Tag Archives: India-China relations
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India China bilateral trade and India’s Fiscal Problem

22 Mar

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Source:http://www.economist.com/node/21557764

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.

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Source:        http://online.wsj.com/article/SB10000872396390443687504577563542149677000.html

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.

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Source: http://www.rediff.com/business/Union-Budget-2012-13/slideshows

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.

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Source: http://www.91mobiles.com/video/24415/China+wholesale+Nokia+N87+style+qwerty+keypad+phone.html

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.

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Source: http://www.rediff.com/business/slide-show/slide-show-1-indias-industrial-output-falls/20130212.htm

The image below shows the increase in China’s service sector

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Source: http://www.economist.com/blogs/analects/2013/02/services-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

References

1        http://takshashila.org.in/wp-content/uploads/2010/03/PB-AnanthRitwick-IndiaChinaTrade-Sep2011.pdf

2        http://articles.timesofindia.indiatimes.com/2013-01-25/outsourcing/36547143_1_china-indian-bpos-convergys

3        http://www.bjreview.com.cn/business/txt/2012-12/31/content_509748_2.htm

4        http://www.businessweek.com/articles/2012-03-21/indias-misguided-china-anxiety

5        http://www.businessweek.com/articles/2012-02-23/chinese-imports-invade-india

6        http://www.iprochina.com/news_detail/newsId=2863bd68-8092-4ab1-94b8-8e7385c79cf3.html

7        http://www.bloomberg.com/news/2013-01-07/india-imposes-20-import-tax-on-chinese-hot-rolled-flat-steel.html

8        http://ema-europe.org/2012/04/india-vs-china-the-elephant-can-not-fly-like-the-dragon-unless-winged/

9        http://www.thehindu.com/business/Economy/indias-trade-with-china-falls-12/article4295117.ece

10    http://online.wsj.com/article/SB10000872396390443687504577563542149677000.html

11    http://www.indianembassy.org.cn/DynamicContent.aspx?MenuId=3&SubMenuId=0

South China Sea a Sea of Disputes

10 Mar

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Source:   http://www.economist.com/node/17493342

South China Sea (SCS) is a marginal  sea around 3,500,000 sq km it is part of Pacific Ocean encompassing an area from Singapore and Malacca Straits to the Strait of Taiwan.One third of the world’s shipping transit through it;  it is believed that its seabed has huge oil and gas reserves. It comprises over 200 islands, rocks, and reefs and includes the Paracels and Spratly groups of islands. The unresolved maritime claims to all, or parts, of South China Sea involve Vietnam, Malaysia, the Philippines, Brunei, Taiwan, and China. Vietnam Taiwan and China have claimed entire area, while others have claimed contiguous zones.

Beside its dispute I have also made an attempt to understand the geopolitics surrounding South China Sea; its strategic importance to China, role of USA, and how India is trying to counter balance China with its “Necklace of Diamond” strategy against China’s so-called “String of Pearls”.

Historical background and claims in South China Sea (SCS)

Historically this sea was controlled by various Dynasties that ruled China from 206 B.C. to 589 A.D. From 7thcentury it was controlled by Kingdom of Champ which ruled today’s Vietnam and from 1644A.D. to 1911 by Qing Dynasty of China.Later, during WW II, it was under Japanese control. Hence, China, Vietnam and Taiwan claim entire SCS as they have historical evidences to support their claims. In 1887 China and France signed a boundary agreement which specified that islands situated east of the designated line belonged to China.In San Francisco Conference of September 1951 the allied powers failed to identify who had title to the SCS islands after they divested Japan from its possession. Article 2(f) of the San Francisco Treaty simply stated that “Japan renounces all right, title, and claim to the Spratly and Paracel Island.[1] This gave rise to a legal and political vacuum, and thereby allowed the littoral states to raise their respective claims. The separation of historical claims from actual occupation played a significant role for the subsequent development of the SCS dispute.

On 12 May 1977 Vietnam declared a 200 nautical mile Exclusive Economic Zone (EEZ), and included the Paracels and Spratlys islands in its territorial water, by 1999 some 27 islands and reefs were occupied by Vietnam in the Spratlys. During the same period Philippine occupied eight islands beginning in March 1978, and issued a declaration incorporating the claim into the Philippine territory in the following December. From one continental shelf in 1979 Malaysia occupied 5 shelves by 1999.

The United Nations Convention on the Law of the Sea (UNCLOS) in1982 has laid down a number of guidelines concerning the status of islands, continental shelves, exclusive economic zones (EEZ), enclosed seas, and territorial limits. UNCLOS states that countries with overlapping claims must resolve them though good faith negotiation.

Association of Southeast Asian Nations (ASEAN) has been keen to ensure that the territorial disputes within the SCS do not escalate into armed conflict. As such,  Joint Development  Authority have been set up in areas of overlapping claims to jointly develop the area and divide the profits equally without settling the issue of sovereignty over the area.

 

The image below shows their respective claims

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Source:    http://www.economist.com/blogs/analects/2012/08/south-china-sea

The image below shows how UNCLOS (1982) has defined their maritime boundaries as regard to Exclusive Economic Zone (EEZ)

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Source:http://www.thehindu.com/news/international/article3281437.ece

The latest escalation on friction has started with a confrontation between China and the Philippines over the Scarborough Shoal and International bids by China and Vietnam for oil exploration in areas of the SCS contested by the two[2].

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Source: http://www.asiaobserver.org/asian-political-cartoons

Efforts by the Philippines and Vietnam to get the support of their ASEAN counterparts during the 45th ministerial meeting on 9 July 2012 resulted in ASEAN’s inability to issue a communiqué for the 1sttime. The disputes are likely to persist or even grow as there is a large potential for oil and gas reserves along with rich marine resources in SCS.

Therefore, without a strong, effective and permanent dispute settlements mechanism with a binding legal force, UN and ASEAN can only manage, not settle the disputes in SCS.

China’s Strategic interests in South China Sea (SCS)

China with its rapid economic and military growth has started playing a major role in shaping the geopolitics of world in general and Asia-Pacific in particular. In the longer term, China probably aspires to supplant America’s pre-eminence, but in the shorter and medium term it is preoccupied with domestic problems, with trying to expand its influence in neighbouring regions and warding off perceived US pressures or designs that are seen as inimical to China’s interest.[3] China has claimed almost 90 % of SCS as its own integral part according to its 9dash line map based on historical evidence.

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Source: http://www.cnas.org/blogs/naturalsecurity/2012/11/beijing-pushes-diplomatic-envelop-south-china-sea-dispute.html

About 80% of China’s imported oil supply passes through SCS, and almost 90% of its export is through this region.Beside it is believed that SCS has a large number of hydrocarbon reserves mainly oil and natural gas. As a result, control of SCS is central to China’s strategic thinking. The most important priority in China’s foreign policy objectives in Asia-Pacific, including the SCS, is to ensure a stable external environment conducive to China’s economic growth and military modernization.

To enlarge its political and economic space and to conscribe the United States from undertaking perceived anti-China moves in this regionChina has been building various cooperative multilateral institutions and bilateral partnerships with neighbouring countries.

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Source: http://www.economist.com/node/21562272

USA and its Strategic Interest in Asia Pacific

Long before USA became an Atlantic power it was a Pacific Power. United States has been dominant in the Asia-Pacific because of three structural factors: Its claims global leadership; secondly US perceives Pacific Ocean as a natural zone of American influence, as “our lake”; and the third is the outcome of the dynamics of the US political system.[4]

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http://www.asiaobserver.org/asian-political-cartoons

East Asia/Southeast Asiais a multi-billion dollar market for US agricultural products and supports, directly and indirectly, millions of American jobs in all sectors of the US economy. Besides its economic worth, Southeast Asia is of great strategic importance for the United States. It is situated in the middle of the sea routes from the Persian Gulf and the Indian Ocean to the Pacific, through which much of the world’s trade and energy supplies pass. Hence the fundamental goal of the US in the Asia-Pacific is to prevent the domination of Southeast Asia by any other power.

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Source: http://www.asiaobserver.org/asian-political-cartoons

With this brief prescription it becomes clear that the issue SCS is a core issue of US National Interest. China wants to deal with each of its rivals one-on-one and is moving to exploit competing claims within ASEAN to keep its members divided. Meanwhile United States claims that it, is trying to foster a unified ASEAN code of conduct in the dispute with China.

The following video gives us glimpse of current situation in the disputed region

http://www.youtube.com/watch?v=W-CDMSOGaRY

India’s rise and its strategic interest in South China Sea (SCS)

The East Sea/South China Sea’s geopolitics has an ancient as well as contemporary significance for India. Strategically, India believes that enhancing its engagements in East Asia is one of the measures to limit China’s influence on South Asia and Indian Ocean.

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Source: http://globalbalita.com/2013/01/15/island-nations-play-china-and-india/

Under the look East Policy launched by India in 1991, a new phase of economic and engagements with ASEAN and East Asian states was initiated. This brought India and China face to face. India has a strong strategic interest in keeping sea lanes open in SCS, in order to promote its political, military, economic and cultural cooperation with the East Asian region. In 1996 India became member of ASEAN Regional Forum (ARF;in 2005 it was included unequivocally in East Asia Summit. This means that India has transcended its South Asian Focus and has emerged on the wider regional scene as an actor with significant broader Asian interest.

In December last year India hosted India-ASEAN commemorative Summit celebrating the 20th anniversary of Indian-ASEAN dialogue partnership and 10th anniversary of Indian-ASEAN summit level partnership. Wary of continued Chinese aggression in the SCS, ASEAN nations are looking at India to take a leading role in this region’s maritime politics.

The SCS is not only a strategic maritime link between the pacific and the Indian oceans, but vital gateway for shipping in East Asia, almost 50% of India’s trade transits through the SCS. Besides the political, security, trade and connectivity significance India is also interested in the energy resources of this region. Apart from helping secure energy supplies for countries like Japan and Korea, India has the unique distinction of shipping oil from Sakhalin to Mangalore through sea routes of this region.

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Source: http://www.thehindu.com/news/international/china-summons-us-diplomat-over-south-china-sea-row/article3731681.ece

India’s (ONGC Videsh) oil exploration in collaboration with PetroVietnam  annoyed China and resulted in a small skirmish between them;China deliberately tried to hammer India’s oil exploration.In December 2012,Indiastated that its interest in this region are purely commercial, aimed at energy exploration and it will use force if needed to secure it.

The following video further supplements my argument.

http://www.youtube.com/watch?v=uASByFNefjo

Conclusion

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http://www.defence.pk/forums/indian-defence/142228-india-moots-trilateral-dialogue-united-states-china.html

From the above explanation it becomes clear that Southeast Asia is witnessing an emergence of a new tri-polar structure with China, USA and India as its poles and where USA’s hegemony is challenged by China.

India is now being courted by USA as a counterweight to China as both are huge countries and know how to calculate their national interests.  The recent rise of China’s assertiveness in SCS has a direct linkage with its acquisition of Gwadar port (Pakistan), it is believed that it will drastically reduce China’s dependency on the Malacca strait and hence will allow China to even use coercive measures against its opponents. If China continues to assert dominance over these waters, it will be difficult for India to continue with its activities through this channel. Therefore, it is vital for India to have access to the region.

China’s recent acts in the SCS indicate that it is unilaterally trying to change the status Quo in SCS through its revisionist agenda i.e. a shift from land centric to maritime diplomacy. On India’s part if it is concerned about freedom of navigation this is an issue that will profoundly impact Indian foreign policy.

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http://articles.economictimes.indiatimes.com/2011-09-18/news/30172047_1_south-china-sea-india-and-china-china-claims

The difference in economic and military potentials between India and China is so great that today it is impossible to talk about parity, but it is equally true that despite its limited resources India  possess biggest challenge to China’s Hegemony in Asia-Pacific. Hence India will continue to actively indicate its presence in this and other regions vital to its interests, but it is unlikely that they will start a direct confrontation with each other at least in near future.

By SumedhLokhande

END NOTES/REFERENCES


[1]LeszekBuszynski & IskandarSazalan, Maritime Claims and Energy Cooperation in the South China Sea, Contemporary Southeast Asia, Vol. 29, no.1 (April 2007), p. 144.

[2]Vikram Nehru, Collision course in South China Sea, The National Interest.

[3]Daljit Singh, Asia-Pacific Political & Security Dynamics, in Political & Security Dynamics Of south & SEA, (ISEAS)2007, p., 27.

[4]JornDosch, United States Security Policies in Asia, Hodeley&Ruland, (ISEAS) 2006, p., 112.

5 Vo XuanVinh, India’s Stand on the East Sea/South China Sea Disputes and its Implications, World Focus, January 2013.

6 Dr. Jagannath Panda, South China Sea: ASEAN wants India to Counter China, World Focus, January 2013.

http://www.nbr.org/publications/element.aspx?id=564

8 http://www.thejakartapost.com/news/2012/07/28/open-war-south-china-sea.html

9 http://www.bbc.co.uk/news/world-asia-pacific-13748349

10  http://www.eia.gov/countries/regions-topics.cfm?fips=SCS

11 http://www.voanews.com/content/south-china-sea-dispute-poses-challenge-for-us/1592927.html

12  http://maritimeindia.org/article/south-china-sea-dispute-and-india

13  http://www.rediff.com/news/slide-show/slide-show-1-india-to-counter-chinas-threat-by-necklace-of-diamonds/20120131.htm#1

14 http://www.futuredirections.org.au/publications/associate-papers/613-india-s-strategic-perceptions-dilemmas-and-opportunities.html