India-China relation faces many challenges
Prime Minister Narendra Modi's tour of China has led to some forward movement in efforts to bridge the increasing trade deficit between the two countries. Mr Modi discussed the issue with Chinese President Xi Jinping and Prime Minister le Keqiang, following which India and China have agreed to set up a high-level body that will focus on sorting out trade issues and expanding economic cooperation in areas as diverse as infrastructure, information technology, pharmaceuticals, agriculture and manufacturing. The key to closing the trade deficit, which was pegged at a whopping $48 billion last year, lies in persuading China to further open up its markets to Indian goods and services.
Pharmaceutical products and IT services make up for a big chunk of Indian exports globally, but Chinese sees itself as a competitor in these two segments and has, therefore, restricted trade. From India's point of view, if these two are kept out, there's little else it has to offer. Previously, India's biggest export to China used to be iron ore, but that has been banned in recent years, skewing the trade equation even further. In comparison, the pocket-friendly goods that China exports to India, such as mobile phones, computer hardware, soap and several other essential items of daily use, have a large market — especially among the burgeoning lower middle classes. And so it comes as no surprise that the Confederation of Indian Industry has reported that, for the 11-month period between April 2014 and February 2015, Indian exports to China were just $11 billion while Indian imports of Chinese products and services totalled $55.8 billion.
For India, this marked an 18.2 per cent increase in imports and an 18.9 per cent dip in exports. A second tool to balance the trade deficit is to increase Chinese direct investments in India. Between 2000 and 2014, China made direct investments in India worth just about $400 million — a fraction of what it invested in, for example, the UK ($22 billion) and Japan ($17billion). The Modi Government has been consistently wooing China to invest more freely in India, as was evident even during President Xi's visit to India last year. At that time, the Chinese promised to make huge investments in IT parks and other infrastructure project here. This time around, investments and trade agreements worth $10 billion have been announced. It will possibly be years before even some of these projects are completed. Nonetheless, there is a palpable sense of optimism among the Chinese that the Modi Government will be able to improve the business climate in India, making it easier for Chinese businesses to make direct investments in India, apart from smoothening the way for commercial cooperation at the Government-to-Government level.
The other contentious issue between India and China is the border dispute, and there has been little progress here. Both sides have no doubt agreed to firm up confidence-building measures along the border, which will hopefully prevent at least the kind of Chinese incursions into Indian territory that we saw in ladakh in 2013 and even during Mr Xi's visit to India in 2014. But a real resolution of the boundary question is still not in sight.