The first decade of 21st century witnessed rapprochement of India China relations which were stagnant since the Sino-Indian war 1962. Bi-lateral trade between the two nations became the main driving force towards normalisation of relations. Since 2000 there is steep rise in bilateral trade and is expected to reach US $ 100 billion in 2015. But the increasing lopsided balance of trade in China’s favour has become a source of anguish in Indian policy circles, and has played an important role in increasing India’s balance of payment woes. This year the trade deficit increased a record high to US dollar 29 billion despite of 12% fall in bi-lateral trade compared to last year. In this article I have made an attempt to understand the cause of trade deficit, its implication on India’s economy and what India should do to create a better balance.
Trade and economic relations
India and China officially resumed trade in 1978 and in 1984, the two sides signed the Most Favoured Nation (MFN) Agreement. From 1992 both nations began active bilateral trade which made satisfactory progress by 1994.In the same year both countries signed a Double Taxation Avoidance Agreement and the prevention of fiscal evasion with respect to tax on income. In three years from 1999-2000 to 2002-03, India’s export to China increased at an average of 50.2% per year, and imports from China at 26.6% per year. Further by deciding to offer some trade benefits to each other both countries signed the Bangkok Agreement in 2003. According to the Agreement, China extended concessions on 217 products from India while India offered concessions on 188 products exported by China. After this deal India-China bilateral trade got a boost and it surpassed US $ 10 billion in 2004, China became India’s largest trading partner by 2008, and in 2010 both proposed to achieve US $ 100 billion by 2015 as a result by 2011-12 the trade between both countries reached 73.9 billion.
The flip side is that much of the trade has been in China’s favour, leaving India with a deficit of $27 billion in 2011-12 and this year it reached US $ 29 billion despite 12 % fall in bilateral trade. For every $100 item that India sells to China, It buys back goods worth $320.
As shown in the above figure India’s export to China mainly consist of raw materials, whereas China’s export consists of manufactured and value added goods. Though India has urged Chinese government to better the lopsided bilateral trade nothing much has happened. It is not easy for Indian goods to enter China and the most restrained are the Indian pharmaceutical products which find it difficult to reach the Chinese market. According to Som Mittal, President, Nasscom (a trade association) Indian companies struggle in China due to non-tariff barriers such as requirements to obtain security clearances before doing business with government backed companies.
On one side Indian firms and value added goods are restricted from entering China and on the other hand Chinese manufactured goods are invading Indian markets this has adversely affected growth of manufacturing Industry in India. The image below shows the adverse affect of this bilateral trade on Indian economy.
Indian manufactures are unable to compete with cheap Chinese goods. The main problem is that China doesn’t have any strong Intellectual property rights laws. As a result whenever a new product is launched in international market Chinese firms are ready with their cheap replicas which look more or less similar to the original.
Today 60% goods in Indian local markets are of Chinese origin raging from stationary, household, decorative, fine arts, God idols, firecrackers etc. This has resulted in stagnation of Indian cottage industry; according to a report in the last 10 years nearly 50 % of cottage industries in towns like Bhiwandi have shut down. It has also giving tough time for major manufacturing industries in India. For instance, Bharat Heavy Electricals a US $ 13 billion New Delhi- based producer of power equipment is struggling to compete against lower-priced products from Shanghai Electric and Dongfang Electric.
The main concern on India’s side is dumping of large number of Chinese goods in Indian markets. India has been most disgruntled by Chinese trade manipulations and has lodged a total of 137 cases with the World Trade Organisation (WTO) against China in the last 15 years. India imposed banned on a number of Chinese goods in India e.g. import of milk and milk products such as chocolates in 2008 and since then it has been extended. India also imposed ban on import of Chinese toys for six months in 2010 which was lifted after two months when China warned to take up issue in WTO. In 2011 India also imposed ban on import of Chinese telephone equipment. Even after celebrating 2012 as a friendship year, in January 2013 government of India has imposed safeguard duties on import of certain insulators from China for a period of two years; 35% for the first and 25% for the subsequent year. India has also imposed a 20 % tax on imports of hot rolled flat products of stainless steel from China to protect local producers which is said to last for 200 days. But these moves by government has not helped as despite a decline of trade by 12% between two countries the Fiscal deficit has still increased by US $ 1.79 billion taking it to a record high US $ 29 billion dollar; it means these moves have constrained competition rather than the competitor. Today china accounts for a fifth of India’s overall fiscal deficit.
How to tackle with this fiscal problem
India’s economic development is based on IT and Service sector whereas China’s development is based on manufacturing. As a result India dose not produces much that it could export to China and in case of IT and Service sector language becomes a problem; our specialization is English and not Mandarin which is phonetically different from English. Hence the best way to tackle this trade deficit is to improve manufacturing and industrial sector which is on decline as Indian markets are becoming more dependent on Chinese products and if this dependency increases Indian markets will soon be monopolised by Chinese goods. On the other hand China is aggressively developing its service sector and if the growth continues it is likely to take over Indian service sector in future.
The image below shows the decline of 3.7% in industrial production this fiscal year compared to same period of 2011-12.
The image below shows the increase in China’s service sector
Hence it’s high time that India rebalances its economy by developing Industrial sector, which is plagued in low productivity. If India is successful in building infrastructure for producing ancillaries it will dent India’s imports from China; this will not only reduce fiscal deficit but, in the long run help India to become self-sufficient in manufacturing, and will complement its service sector.
The main hurdle is India’s underdeveloped infrastructure and the rising cost of land, non-availability of electricity and water whereas on the positive side it has a large human resources and an increasing middle class that has emerged as a large global market. If India wishes to become a developed nation it’s over dependency on service sector will take it nowhere. If taken into account Indian government’s record in policy framing and its implementation it will take two decades from now to make India self-sufficient in manufacturing.
For the time being India should ask Chinese companies wishing to remain major suppliers to Indian companies start manufacturing in India. India should also ask Chinese companies and Banks to invest in India’s infrastructure. This will increase Chinese investment in India.
Further India must demand higher market access for Indian value added goods in China and should plug into the Chinese supply chain by exporting goods not found in China which will help decrease the fiscal deficit.
By taking into account China’s ability to produce low cost manufacturing goods and India’s inability to do the same, the fiscal deficit is likely to persist in near future. As a result in the current decade, India’s top economic priority should focus on infrastructure building to develop its industrial sector. The sooner the infrastructure deficit gets addressed, the faster India will start competing with China on the manufacturing front.
By Sumedh Lokhande