Sino-Indian trade: Taming the dragon

It would be logical to infer that greater economic engagement between China and India — the second and fourth-largest economies (PPP values) in the world respectively — would be in the mutual interest of both nations. However, for various reasons, this has not happened. Though China is India’s largest bilateral trade partner ($70 bn in 2016, having grown from a mere $2 bn in 2002), the Sino-Indian trade relationship is still just one-third of that between China and South Korea ($218 bn), and even lower than that between China and Vietnam ($97 bn).
 
Investments by China and India in each other’s economies are still minimal, even though there is increasing interest now amongst the Chinese to invest in India, especially in brownfield projects. Indian tourists to China number about 700,000 per year, whilst Chinese tourists to India are only about 200,000. These minuscule numbers represent a mere fraction of China’s 84 million outbound tourists, or of India’s 18 million. Overall, the India-China canvas of engagement is very narrow.
 
Further, over the years, India has persistently run a bilateral trade deficit with China, which now (2016) amounts to $46 bn. This has caused political worry in India; (rationally, it is difficult to understand why — for trade balances should be evaluated not in bilateral terms, but as an overall national picture). But be that as it may, since the deficit is a reality — and a worry — we need to figure out how to deal with it.
 
Logic tells us that since the merchandise trade balance is the net figure of exports and imports, increasing exports to China is an obvious solution. So is attracting tourists from China: as an invisible export, tourism from China would reduce the overall adverse trade balance (merchandise plus invisibles). Reducing imports from China — ceteris paribus — would also achieve the same result. Finally, inward investment from China would provide a positive infusion on the capital account, thus mitigating the deficit on the revenue account.
 
But theoretical solutions are useful only as far as they are feasible and timely. So, how should we evaluate these four options: (i) increase exports to China (ii) increase tourism from China (iii) decrease imports from China and (iv) increase inward investment from China? Let us consider each in turn.
 

• Indian exports to China are predominantly of commodities and raw materials such as iron ore. This is one of the reasons for the trade imbalance — India is not competitive in many value-added exports. But there are areas like IT, pharmaceuticals (and others) where we do have advantages. As one example, the price of many Indian generic drugs is well below what the Chinese pay for their medicines. A compelling case can be made that Indian generic exports will help China reduce health care costs for its people. Since India imports Chinese drug intermediates (APIs) for many of its formulations, the Chinese API business is a natural ally to support the entry of India’s generics into China. Strange, but true.

 

GAINS AT HAND India has a huge need for investment in infrastructure facilities such as railway modernisation, port development, energy projects etc., all areas where China has both strength and experience. Photo: Reuters

Our real problem in penetrating the Chinese market is one of insufficient and granular knowledge of its nature and working methods. To start with something as obvious as the language gap: India has a serious lack of translators and interpreters skilled in Mandarin. Then comes due diligence and market intelligence. Indian industry and our government must work together more strategically and purposefully to build an ecosystem to drive Indian products and services into China’s huge and expanding market. However, this will take time, and so this option can only be a medium-term target.
 

• On the other hand, stimulating inbound tourism from China is relatively easier. What needs to be done is well-known: simplified visa procedures, a good stock of Mandarin-speaking tour guides, and some imaginative tourism offers drawing on India’s strengths and specially crafted for different segments of the Chinese outbound tourism market. And above all, a creative communication strategy in China’s social, print and TV media presenting India as a novel and engaging destination for the Chinese traveller. The problem is within India: no single company is willing to risk investing money to develop the Chinese tourism market as above, lest competitors steal a march on them. To overcome this “free rider” issue, the Indian tourism industry and our government need to jointly produce a strategic action plan. For quick results, all players on the Indian side need to pull together.

 

• Reducing imports from China — through bans or additional duties — is a bad idea, other than for particularly egregious cases of “dumping”. The reason is that legal imports represent genuine demand from Indian citizens for those products in preference to others. Interfering with these market forces will only mean redistributing the pleasure and pain differently, but still amongst Indian citizens, and with unforeseen consequences. Such protectionist tendencies will also not help India gain entry into larger plurilateral trade groupings, like the RCEP.

 

• The last option — to increase Chinese investment into India — seems the fastest and most productive way to bridge the trade deficit. China has over $3 trillion as reserves in foreign currency, and seeks opportunities where its investment can earn a decent return. India has a huge need for investment in infrastructure facilities such as railway modernisation, port development, energy projects etc., all areas where China has both strength and experience. Further, India presents a safe and stable investment destination, with a favourable demography. Indeed, Chinese investment can accelerate “Make in India” (another irony!), creating enormous employment opportunities in its wake, particularly in relatively low-skill areas like apparel, garments, leather, toys etc. where China is vacating manufacturing space due to high labour costs.

 
Indeed, by first addressing economic issues that could produce significant mutual welfare, we might well reach a scenario where an equitable solution to the intractable border problem will no longer seem a pipe dream.

The author is an independent director on several corporate boards and is an Honorary Fellow, Institute of Chinese Studies, Delhi