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India- China Bilateral Economic Ties: Issues and Prospects By D.S.Rajan

C3S Paper No. 0004 / 2015

It may not be wrong to assume that the prevailing growth asymmetry between India and China can have implications for their economic partnership; the ties definitely look as one between two unequals- India occupying a weaker position as against a stronger China. To elaborate, China adheres to a system of socialist market economy, in which the public ownership system plays a leading role. India, on the other hand, follows a mixed economy model involving both private and public sectors. China’s economy is now the second largest in the world (GNP in 2013 at the level of US$ 9.24 trillion), after that of the U.S. India ranks No.10 in the global list. China’s “comprehensive national power” now exceeds that of India by a wide margin. The former’s economy was over four times the size of India’s in 2012, and over eight times the size when adjusting for purchasing-power parity (PPP). China’s official military budget of $119 billion in 2013 was over three times larger than India’s $38 billion defense budget. In 2013, China’s real GDP growth rate was 7.7 % as against India’s 3.2%. In terms of alleviation of poverty, China seems to be doing better than India (China’s 0.061% and India’s 29.8%. in 2010); China’s literacy rate was 95% in 2010 as against India’s 62% (2006). China is also the biggest exporting nation globally (US$ 2.2. trillion in 2013). Its main strength now lies in manufacturing for e.g. cell phones and personal computers, making it a workshop of the world. China’s foreign trade is burgeoning day by day –its total exports and imports surpassed US$ 4 trillion for the first time to reach US$ 4.16 trillion in 2013. It now has the largest foreign exchange reserve in the world- about US$ 3.4 trillion. Its investment abroad is gaining strength; it is now the third largest investor after the US and Japan. On the reverse, in terms of inflow of Foreign Direct Investment (FDI), China has become second largest in the world- it attracted a record US$117.6 billion in FDI in 2013. 450 out of the FORTUNE 500 American companies have established production lines and business presence in China. Also, the PRC’s requirement of raw material from abroad to speed up its development at home has grown significantly. China has surpassed the US to become the world’s biggest energy consumer. Only with regard to demography, India stands to gain vis-à-vis China; In 2012 India’s working-age population grew by twelve million while that of China shrank by over three million.

The importance of the outcome of the PRC President Xi Jinping’s visit to New Delhi in September 2014 to India-China economic ties needs no emphasis. The widespread perception in India is that the visit was a success in economic terms, but not so promising in political sense. The Chinese intrusion in Ladakh’s Chumar area has been seen in India as one which provided a negative backdrop to the visit; in broader terms, opinions in India view the intrusion as symbolic of the existing trust deficit affecting bilateral ties. It is true that two sides agreed during the visit to conduct their relations from a strategic and overall perspective and consolidate their ties on the basis of Five Principles of Peaceful Coexistence and mutual respect and sensitivities for each other’s concerns and aspirations, but there was no sign of an early solution to strategic issues dividing them , particularly to the key boundary problem; India and China merely reiterated their commitment to seek a fair, reasonable and mutually acceptable solution to it.

In purely economic terms, significant has been the readiness of India and China, exhibited during the visit, on taking the bilateral cooperation into new areas including industrial investment, infrastructure development, energy conservation and environment protection. Notable have been the steps agreed upon by the two sides on rebalancing bilateral trade and addressing the existing structural imbalance in trade through adopting measures like advancing cooperation on pharmaceutical supervision, conducting speedier negotiations on agro-products for two-way trade, establishing stronger links between Indian IT companies and Chinese enterprises, and increasing services trade in tourism, films, healthcare, IT and logistics. As a particular measure, they could approve a ‘Five Year Trade and Economic Development Plan’, aimed at laying down a roadmap to promote sustainability and lessen the bilateral trade imbalance as well as to strengthen investment cooperation in order to realize the US$ 20 billion Chinese investment in India, in next five years, assured by Xi Jinping; this investment is to be made in various industrial and infrastructure development projects in India, particularly in the establishment of two industrial parks in India, one in Gujarat and one in Maharashtra.

What has been achieved during Xi Jinping’s visit to India makes one to think that an unprecedented rise may be in the offing in the prospects of India-China economic relations; the driving forces are not difficult to identify. The new Modi regime in India like its predecessor and the Xi Jinping administration in China, are increasingly realizing the importance of domestic development to the nation building in the respective countries and to fulfill the same, are displaying keenness to work out mutual benefit-based external economic strategies. What we see today is the specific application of these strategies to India-China economic ties.

It would be appropriate to focus on the present status and future of India-China trade and investment ties. In early 90s, the level of bilateral trade was insignificant as the trade basket was restricted to a limited number of products. In 2008, China became India’s biggest trading partner replacing the U.S and that position remains same till today. Bilateral trade increased by nearly ten and a half times during 2003-11; it reached the level of US$ 74 billion in 2011, US$ 66.7 billion in 2012 and US$ 65.47 billion in 2013. The decline seen in 2012 and 2013 is being attributed to a variety of reasons including depreciation of Indian rupee, global slowdown and fall in Indian exports due to India’s curbs on the export of iron ore, the single biggest export item (53% of India’s total exports to China). The two countries aim at achieving the trade target of US$100 billion by 2015. On the most prominent issue of trade imbalance in India-China economic ties, hopes for an early solution to it appear to have risen of late. China’s proposed US$ 20 billion investment in India, its readiness to open its pharmaceutical, agro-products, IT and service sectors to India’s participation and on the reverse, India’s nod to the Chinese entry into India’s infrastructure projects, may pave the way for eradicating the deficit, which stood at US$ 31.4 billion in 2013. Speaking on India, progress on trade deficit issue, would depend on its ability to introduce new products to China having global competitiveness (Major Indian exports so far to the PRC are: iron ores, slag and ash, iron and steel, plastics, organic chemicals, and cotton. India’s imports from China so far mostly relate to the manufacturing sector, more precisely in the sectors of chemicals, machinery and mechanical appliances and base metals). Expert studies (for e.g S.K.Mohanty, Research and Information System for developing Countries (RIS), New Delhi, indicate that India could emerge as a competitive supplier to the Chinese market, as it has a large domestic market in value chain in a number of sectors, including the parts and component sector; its exports to China in this sector could be more competitive than that of several South East Asian economies on which China is seriously dependent for intermediate input supplies. On imports from China, India should respond to the changing pattern of import demands of the latter which is rebalancing its economy taking the focus away from the traditional export and investment-led growth. Examples of pattern changes include the fall in China’s demand for coal imports, continuous rise in its energy demand from abroad and appetite for foreign hitech products. Also, India would stand to gain in bringing medium and high-technology intensive products from China. The resultant change in the composition of India’s imports from China can have a positive impact on the bilateral trade imbalance. Growth in trade has prompted a spurt in investments between the countries as well. China’s accumulated investment in India reached US$57.6 million while India’s investment in China reached US$44.2 million by December 2011.

Next to trade imbalance, the other issue which may affect the prospects of India-China economic relations is the exchange rate regime in China. Authorities in China artificially keep the Chinese Yuan undervalued against world currencies and this step benefits its world exports, particularly to exports to the neighboring countries in Asia. India may have to carefully study the implications of Yuan rate for its export to nations in South East and East Asia, a region where it is competing with China for markets.

India-China differences on the leadership in the regional integration process may be another issue relevant to their economic relationship. India supports the East Asia Summit (EAS)/ Regional Comprehensive Economic Partnership (RCEP) process; it favors leading role in the EAS by ASEAN plus 6 nations (10 ASEAN nations plus Australia, China, India, Japan, South Korea and New Zealand). China on the other hand wants ASEAN plus 3 (10 ASEAN nations, China, South Korea and Japan) to play a leading role in the EAS; it considers India, Australia and New Zealand as ‘secondary’ group in the EAS. The future of regional cooperation would very much depend on the progress in the ongoing negotiations among 16 countries on the RCEP proposal launched in November 2012. India and China are among those taking part in the negotiations. Five rounds of talks have been held so far. Meanwhile, China has made its own proposal to establish a working group to study the feasibility of a Free Trade Area of the Asia Pacific. Concerning India-China bilateral economic ties, is also the question as to how each perceives its role in the South Asian Association for Regional Cooperation (SAARC)? China, an observer SAARC nation now, is keen to join that organization as a full member with an eye on expanding its presence in South Asia; its aim seems to be the signing of a China-SAARC Free Trade Area. With regard to India, China feels that both the nations can work together as ‘dual engines’ for regional stability and development. It is seeking India’s support to China becoming a full SAARC member. President Xi Jinping has said that “China welcomes and supports India’s full membership in the Shanghai Cooperation Organization with the expectation that India will support China in building relations with SAARC”. Motivating China to play an active SAARC role, is its thinking that the same will benefit the concerned South Asian economies as well as of itself, particularly its South Western part and the protection of the country’s sea lane security in the Indian Ocean. For this purpose, China says that it will follow a policy of “upholding justice and seeking interests”, which can accommodate interests of all neighboring nations, including the SAARC countries. According to it, initiatives under such policy comprise China’s four proposals – New Silk Road Economic Belt, 21st Century Maritime Silk Road, China-Pakistan Economic Corridor and the Bangladesh-China- India- Myanmar (BCIM) Corridor. In an overall sense, China appears to assess that the SAARC is divided into two camps- one led by India and another by Pakistan and that India is adopting a ‘big brother’ attitude in South Asia (“China’s Economic Relations with SAARC: Prospects and Hurdles”, Liu Zongyi, China Institute of International Studies, 1 December 2014). On its part, India has so far been hesitant to endorse China’s proposals; the Joint India-China Statement, issued after President Xi Jinping’s visit to New Delhi, did not mention the first two. The apparent India’s reservations on the third proposal, i.e China-Pakistan Economic Corridor, can be understood in the context of the issue of Kashmir, a likely Chinese corridor area. On the BCIM, India’s position appears a developing one; it may have to respond to some domestic concerns arising from the likely implications for its Northeast part of the unresolved border dispute with China and the security challenges to the country in the event of opening that sensitive part for foreign participation.

Affecting India-China economic ties is also the ongoing competition between them for resources worldwide. As the two face continuing gap domestically between the resources supply and demand, it is natural that they compete to reach out to resource-rich nations in the world. The PRC became a net oil importer in 1993 and the largest global energy consumer in 2010. The U.S. Energy Information Administration (EIA) projected that China would surpass the United States as the largest net oil importer by 2014 due to its rising oil consumption. Oil imports in China grew by nearly 10 percent in 2014, to nearly 2.3 billion barrels (308 million tons). Taking the case of India, it is currently the fourth largest oil consumer in the world, behind the US, China and Japan. It is expected to become third largest by 2025. In the estimates of the US Energy Information Administration (EIA), India’s oil consumption will rise from 3.68 million barrels per day (bpd), or 173.5 million tonnes, in 2012 to 5.19 million bpd in 2025, overtaking Japan’s 4.38 million bpd consumption.

India-China competition for resources – oil and natural gas, industrial and construction materials, foreign capital and technology, is expected to intensify in future in the regions where the latter remains active at this juncture – Middle East (Iran and Saudi Arabia), Central Asia (Kazakhstan), Russia, Africa (Sudan and Angola), Latin America (Venezuela and Brazil) and the Asia-Pacific region (Myanmar and South and East China seas). China is encouraging its state-owned companies to reach exploration and supply agreements with resource-producing nations in these regions. Simultaneously, Beijing is acting at state levels to influence such nations, which are getting manifested in four ways – conducting high-level diplomatic exchanges, promoting bilateral trade, extending economic aid especially for infrastructure building, and even providing military assistance. China is diversifying energy supply sources in response to perceived vulnerability to any over dependence in this regard on the politically volatile Middle East and Africa. Russia and Latin America have become China’s new markets. President Xi Jinping’s New Silk Road Belt and the 21st Century Maritime Silk Road proposals are meant to facilitate energy supplies connectivity to China from abroad. China has especially been able to conclude several international deals, to get shale gas from North America, build pipelines across Myanmar and secure stakes in Russian liquefied natural gas (LNG) projects and Caspian Sea oil and gas. To ensure an uninterrupted supply of oil and gas, China has been able to strengthen energy infrastructure by building a network of pipelines from Turkmenistan, Kazakhstan, Russia and Myanmar. On the other hand, Indian initiatives to respond to those taken by China seem to be inadequate. Indian entities like Oil & Natural Gas Corp. (ONGC) continue to face challenges from Chinese companies such as China National Petroleum Corp. (CNPC) in winning prospective oil and gas opportunities in the third countries. Admittedly, the new Modi government in India is seized of the urgency to accord priority to the nation’s energy security matters.

(The writer, D.S.Rajan, is Distinguished Fellow, Chennai Centre for China Studies, Chennai, India. This formed the basis of his presentation on the subject at an interaction with the visiting Chinese scholars, organized by the Indian Council of World Affairs, New Delhi on 13 January 2015. Email:

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