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With China closing in on the US in geometric progression—the US economy is now bigger by only 2.5 times that of China in gross domestic product (GDP) terms; it was five times bigger in 2005 and 10 times in 2000—China is potentially moving from economic supremacy to invincibility.

The Indian government’s economic engagement with China starts and ends with trade deficit with that country. With an “as is where is" focus, the danger is in the perpetuation of a structure of trade with India supplying raw materials such as ores and buying power and telecom machinery from China, thereby facing adverse terms of trade in perpetuity, irrespective of the size of the deficit.

Instead of this bilateral “administered trade" type of efforts, what is needed is to help Indian companies avail opportunities provided by the market for gainful engagement in and with China. Trade deficit will be the consequence, and not the cause, of trade and investments.

For this, it is imperative to understand the extant and emerging growth pattern in China, the new structure and spread of demand engendered by it and the new backward and forward linkages spreading growth across classes and regions.

The pace and pattern of manufacturing growth that China has witnessed so far, in classic Schumpeterian style, has sown the seeds of an equally massive opportunity in the services sector.

Manufacturing and infrastructure-led growth in the past 25 years has now generated a much greater demand in sectors such as retailing, financial services and logistics. This has come at a time when, following its entry into the World Trade Organization, China opened its retail sector significantly, fuelling growth and consequently creating further opportunities.

With rising personal disposable incomes, an expansion in consumer credit and a modernization drive in sectors such as education, finance and healthcare is expanding the tertiary sector. Spending is projected to grow as banks, telecom operators and manufacturers invest to meet challenges posed by growing demand for their services.

For instance, with bank cards growing in popularity along with e-commerce and other online payment-based services, bank card-based retail sales in China are rising over 50% annually. This is driving demand for new systems and hardware to process transactions.

Faced with structural constraints such as rising wage bill leading to impaired profitability, there is a growing trend among firms to seek greater efficiency by using IT to improve productivity and lower costs, including labour costs.

The mid-market business has become a key market driver. China’s information technology (IT) market growth is being driven by growing demand from small- and medium-sized enterprises (SMEs) and the growth into Western China and rural areas.

Information among SMEs has become a top priority, as smaller companies have been the most vulnerable to the current decline in demand in many of China’s export markets and tighter credit conditions at home and abroad.

On top of all this, the China government is consciously promoting services sector growth now. The Chinese five-year plan aims to increase the contribution of services to GDP by 4 percentage points by 2015. The additional opportunities that will accrue from this incremental change alone are estimated at over $1 trillion.

At the government level, e-government services in China are being developed at a provincial level, with online services being delivered by local government departments and organizations. The national information development strategy guidelines are promoting long-distance healthcare, long-distance education, e-commerce, e-government and agriculture. All of this will require services sector development.

The IT market will also receive a boost in 2012 from a 50% increase in import tariffs on some electronics products, such as laptops. On the policy front, in the latest official guidelines on foreign direct investment (FDI), China has signalled its keenness to promote opportunities in areas such as alternative energy, biotechnology and IT.

Not surprisingly then, the tertiary sector now accounts for more FDI into China than that into the secondary sector for the first time. FDI in wholesale and retail sectors over the past five years has boomed, averaging growth of nearly 40% a year indicating that FDI is focusing firmly now on the services sector rather than on manufacturing. Investment in wholesale and retail trade, residential services, and leasing and commercial services has expanded equally rapidly.

With such a range of opportunities waiting to be tapped, what are Indian firms, especially, the famed IT ones, waiting for? The scale at which our leading IT companies plan to expand in China —Tata Consultancy Services looking to hire 6,000 employees over the next few years or Infosys planning to build a team of 4,000 people, and Wipro around 1,000 in China—is akin to what the great Sufi poet Rumi said, using a walnut kernel to drink from a waterfall.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com

Also Read |Haseeb A. Drabu’s earlier columns

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