Following the torpor of the August holidays on both sides of the Atlantic, each September marks the revival of the international diplomatic calendar. On the political side, the centrepiece is the annual meeting of the United Nations General Assembly in New York; on the economic side, a similar marker is the Annual Meetings of the World Bank and the International Monetary Fund, held in Washington twice every three years. To these “global plenaries”, with their associated preparatory meetings, have now been added Ministerial Meetings of the G20, in preparation for the Leaders Summit in Cannes in early November this year.
Amid all these comings and goings, it would be easy to miss an important bilateral event of perhaps greater consequence for India’s economic prospects: the first India-China Strategic Economic Dialogue. This is to be held in Beijing later this month (starting September 26), led on India’s side by the deputy chairman of the Planning Commission and on China’s side by Zhang Ping, chairman of China’s powerful National Development and Reform Commission. The two countries agreed to institute such a dialogue on the occasion of Chinese Premier Wen Jiabao’s visit to New Delhi in December last year.
At the bilateral level, the two sides already have a great deal to talk about. As it evolves and deepens, however, the economic relationship will grow in significance for the rest of Asia, and, in time, for the global economy.
It is common knowledge that China and India are already the largest and third-largest economies in Asia, the two fastest-growing major economies, and the two most populous nations in the world. Taken together, they constitute a major growth pole in an otherwise anaemic global economy. Though some analysts (such as Professor Dani Rodrik, recently in Delhi) might disagree, most economists would judge that the rapid growth of both countries has been substantially driven by their increasing integration with the global economy, most of all in trade (both goods and services) and through direct investment.
China’s sustained commitment to such global integration over the last 20 years or so has been one of the important factors responsible for its sustained, rapid growth, as well as for its now commanding position in the global merchandise trade. While India’s external liberalisation has been successful within its own terms, it has been much more halting and hesitant. On account of our policy choices, our economy is today dwarfed in size by China, but is arguably better balanced between consumption and investment, and between net exports and domestic demand. There is worry about the size of our deficit on merchandise trade, running at about seven per cent of gross domestic product, but the strong performance of merchandise exports suggests that this does not represent a generalised competitiveness problem, but rather the adjustment of the economy to its underlying comparative advantage, and to the savings-investment balances in the economy, where our fiscal position is a major distortion.
Notwithstanding these asymmetries, deeper integration of the two economies is both inevitable and economically desirable. China is already India’s largest trading partner. India is slowly becoming a significant market for China, not a mean achievement given that China is now the world’s largest exporter. Both countries have also agreed at the policy level that such integration should proceed for mutual benefit of the two economies even as security tensions (border issues, Tibet, Pakistan, South China Sea and Indian Ocean) persist and even intensify. Such compartmentalisation has been successfully pursued in north-east Asia between Japan, Korea and China, and indeed between Taiwan and the mainland, despite equally grave and long-standing security disagreements.
More critical than these political issues is the ambivalence felt by both the corporate and official sectors in India towards greater economic engagement with China. This ambivalence has stalled any progress towards a trade agreement with China, at a time when most of our large Asian neighbours are negotiating preferential access to the Chinese market.
Addressing the issues that underlie this ambivalence will no doubt be a key goal of this and subsequent economic dialogues. Among these issues is the current imbalance in the goods trade, where of a total volume of $60 billion in two-way trade in 2010 China’s exports to India exceeded India’s exports to China by a wide margin. There is also the commodity composition of trade in each direction, with China’s exports to India representing significantly more sophisticated manufactures than trade in the reverse direction. Finally, there is the global concern with China’s exchange rate regime.
Focus on bilateral trade imbalances with a particular country partner, either in volume or in composition, makes relatively little economic sense. In the case of China, a basic concern is that such trade is driven by strategic rather than purely commercial considerations. India points to the lack of success of its globally competitive pharmaceutical and information technology sectors in the Chinese market as an example of “hidden” non-tariff barriers. It may be noted that the United States has long complained about similar barriers to import of foreign cars into otherwise open economies such as Korea and Japan, and it is not immediately clear whether China particularly discriminates against imports from just India. China’s apparent “hyper-competitiveness” in supply of project imports, particularly in the electricity sector, has also caused disquiet. Slightly different issues arise in the sourcing of telecommunications equipment from Chinese suppliers, in that there is no extant domestic supplier of comparable equipment.
I have focused on the trade issues because these are the proximate irritants in the economic relationship at present, but there are equally important issues involved in both foreign direct investment and other forms of financial cooperation. India has enormous needs and opportunities in the infrastructure sector, and China has both skills and finance available in this area. China, in turn, stands to improve its own productivity by benefiting from areas in which India is a competitive supplier, including the sectors mentioned above.
Accordingly, an important goal of this first Strategic Economic Dialogue should be to put in place mechanisms to enhance mutual understanding and transparency on these thorny issues between the two sides. This can be done by dialogue, and also through detailed joint research to validate and demonstrate non-discriminatory treatment. In time the goal should be to develop sufficient interpenetration of the two economies, so that economics tempers insecurity, rather than the other way round.
The author is country director, India Central, International Growth Centre.
The views are personal
