C3S Paper No. 2087
Published below is the first prize winning essay on “Sino-Indian Economic Relations: Challenges and Opportunities”
authored by Karthik Shankar, SRM University
1st Prize Essay
THE INCIDENTAL PARTNERSHIP (AND WHY THAT SHOULD CHANGE)
India and China’s economic relationship has always been an incidental rather than a concerted affair. In ancient times, both countries were connected through the economic and cultural linkages of the Silk Road. In the modern era, this economic interdependence grew in spite of the various political differences between the Dragon and the Tiger. Despite the endless list of touted state visits from various political leaders to the other country; Atal Bihari Vajpayee in 1979 and 2003 (first as Foreign Minister and then later as Prime Minister), Rajiv Gandhi in 1988, Li Peng in 1991 and Hu Jintao in 2006 among a few; little usually comes of these diplomatic overtures. These visits simply reiterate the fact that India and China wish to work together without drawing up long term airtight financial plans or delving into prolonged discussions of arduous territorial issues. However that is not to say that these talks have been of no avail. These meetings indicate is that there is mutual interest among both countries to cooperate; however there is little initiative in pursuing forward thinking goals in this regard.
Chinese premier Xi Jinping’s recent visit to Delhi seems to be a more positive development in this direction. Deals were signed that would see China invest billions of dollars in railways, industrial parks and nuclear power; areas that would earlier have been considered sensitive. While experts such as Srikant Kondapalli have considered the $20 billion amount ‘a trickle’1, considering the Chinese general consul’s promise of $100 billion2 just days earlier, this outlay indicates that both countries are willing to move forward on economic collaboration.
India and China still regard each other’s political moves with eagle eyed scepticism but a renewed economic partnership would not only create a more Asian centric growth model but also lead the neighbours along a path of greater political cooperation. As Anderson and Geiger (2010) note, this does not mean that border issues can be put on the backburner3. There is a general mistrust between the two countries regarding the border dispute that belies further cooperation. The trade imbalance heavily favouring China further exacerbates this problem. Both countries believe that their civilizational status entitles them to the mantle of superpower, however this can only be achieved through economic, social and cultural cooperation as was the case in ancient times.
In the 50 years since the signing of the Panchsheel agreement, a lot has changed with regards to India and China. Both countries opened up their economies; China in 1978 and India in 1991. As such, both have grown at an unparalleled yet steady rate, allowing them to remove millions out of poverty.
Superficially, both countries shared similarities; having rural populations that primarily depended on agriculture, more than a billion people and a shift towards capitalist market reforms after decades of existing in economic purgatory. However both countries have taken very different developmental paths. China has built up an export driven economy by focussing on manufacturing while India has created an economy driven by domestic demand. China has also successfully supplanted its manufacturing industry in the arena of high tech goods and away from low tech goods. In 2000, China’s share of the total exports of high tech goods was just 6.5%. In 2013, this figure shot up to a gargantuan 36.5%4, which points out China’s immense success in transitioning away from labour intensive low value industries to high value knowledge intensive industries. On the other hand, India’s share in the same does not even account for 0.5%; less than countries like Vietnam and Poland. The countries have also diverged with regards to demographics. 31% of China’s population is below 25 while it is almost 50% in India’s case. Despite being a developing economy, China has one of the fastest aging populations in Asia, thanks to its one child policy that was implemented in 1979.
Despite several differences, most of which are related to the border issues as well as protectionist trade, both countries enjoy a robust trade alliance, albeit one that is constantly mired with deep distrust regarding the other’s overtures. The Panchsheel or the five principles of peaceful co-existence is not brought up much these days with regards to the two’s diplomatic relations. However, the fourth principle; equality and cooperation for mutual benefit; has been a repeating motif for both countries over this past decade of vigorous trade growth.
Both countries face some significant challenges with regards to further fostering their economic relationship. Among these, the disputes related to the world’s largest contested border and the skewed nature of their bilateral trade are the biggest. India and China economic concerns are still filtered through the prism of military relationships. According to Karackattu (2013), the chief reason India and China have not been able to expand their sphere of economic interaction is because of limited market access for Indian companies in China (proxy for protectionism), and barriers to investment in India (attributed to security concerns and allegations of “dumping” against China).5
The biggest problem that both countries face is the lack of a demarcated border. China does not accept the MacMahon line as a legitimate international boundary.
It is important for both countries to resolve these border tensions. Such political disputes can spill over negatively into economic trade. For instance India and China had a trade of over $25.5 million in 1956 but just $2.5 million in 19776, the effect of a few decades of military skirmishes and non-existent diplomacy. This negative spillover into the economy can take place even in today’s hyper-globalised environment. Even today, India and China have failed to capitalise on border trade. Despite the fanfare that surrounded the reopening of the Nathula pass in Sikkim, along the historic Silk Road route, little has come of it. The shadow of the 1962 war looms over the region and has led to little ease of the bureaucratic hurdles, including expanding the list of tradable goods. Moreover, poor infrastructure facilities don’t allow traders to make use of even the little opportunities availed to them. Monsoons wreak havoc on road transportation during almost three months of the year and trading is closed in winter. The pass not even lived up to the most pessimistic of economic expectations let alone carefully constructed mirages that foretold it would become an international trading hub in five years. Another recent proposal has been to open up Jelep-La in West Bengal for trading. However, there seems to be no point, since there will be little movement on the economic front if issues of security, stringent visa restrictions and border standoffs are not sorted out.
Nowhere has this effect of border issues negatively affecting economic development more apparent than with the case of Arunachal Pradesh. China has long disputed India’s claim to the territory and military standoffs are common. In 2009, an ADB (Asian Development Bank) loan of $2.9 billion was blocked by China because $60 million of the fund was to be allocated for a flood management programme in Arunachal Pradesh.7 This led to India deploying more than 100,000 troops in the Arunachal Pradesh border and suggestions that India and China sort the issue bilaterally. The loan subsequently never came through
The mistake that a cavalcade of successive governments have made is that other countries need India, more than we need them. That might be true with India’s smaller trading partners; it is most definitely not true in China’s case. While China is India’s largest trading partner, India does not even figure in China’s top ten trading partners.8 Trade is also highly skewed. India’s imports from China far exceed its exports. India’s trade deficit with China amounted to $36 billion in 20149 and it shows no signs of abating in the near future.
Moreover India’s exports are not from high valuation goods and services such as information technology and pharmaceuticals which form the bulk of India’s trade with the West but raw materials, such as iron ore and coal. This lack of diversity in Indian exports might reap the country profits in the short term but hurt India in the long run since these resources are bound to run out at some point. Primary resource-based exports don’t have much scope for job generation and will not give India access to the more valuable secondary and tertiary processes of good production. Thus, it will lead to a long term structural imbalance.
Both India and China are prone to protectionism, which harms the health of their trade. India for instance has on several occasions slapped excess duties on Chinese products, especially those from the telecommunication industry. The sales of Chinese majors Huawei and ZTE fell heavily after they were was charged with anti-dumping duties. The 236% tax levied on Huawei’s goods10 destroyed its credibility for a while in the Indian market and placed it on a list of security risks, which possibly discouraged others Chinese businesses from entering the fray.
China also has not been welcoming to Indian businesses. While there are more than hundred Indian companies with a presence in China, most suffer because of bureaucratic hurdles and struggles to bypass the cosy relationship between the government and large state funded conglomerates. India has repeatedly requested China to ease the restrictions on the IT and pharmaceuticals sector to no avail.11
Competition over Natural Resources
Both India and China have been engaged in a full on battle over natural resources. China has constructed a dam and is in the process of constructing two others over the Brahmaputra (known there as the Yarlung Tsangpo river). causing many to speculate that China would divert waters away from the river to the country’s Southern region.12 While China has promised not to do so and signed a deal with India to exchange flood data13, it hasn’t allayed fears that it plans to change the flow of the river in the region, which could lead to flooding in certain areas and a smaller (and more inconsistent) water flow downstream.
This competition is not limited to the countries’ borders and is happening on a global scale. Both countries have been vying for Myanmar’s ample oil and natural gas reserves for a while. India has a $40 billion natural gas deal with the state14 while China has several projects; one of which was awarded to it after Myanmar reneged on a deal with India. China’s funds naturally give it a bigger advantage especially in Africa where it has embarked on a relentless investment drive buoyed by resources such as oil, copper, tin and diamonds in countries like Angola, Nigeria and Botswana.15 However India has also pushed China’s buttons by engaging in joint oil and natural gas exploration with Vietnam in the hotly disputed South China Sea region. As resources get scarcer and rising oil prices drive commodity prices up, this fight for control of resources is likely to get more ugly.
A 2014 Pew Research Global Attitudes survey found that only 31% of Indians had a favourable view of China while the figure was 30% for the Chinese.16 56% of Indians also listed the country as a threat. While these might seem inconsequential, they can have long term ramifications on favourable economic policies that might improve trade between the countries. Immediate pacification of hardline elements in either country comes to the forefront over the more drawn out process of cool headed diplomacy. Last year over 5000 workers in China protested against the takeover of joint Sino-US business venture Cooper Tire and Rubber by Indian company Apollo Tyres.17 The ambitious $2.5 billion deal was called off later on, owing to the outrage. In the meantime the company has gone on to invest its capital in other countries, most notably a $573 million plant in Hungary.18 The furore surrounding the takeover shows that perceptions can play a big part in shaping economic affairs as Chinese workers expected the American company to be able to better handle the joint venture’s level of debt.
Despite these stumbling blocks, trade between India and China sits at over $70 billion, a sizable amount but just a fraction of Sino-US’s $562 billion bilateral trade. If many of the impediments to political and economic interdependence are removed and greater economic cooperation is nurtured, this amount could grow several-fold.
Chinese infrastructure firms are among the largest in the world. Moreover, China Development Bank has the funds to bankroll mammoth projects around the world. India could definitely use some of this infrastructure investment push to attract more foreign companies and especially to kick start its nascent manufacturing industry. China has already invested over $500 million in six highway projects in the country. However a recent project which is worth almost $900 million in value was rejected because the model proposed was not transparent.19 While India should not do away with the competitive bidding that goes into selecting the companies that execute these projects, a certain degree of flexibility would allow it to benefit from Chinese investment.
China could also help India move from her heavily road dependent transportation chain to more efficient railway networks. 70% of India’s container transportation takes place through roads20 which leads to numerous delays and gaps in timely supply. China is investing heavily in an $18 billion economic corridor linking Kashgar in China with Gwadar Port in Pakistan through an 1800 km long rail link.21 While Xi Jinping has signed agreements to build railways in India, there was no agreement regarding inter-country railway lines, which could have enormous scope for improving cross border trade.
Additionally, India’s northeast is one region that requires billions of dollars in infrastructure support, from railway development to roads. Given that a lot of internal security issues in this region stem from a lack of economic opportunities, economic cooperation on this front will create gainful employment for people in the region. What’s more is that if the allegations of Chinese influence in the northeast are true, this would create a vested interest for China in order to deal with rebel factions in the area.
India and China could also collaborate on the contentious issue of ports. When China opened up a $500 million container terminal in Colombo last year, it alarmed many in India. While there are numerous allegations that China’s building of ports in Pakistan, Bangladesh, Burma and Sri Lanka is part of a purported ‘String of Pearls’ theory, the real reason is likely to be more mundane. China is the world’s largest exporter and these ports will open up trade access to and from Western China.22 Only 68% of Indian cargo is containerised23, less than the world average of 80% which provides numerous avenues for joint development of ports. Not only would it give China more access around the waters of the Indian Ocean but it would also boost India’s maritime trade.
Bilateral Trade Agreements
India has free trade agreements with regional groups such as SAFTA and ASEAN. China also has free trade blocs with several countries. However, there seems to be no movement with regards to a bilateral trade agreement between the two. In 2007, when both countries claimed there was a chance of a free trade agreement, industrial chamber groups such as FICCI (Federation of Indian Chambers of Commerce and Industry) criticised the plan as they felt it would harm Indian businesses.24 Moreover, there is no BIPA (Bilateral Investment Promotion and Protection Agreement) between India and China.25
In reality, India and China would not threaten each other’s economies mainly because the economic engine that has been driving both has been so radically different. China due to cheap labour, an undervalued yuan and government subsidies in the steel and textile industries has developed a highly sophisticated industrial economy. India’s English educated professionals, on the other hand, were able to adapt western business models to a lower-cost environment. According to Syed and Walsh (2012), tasks from customer service and software programming to the development of software, new business processes and other services all benefitted from this quick adaptability.26
If China opens up the services sector to India, the two countries could jointly work on integrating their manufacturing and services industry, without eroding the advantages that each has in their field. As pointed out by Karackattu (2013), Tang (2010) recognises that there are opportunities for joint collaboration in the area of production streamlining. Since India’s strength lies in small batch orders and customisation while the Chinese specialise in mass manufacturing, the two process levels could co-exist and complement each other.27
Finally, there is evidence that the positive effects of a trade agreement would spill over to the political side. Analysis has shown that that FTAs force countries to work together and reach compromises on several areas of dispute. Bilateral trade gains increase the opportunity cost of war reducing military conflicts, since they would affect trade.28
Foreign Direct Investment (FDI)
India requires more foreign direct investment, especially from a neighbour like China which could invest in labour intensive industries such as machine manufacturing plants or energy generation units as opposed to Western countries that focus on information technology. For China on the other hand, it could benefit from diversification in terms of investing its surplus cash. Rather than tie up the money in government bonds in the US, it could stand to gain a lot more from a healthier return on asset option. There are some signs that this is already taking place. Sany, a Chinese heavy machine manufacturer has invested over $60 million29 in a plant in Chakan, Maharashtra that employs more than 300 people. The company has promised to invest another $60 million in the future.
So far China has invested $800 million in India (0.2% of its FDI stock) while India has invested $500 million (0.4% of its FDI stock).30 While these are very low levels, the potential to grow from such a small base is also immense.
India’s economic growth has so far been achieved by leapfrogging from the agricultural sector to the services sector. However there are numerous ramifications due to this. More than two thirds of the population still relies on the primary sector, which makes it almost impossible for them to jump to jobs in the knowledge oriented service sector. Even the few industries in India that are booming are niche ones such as pharmaceuticals and car manufacturing, which require semi-skilled or skilled labour. Building infrastructure such as roads, electricity and ports will allow India to reap the benefits of labour intensive industries in the same way that China did.
China’s wages have risen to a level that other countries can take advantage of a void in low cost manufacturing. A study by Asian Briefing shows that wages in India are 2 to 3 times less than China31. Mumbai has a minimum monthly wage of just $83 compared to Shanghai’s $264. Moreover pressures on China’s manufacturing have been noted in recent years as the country transitions towards skilled jobs. China’s median age is 37 years as opposed to India’s 2732. India has the world’s youngest population, with 50% being below the age of 25. Hence, India has all the tools required to become the new manufacturing destination in Asia. Chinese companies being involved in this process would give Chinese firms a head start into India’s vast untapped potential. By making inroads into the manufacturing sector in India, China could move away to its inevitable transformation into a service oriented economy while still having control over manufacturing supply chains.
Small and medium enterprises (SMEs) that account for 40% of India’s workforce will play a huge part in any possible manufacturing boom.33 For this India needs to remove bureaucratic hurdles from the way of these enterprises. Other major challenges such as providing better credit lines and giving them access to the latest technology could also happen with the help of China. Karackattu (2013) points out that there is a relatively unnoticed SME-to-SME interaction between China and India, which is mutually beneficial.34 He lists out several examples of this trend. One of them is Yapp, a Chinese automotive company, which has a joint venture with India’s Zoom Enterprises and manufactures supplies for major car makers including Volkswagen India, Ford India and Mahindra.
Finally this collaboration could even extend to promoting social equity. Notably the participation of women in the workforce is far less in India than China. Only 34% of women with college education are gainfully employed as compared to 81% of women from the same demographic in China.35 This creates even more opportunities for India to learn from China, whether it is creating a more enabling work environment for women or investing more in industries that are likely to benefit them.
While trade across strictly monitored country boundaries has been negligible, greater connectivity across borders to landlocked but still robust growth regions like the twin city special economic zone of Chengdu and Chongqing will allow poorer areas near the border to benefit from the trade of goods and services. Karackattu (2013) mentions that initiatives such as the grouping of Bangladesh–China–India–Myanmar BCIM should move beyond Yunnan and instead focus on the Chengdu-Chongqing region. This will spread the fruits of trade around the border regions of India and China.36 Given that India and Bangladesh are expected to have a border trade of over $90 million in 201637, this should set the parameters even higher for Sino-Indian trade.
China and India have taken a few steps towards partnering on energy resources. In 2005, India’s ONGC (Oil and Natural Gas Corporation) and CNPC (China National Petroleum Corporation) won a joint bid for Petro-Canada’s oil assets in Syria that allows them to control an annual output of more than three million tons of oil.38 Such initiatives reduce competitive zero sum bidding for such resources around the world and prevent political or economic rows from emerging over their control. Capital is also diverted to more important avenues such as research and development as opposed to unhealthy bidding that could be fuelled by jingoistic attitudes.
China is also one of the countries competing for a piece of India’s lucrative nuclear energy market. While nuclear energy makes up just 3% of India’s energy sector so far, there are plans to increase the country’s nuclear capacity by adding nearly 30 reactors at an estimated cost of $85 billion by 2032.39
The countries are also natural allies, being committed to renewable energy, while still resisting Western calls to sign on for restrictive energy treaties like the Kyoto Protocol. Both India and China see the gains in green energy, both from an environmental perspective as well as reducing reliance on foreign sources of energy. China has committed almost $300 billion towards renewable energy in its 12th Five Year Plan.40 The new Indian government is also taking a proactive stance starting with changing the name of environment ministry to the Ministry of Environment, Forest and Climate Change. If Modi replicates Gujarat’s success on a national level, it augurs well for the economy. Gujarat produces 70% of India’s solar energy. In fact, the world’s first canal top solar project was commissioned in the state.41 Given that China has money to spend to expand its clean energy goals and India which has successfully implemented several solar energy projects both could take their similar environmental stances to create a tangible partnership. One such project has seen Chinese equipment major TBEA set up a $200 million green energy park in Vadodara, Gujarat earlier this year. The firm plans to spend at least $100 million in expanding it.42
The area of agricultural production is another important field where India could benefit from Chinese help. China’s 1978 liberalisation started with agricultural land reforms. The multi-fold increase in agriculture production and productivity is what led to the next stage of manufacturing growth. China’s agricultural growth has seen a meteoric growth, from disastrous beginnings with a famine between 1959-61 that killed more than 30 million people, China’s agricultural sector has blossomed into a field driven by productivity increase as well as neoteric technologies from the use of satellites to detect weather patterns to the use of cloud seeding to produce rain for farmers’ crops. Today China produces 20% of the world’s food despite having a sown area that is only 9% of the world’s total.43 India on the other hand didn’t go through the stage of significant land reforms. While India’s food supply is largely self-sufficient and there has been a fivefold growth in food produce since the green revolution, a very small portion of Indian agriculture is mechanised. Moreover, there is very little efficiency in food production. For instance, India had the worst productivity of 3.1 tonne per hectare in paddy against a world average of 4.2 tonne per hectare. Moreover India uses 84 kgs of nitrogen based fertilisers per hectare as compared to China’s 63.6 kgs.44
India could stand to gain from China in this field by establishing special committees that could study the implementation of various Chinese schemes and try to replicate it in India. China has several programmes such as the Vegetable Basket Programme (which focuses on production of vegetables rather than food grains), a $1.3 billion project that returned more than 30 million hectares of grazing lands to grass lands and a collective water management system. Tailoring such measures for the Indian agricultural sector would allow it to break from the shackles of low efficiency and low productivity that has encumbered it for decades.
India’s pharmaceuticals industry is one of the fastest growing industries spurred by innovation and competitiveness. The industry is ranked third in terms of volume and 14th in terms of value in the global pharmaceutical market.45 While various companies such as Ranbaxy and Dr Reddy’s Laboratories have seen their generic drugs make way to emerging economies such as Russia and Brazil and even highly regulated first world markets like US and Central Europe, they have seen little success in China. Such knowledge-intensive processes could benefit China, where industrial growth has been fuelled more by process heavy manufacturing. Indian companies have several issues regarding market access. Regulatory processes are slow moving in the Chinese healthcare sector as generic product approvals take more than five years46, compared to just a year in the US. Moreover, Indian companies have not been able to build up a relationship with the hospital system and as such are not privy to machinations of the bidding process that allows the use of a single generic drug version in each hospital. While the pharmaceutical industry was one of the topics discussed in the meeting between Modi and Jinping, there were no policies outlined with regards to the industry. A mutually beneficial agreement would have China allocate a certain number of quotas for Indian drug manufacturers that have a joint dealership with Chinese pharmas. The process would allow the Indian pharmaceutical industry to share its innovations and research processes, while still gaining access to the Chinese market. A non-compete clause could also ensure that these valuable innovations are not duplicitously duplicated by Chinese pharmaceuticals that export generic drugs. Such an agreement would aid Indian companies’ bottomline while providing more low cost healthcare options for Chinese consumers.
Asian Trading Bloc
ASEAN has separate FTAs (Free Trade Agreements) with both India and China. The regional bloc’s next move is to move ahead with the Regional Comprehensive Economic Partnership (RCEP) which would link the ten member states of ASEAN with the countries it has FTAs with, namely China, India, Australia, South Korea, Japan and New Zealand. Such an economic bloc would cover 3 billion people and a GDP of over $17 trillion, which would make it the largest trading bloc in the world. India and China are the two members that could create the impetus for moving forward with such an agreement. Moreover, it would also allow them to take on joint leadership role in spearheading the economic success in the region.
Another important, albeit oft looked, consideration with regards to cooperation between the two countries is soft power. America enjoys immense cultural currency in India and China. Hollywood movies are extremely popular in both countries, fast food joints have become the norm and leaders such as Martin Luther King are mentioned in both countries’ history textbooks. China has tried to rectify its lack of soft power around the world by aggressively opening up Confucius Institutes (comparable to UK’s British Council or France’s Alliance Français). The first one in India opened last year in Mumbai University.47 In terms of the movie industry, China limits the number of foreign movies it allows to play on its screens, which makes it an uphill process for Indian films to even release there. However recent deals signed between Modi and Jinping promise more collaboration on that front. China will also be the guest of honour at the 2016 New Delhi World Book Fair, which will promote its ancient literature to modern Indian readers.
The animosity between the two countries is highly exaggerated in the media. While India and China are always pitted against each other, it is clear that security concerns must not impede economic initiatives. China would not invest in a country it considers an enemy after all and both India and China stand to benefit from opening up the economy to each other. The era of the zero sum game is over. After all, the world is too intrinsically linked for one side to benefit from the other’s economic loss.
Border tensions will exist side by side with these mutual economic collaborations. China’s recent foray into Indian soil is definitely a sign that those border tensions will not disappear for the foreseeable future. If India conflates China’s military aggressiveness with China’s civilian relationship, then true economic cooperation will be a while away. If India and China wish to solve this problem, some political resolve is required in the manner of Russia and China 2004 meets that put an end to the disputes over their contested territories. Alternatively, India and China could learn to take a leaf out of the Sino-US’s playbook, where despite a lack of geopolitical and military cooperation, economic interdependence continues to be high. To paraphrase the words of Malone and Mukherjee (2012), a more systematic dialogue that continues even after the media racket of high-level visits and acknowledges differences instead of emphasising superficial similarities will lead to a stronger and more collaborative foreign policy among the two countries.48
Reference / End – note
David A. Anderson and Isabel Geiger, “Sino-Indian Trade Relations and the Ongoing Border Dispute” (2010)
Joe Thomas Karackattu “India-China Economic Relations: Trends, Challenges and Policy Options”
Goh, “China and India: Towards Greater Cooperation and Exchange,”
Murtaza Syed and James P. Walsh “The Tiger and the Dragon”
Joe Thomas Karackattu “India-China Economic Relations: Trends, Challenges and Policy Options”
Joe Thomas Karackattu “India-China Economic Relations: Trends, Challenges and Policy Options
Joe Thomas Karackattu “India-China Economic Relations: Trends, Challenges and Policy Options
David M. Malone and Rohan Mukherjee “India and China: Conflict and Cooperation”