What Modi's China visit means for the Indian economy
While India and China have made commendable progress with the proposal to set up the US $100 billion BRICS Bank in Shanghai as an alternative option to the West-dominated World Bank and IMF, the two Asian neighbours now need to find a solution to the highly skewed bilateral trade between them that is turning out to be unviable from India’s standpoint.
With cheap Chinese goods ranging from mobile handsets to tyres and steel continuing to flood the Indian market at a frenetic pace, the bilateral trade between the two will become unsustainable unless China opens up its markets for Indian goods to restore some balance. Going by the current trend, India's huge trade deficit with China could nearly double to a phenomenal $60 billion in the next two years.
Trade deficit
The issue has been red flagged by the commerce ministry in the foreign trade policy statement released recently. "If the current situation persists, by 2016-17, merchandise imports from China will exceed $80 billion while India's exports will be around $20 billion, leaving an unsustainable trade deficit of $60 billion," the commerce ministry has pointed out.
A high trade deficit weakens the fundamentals of the economy as it is difficult to finance and the excess demand for foreign exchange destabilises the rupee.
The matter was also taken up during the recent visit of an Indian delegation to China in March, but Beijing refused to give any categorical assurance on the issue.
It now remains to be seen whether some headway can be made to resolve the deadlock during the talks between Prime Minister Narendra Modi and Chinese President Xi Jinping this week.
The trade deficit with China widened to $36 billion in 2013-14, which works out to a quarter of India’s deficit with all the other trading countries. While India’s exports to the bigger Asian rival shrank 18.6 per cent in April 2014-January 2015, imports went up 17.16 per cent.
India’s imports include manufactured items in both “non-essential” categories as well as power and telecom equipment required for infrastructure. China has not given any commitment at official level talks and has been explaining away the huge trade deficit on the ground that it is merely a reflection of the fact that India is a services-led economy while China is a manufacturing one.
A number of MoUs have been signed on allowing more bovine meat, IT services and pharmaceuticals from India to enter China but there has been no progress at the ground level.
India is pushing for tariff concessions from China in oil seeds, textile items and marine products in the fourth round of tariff concessions under Asia-Pacific Trade Agreement (APTA) in a bid to correct the imbalance in bilateral trade.
Entry barriers
According to the government, a series of non-tariff barriers block India’s exports of pharmaceuticals, IT/ITES and agricultural commodities.
India’s IT services are unable to make a breakthrough in China’s highly controlled and, at times, opaque state-owned enterprises business.
India has been pushing China to allow Indian companies to bid for tenders in its state-owned enterprises.
In the pharmaceuticals sector, India has been seeking removal of entry barriers as registration of existing drugs in China takes three-five years, compared to just three-six months in India. In fact, India’s pharmaceutical exports to the US are much higher despite the higher quality standards in the market.
Indian businessmen also point out that the attitude of the Chinese official agencies is very helpful when you talk of imports but changes completely when you mention that you are looking at exporting to their country.
India also questioned China's decision to continue curbs on Indian buffalo meat imports at an agriculture committee meeting of the World Trade Organisation (WTO) recently.
Apart from the runaway trade deficit, cheap Chinese imports are also hurting Indian industry. India’s steel imports, for instance, jumped 51.6 per cent to 0.76 million tonnes (MT) in April compared with the year-ago period. Although Indian companies such as SAIL are making heavy investments to expand capacities steel imports grew 71 per cent to 9.321 MT in 2014-15, with India remaining a net importer of the metal.
Non-essential imports is another issue, Of the $12.5 billion worth of consumer imports in each of the past two years, mobile phones alone accounted for five billion dollars worth of imports and this segment has seen a surge in imports in the past three-four years.
No progress
The commerce ministry is of the view that the approach for electronics exports promotion must include discouraging non-essential imports and improving product standards.
Engagement with China requires a comprehensive approach on trade, investment and economic cooperation. The need for China to set up manufacturing facilities in India is considered a way out of the impasse.
During Chinese President Xi Jinping's visit to India in September last year, China had committed investment of $20 billion in India over the next five years which included the setting up of industrial parks. However, there has been little progress on the development of these parks.
The Chinese government had last stated that it will be setting up two such parks in Gujarat and Maharashtra but it is yet to announce any concrete investment proposals.
However, the Chinese have been complaining that lack of progress is also due to the fact that they are subjected to heavy security checks which stems from the disputed positions between the two countries on border issues. This is another issue that is expected to figure in the talks.