Sino-Indian ties on a roll, despite hiccups

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With bilateral trade valued at $38.6 billion in 2007, China is currently India’s second-largest trading partner, and is soon expected to leapfrog EU.

In January, during his first official state visit to China, Indian Prime Minister Manmohan Singh said that trade with China was expected to grow to $40 billion by the end of 2008 alone, and that the two countries were exploring the possibility of a regional trading agreement. Both countries had inked 11 agreements. The economic pacts would boost trade to $60 billion by 2008 from the current level of almost $40 billion. Trade is itself the barometer of the transformation of relations between the two galloping economies: the present mark of almost $40 billion was originally set for 2010.

Meanwhile, in a clear reference to China, the defence minister AK Anthony earlier this week said that India would have to constantly upgrade its military and economic capabilities and leave no room for “complacency”.

China’s frequent claims on the Tawang region of Arunachal Pradesh and incursions by its troops in the area have become an irritant in the otherwise warming ties between the two countries. The two countries have also stepped up their military cooperation by staging their first war game in China late last year. Another joint drill is to be conducted in India later this year. In fact, when the Olympic Torch issue almost derailed the relations between the two countries, the Chinese ambassador to India, Zhang Yan, admitted that the progress on the vexed boundary issue was “too slow”, Zhang said: “But if we want to have a proper solution, which can satisfy both sides, it usually takes time.” He said bilateral ties were now moving on a fast-track with frequent high-level visits, coupled with an impressive growth in trade and economic relations. Bilateral trade in 2003, for instance, stood at only $7.6 billion. It jumped to $38.7 billion in 2007. Moreover, in January this year, bilateral trade witnessed a 50% increase over the previous year, setting the stage for “a good beginning”, he said.

However, a Free Trade Agreement (FTA) with China was not an immediate necessity following objections from within the government and the industry. “On the issue of FTA with China, there are deep divisions both within the government as well as within the industry,” the minister of state for commerce, industry and power Jairam Ramesh has recently informed the Rajya Sabha.

Both countries have formed a joint-study group to study the feasibility of a bilateral FTA. However, leading Indian trade bodies have argued that resultant tariff cuts following the FTA will help Chinese goods flood Indian markets. A recent study carried out by the Federation of Indian Chambers of Commerce & Industry (FICCI) states that India’s trade deficit with China has widened in the last five years. So much so that trade deficit has exceeded country’s total exports to China in 2006-07. In fact, trade deficit with China in the first half of the year is already very close to India’s deficit for the full year in 2006-07, which implies that the deficit could be very high in the current year or it could be almost double of our deficit in the previous year.

According to the study, in 2001-02, the value of India’s total imports was $51.4 billion. Out of these, imports from China were $2036.39 million. This constituted about 4% of India’s total imports.

India’s total imports in 2006-07 were $185.7 billion and imports from China constituted 9.4% of our total imports—$17.4 billion. Hence, while India’s total imports have increased about three-and-a-half times between 2001-02 and 2006-07, imports from China have increased by over eight-and-a-half times over the same period.

With the exception of Saudi Arabia, this has been the most pronounced increase in imports over the period under consideration. Imports from Saudi Arabia constituted just 1.22% of total imports in 2001-02 that increased to 7.2% in 2006-07 whereas, most of the other major countries saw their share either declining or hardly changing in India’s imports.

Imports from US in 2001-02 constituted 6.12% of Indian total imports that increased marginally to 6.31% in 2006-07. Imports from Switzerland actually declined from 5.6% in 2001-02 to 4.9% from total imports in 2006-07. The decline in the case of the UK was even more pronounced, from 4.2% in 2001-02 to about 2.25% in 2006-07. This also indicates how Chinese imports are replacing the imports from other countries. As far as India’s position in Chinese world imports in the last few years, the country’s share continues to be insignificant in Chinese imports. While India’s share in Chinese world imports increased from 0.7% in 2001 to 1.48% in 2005, but it came down again in 2006 to 1.3%.

The share of industrial imports from China in India’s industrial GDP was 10.3% in 2006-07, compared to a mere 1.8% in 2001-02. This has significant implications for the growth and widening of the base of manufacturing sector in India in the coming years. The study observes that not only the average growth rate of most of these Chinese goods has been far higher than the average growth of the world imports since 2001-02, but the share also of these Chinese goods in the total Indian imports has increased significantly in 2006-07. However, points out Sachin Chaturvedi at RIS, “The combined size of the Sino–Indian economy is large and expanding. There is considerable scope for growing economies in the developing world and least developed countries (LDCs) to benefit from the continued process of trade expansion in these two countries.”