trade between the two countries has steered bilateral relations for the last decade. The bilateral trade has travelled a long way since the two sides signed the Most Favoured Nation Agreement in 1984, crossing the $10 billion mark in 2004, and China becoming India's biggest trading partner in 2011.
That said, the bilateral trade has seen a downward trend since 2011, with 2013 registering a 1.5 per cent decline. The current trade deficit with China stands at $31.42bn. The leadership of both the countries have set an ambitious target of $100 billion to be achieved by 2015, which looks implausible now.
Alarming levels of deficit and the rising imports from China have cast a shadow on the once flourishing trade. China's predatory trade practices, which include a mulish refusal to allow free flow of its currency, making its exports advantageous — low wages; local tax incentives and aggressively subsidising domestic players — make the current trade between these two countries unsustainable. Besides, Indian exporters are routinely confronted with market access issues in China.
It would be difficult to sustain good trade relations between the two countries unless some concrete steps are taken by both the sides to bridge the growing deficit. This is a problem that India is grappling not only with China but with several of its trading partners, including Indonesia and a few other Asean countries. There are quite a few reasons for the growing deficit with China.
India's economic growth has seen a shift from agriculture to the services sector over the years. The software services and IT-enabled services exports, in particular, is one sector where India has not only had a competitive edge globally, but also against China. However, this golden industry faces restrictions in the Chinese market, with the country's increasing focus on developing its service industry in an attempt to create more employment for its youth. The International Data Corporation says that China, with a 10 per cent share of global software developers, is already ahead of India (which has 9.8 per cent of the world share). The threat is notably serious because China is wooing Indian investment to help set up its own software services industry. While Indian software and services industry exports are focussed on the developed markets, and the industry as such does not face a slowdown; India needs to eye the Chinese software industry to arrest the fast-widening trade deficit with China. Further, there is a need to build on the value chain in software services.
The farm sector and agro-processing industry also face limited access in Chinese market, continuing the Chinese trend to allow limited access in the higher-value sectors. In the past, China banned several agricultural exports from India, including Basmati exports, without providing sufficient scientific evidence required under the Agreement on Sanitary and Phytosanitary Measures.
Apart from market-access issues and China's unfair trade practices, India's own set of structural hurdles — some of which are deep-rooted — and productivity gap with China are to be blamed for the ballooning trade deficit with China. This is because, in defiance of the 159 anti-dumping cases against China since 1992, the largest among foreign nations, across a broad spectrum of sectors — steel, pharmaceuticals, consumer goods, etc — trade deficit looms large.
Raw materials like iron ore, bauxite and cotton, which make up the bulk of India's exports to resource-hungry China, have also continued to post a downward trend owing to mining bans in Karnataka and Goa by the Supreme Court. Before the ban, India was the largest exporter of steel-making raw-materials to China — a slot replaced by Australia and Brazil, while iron ore remains China's top import commodity. A sharp decline in their exports in the last two years has pulled down India's overall exports to China by about 25 per cent. For a country rich in mineral resources, caps on production and exports greatly minimise the scope of sustainable capitalisation of these resources.