The second India-China strategic economic dialogue held last week came at a time when the two countries need to address a range of bilateral economic issues. Revisiting bilateral economic relations is important for changing the global rules of economic engagement. For years, India and China have been involved in re-shaping the global economic architecture to make the functioning of the multilateral institutions in the areas of trade and finance democratic. India and China are also coordinating their positions in critical negotiations on climate change that are taking place in Doha.
Bilateral economic relations between India and China have gone through interesting phases in the past decade. Towards the middle of the previous decade, the two governments were in active consultations for commencing negotiations for a free trade agreement (FTA). These preparations went astray as the Indian government faced opposition from major industry associations. These associations were apprehensive about their ability to stand up to competition from the relatively cheap Chinese products and, were therefore, unwilling to allow lowering of tariffs through an FTA. Another reflection of the unease of Indian businesses with imports from China is the large number of anti-dumping complaints that have registered against Chinese firms.
Policymakers may have failed to bring the two economies together in a closer relationship through a FTA, but the market had worked out its own plan. Rapid expansion of trade since the beginning of the previous decade indicates this clearly. In 2001-02, India-China trade was just less than $3 billion. This increased to $75.6 billion in the last fiscal, registering a 25-fold increase. More significantly, China has emerged as India’s largest trade partner since 2009. Currently, India-China trade accounts for nearly 12% of India’s total trade.
The spurt in trade volumes took place on the back of India’s rapidly increasing imports from China. From a tad above $2 billion in 2001-02, India’s imports from China increased to over $57.5 billion by 2011-12—a 28-fold increase. In contrast, India has not been able to penetrate Chinese markets very well; its exports have lagged its imports from China by a considerable margin, thus giving rise to the spectre of unbalanced trade. The high trade deficit that India faces indicates this clearly. In 2011-12, the deficit exceeded $39 billion and was more than twice the level of India’s exports to China. It is not just the absolute trade deficit that should worry India, but the rate at which it has increased. In the last fiscal, the level of trade deficit was twice as high as that recorded two years back.
Besides the trade imbalance, the commodity composition is also skewed against India. In 2011-12, raw materials and intermediate products made up for more than 90% of India’s exports to China. In other words, India was feeding the factory of the world that China is. But one noticeable change that has occurred in the past three years is that while in 2008, raw materials were nearly 80% of India’s exports to China, in the previous year, the share of raw materials had declined while those of intermediate products has increased to nearly 34%. This probably indicated that component manufacturers from India are getting involved in the production networks spawned by Chinese enterprises.
In contrast, raw materials and intermediates were less than 40% of India’s total imports from China. The share of these products was as high as 70% in the beginning of the previous decade, but has declined rapidly as China implemented a policy to restrict exports of raw materials.
India has thus got into a division of labour with its neighbour wherein it exports low value-added products and imports high value-added and technologically sophisticated products. Perhaps the only cause of comfort for India could be that China has developed this trade pattern with most of its major trading partners, including Brazil and South Africa.
Where, then, are Sino-Indian economic relations headed and what contribution can the strategic economic dialogue make in this process? Trade relations, the most visible sign of economic engagement between the two nations, need a close look, particularly the yawning trade deficit that India faces. While it is no one’s case that the trade should be balanced, the magnitude of imbalance could introduce undesirable strains in bilateral relations. Importantly, this is also the view of several commentators in China.
Even a casual look at the developments in the Chinese economy shows there are opportunities for India. After 2008, policymakers in China have realized that their growth model, based substantially on exports, cannot be sustained. Rapid growth has also pushed up wages. These will, undoubtedly, erode China’s export competitiveness. This could result in a relocation of production bases away from China. India with a diversified production base is best placed to take advantage of this development. It must prepare to make the most of this coming change.
Biswajit Dhar is director general at Research and Information System for Developing Countries, New Delhi.