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For a formidable economic engagement across the Himalayas

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Talking business: Chinese President Hu Jintao with Prime Minister Manmohan Singh in New Delhi in November 2006. The two countries signed a bilateral investment protection and promotion pact during Mr. Hu’s visit.
Talking business: Chinese President Hu Jintao with Prime Minister Manmohan Singh in New Delhi in November 2006. The two countries signed a bilateral investment protection and promotion pact during Mr. Hu’s visit.

Pallavi Aiyar

Manmohan Singh’s message during his visit to China next week will possibly emphasise the necessity of developing a multi-faceted bilateral engagement, moving away from the uni-dimensional focus on the boundary dispute.

When Prime Minister Manmohan Singh visits China next week, he will be accompanied by a 25-plus member business delegation, comprising the big guns of India Inc. from a range of sectors including manufacturing and IT. On January 14, some 400 members of China’s business and government community will gather at a summit in Beijing organised by the China Council for the Promotion of International Trade (CCPIT), to meet these captains of Indian industry. Ideas will be exchanged to diversify the economic engagement across the Himalayas. A few business deals will be signed.

The highlight of the meeting, however, will be an address by Dr. Singh. He is expected to spell out his vision for the potentially formidable trade and investment relationship between two of the world’s fastest growing economies. The Prime Minister’s message will possibly emphasise the need to develop a multi-faceted bilateral engagement, moving away from the uni-dimensional focus on the boundary dispute.

In line with the recent stress on commerce rather than conflict, Dr. Singh will underline the significance of Mumbai and Shanghai, as much as New Delhi and Beijing, in determining the contours of Sino-Indian ties.

Growing bilateral trade

Indeed, over the last few years, border negotiations may have been limping along, but bilateral trade has been racing ahead. Between January and November 2007, Sino-Indian trade was worth $34.23 billion. This represented an almost 53 per cent increase over the same period in the previous year. In 2006, bilateral trade crossed $25 billion, a rise of 33.8 per cent over 2005. In turn, the figure of $18.7 billion for 2005 constituted a 37 per cent climb from the previous year.

When the previous Indian Prime Minister to travel to China, Atal Bihari Vajpayee, visited Beijing in June 2003, the total value of bilateral trade was $5 billion. At that time, other than minor trading activity economic links across the border were negligible. In the five years since, not only have some 100 Indian companies established a presence on Chinese shores, but Indian banks, industry associations, consultancies and even a law firm have set up shop to facilitate the burgeoning business ties.

However, several questions loom over this rosy surface picture. Apart from India’s long-term concerns over the composition of its exports to China, which primarily comprise low value primary products, a widening trade deficit is causing furrowed brows in New Delhi. While in 2004 the balance of trade was in India’s favour to the tune of $1.7 billion, by 2006 this had turned to a deficit of $4.12 billion. By November 2007, the deficit had risen to over $9 billion.

In an interview to The Hindu in mid-2007, Indian Ambassador to China Nirupama Rao stressed that a trade deficit with China was “tolerable only for a finite period,” beyond which the risk of seeing a “positive of the [bilateral] relationship assuming negative tones” ran high.

Even Chinese trade officials admit that an Indian trade deficit is likely to continue for the foreseeable future. “Unless Indians make a much more concerted effort to sell in the Chinese market, the Chinese surplus will continue,” says Wang Jinzhen, secretary- general of the CCPIT.

One possible solution, according to him, is the early negotiation of a Regional Trade Agreement (RTA) between the countries, something China has aggressively been pushing for in recent years.

Mr. Wang points to the fact that China has concluded, or is in the process of finalising, around 15 Free Trade Agreements (FTAs) with 29 countries and regions. He quotes the Sino-Chilean FTA as an illustration of the mutual economic benefits such agreements can bring to bilateral trade. “Within a year of the FTA with China, Chile increased its exports to China by 100 per cent,” he says.

The joint task force set up by India and China to study the feasibility of an RTA will make public its recommendations during Dr. Singh’s visit. It is widely expected to suggest that the implementation of any RTA be deferred while not ruling it out altogether.

The suggested “go slow” on the RTA is primarily the result of concerns amongst Indian business leaders. Lingering insecurities about Indian industry’s competitiveness vis-À-vis the might of China’s manufacturing are coupled with suspicions of lack of transparency in the Chinese pricing and accounting systems.

India is thus reluctant to grant China Market Economy Status (MES), which should be a first step towards the negotiation of an RTA. Currently India is a leading initiator of anti-dumping cases against China. Should New Delhi grant MES to China, it would mean India having to accept the pricing figures supplied by Beijing. This would lead to fears of large-scale dumping of Chinese products.

Harpreet Puri, founder and head of Business Links, a China-based Indian consultancy, argues that the best way is to stagger a potential RTA, restricting it to certain commodities, rather than implementing a full agreement all at once.

Boosting investments

He is of the opinion, however, that during Dr. Singh’s visit the emphasis should be on boosting cross-border investments, rather than on trade alone. “India’s trade deficit is likely to continue for some time, and so it is really important to make investments rather than trade the foundation of the relationship.”

Although a gradual stepping up of investments across the Himalayas has taken place, they remain meagre. For example, since 2006 Mr. Puri’s consultancy has helped bring in an investment of $60 million from wind energy company Suzlon, and an additional $50 million from Everest Kanto Cylinders. However, actual Indian investment in China till March 2007 stood at $178 million (although contractual investment is valued higher, at $565 million).

Chinese investments in India are less than weighty, with fewer than 50 Chinese companies known to have set up offices. According to the Indian government, FDI inflows from China between August 1991 and December 2006 worked out to a mere $3.61 million. Even the higher Chinese figure of about $17 million for actual investments is distinctly unimposing.

When Chinese President Hu Jintao visited New Delhi in November 2006, the two countries signed a bilateral investment protection and promotion pact. Since then there has been a palpable upswing in Chinese investments south of the border, particularly in the areas of infrastructure and project implementation.

However, Mr. Wang explains how lack of information about investment and market conditions in India, coupled with the country’s stringent labour laws and poor infrastructure, do not yet make it an obvious choice for Chinese investors.

Moreover, although the upgrading of economic ties is expected to take some of the heat off the simmering issues of bilateral political contention, such as the disputed boundary, continuing political suspicions work against an unfettered economic engagement.

Thus, New Delhi has for long stymied Chinese investments in certain sectors, such as telecommunications and port development, on the grounds that particular companies pose a security threat.

The latest sector to be affected is aviation. The Indian government is blocking the entry of Chinese cargo carrier Great Wall Airlines to Mumbai and Chennai, reportedly citing the fact that key nuclear facilities are located near the airports in these cities. New Delhi’s suspicions spring from the fact that one of the former owners of the airline — the China Great Wall Industry Corporation — was blacklisted by the United States for the alleged transfer of missile technology to Iran.

In retaliation, Beijing has blocked Jet Airways’ plans to fly to Chicago via Shanghai.

Sino-Indian economic ties are, in fact, still in a take-off phase. Thus, while China may be set to emerge as India’s largest trading partner, in January-November 2007 the share of Indian exports in overall Chinese imports was a mere 1.46 per cent. In the same period, India was only China’s 10th largest export destination and the 15th largest exporter to China.

This is thus crunch time for identifying and developing mechanisms to manage the bilateral economic relationship in such a way as to minimise potential friction and maximise mutual self-interest.

It is to be hoped that when speaking at the business summit next week, Dr. Manmohan Singh moves beyond the clichéd niceties of touting hardware-software collaboration and instead addresses head-on the challenges of promoting cross-border economic ties in all their thorny complexity.


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