China on trade overdrive in India as US drags feet

US President Barack Obama is sure to push hard for bolstering his country?s economic and trade ties with New Delhi during his three-day India visit starting Saturday, but Beijing seems to have outsmarted him by silently setting the agenda for a quantum leap in trade with India. On the ground, the Chinese strategy, which includes large-scale financing of bulk Chinese exports to India in the infrastructure sector, seems to work better.

And the US plan also looks somewhat self-defeating, despite the rhetoric. A slew of policies that the Obama Administration is planning, like the much-detested carbon tax, the curbs on H1B visas and the withdrawal of tax breaks to companies which have lower capacity to create jobs in the US, could be at odds with Obama?s effort.

In merchandise trade, China is already a bigger partner than the US for India. Total Sino-Indian trade in 2009-10 was over $42 billion, against India-US trade at $36.5 billion. It is another matter that the US accounts for 60% ($30 billion) of India?s services exports.

Although India runs a trade deficit with China (about $19 billion in 2009-10) as against a slight surplus with the US (about $3 billion), New Delhi doesn?t seem to mind a further rise in imports from China. In fact, India?s policymakers would rather spur foreign investments in infrastructure, than worry too much about a current account deficit, that can be financed through capital inflows. Come to think of it, India needs huge foreign money to meet its $1 trillion target for infrastructure investment in the 2012-17 period.

Thanks primarily to the surge in Chinese exports of power equipment to India since 2004, India?s imports from China have grown at an accelerated pace in recent years, especially between 2005-06 and 2007-08. Before the economic crisis put brakes on it, Chinese exports to India grew at a scorching pace ? 60% in 2006-07 and 55% in 2007-08. (The corresponding figures for growth in US exports to India in these two years are 24% and 8%).

China?s exports to India grew at 20% even in the crisis year of 2008-09, followed by a decline (5%) in 2009-10. US exports to India, however, remained in the negative territory for both these years (-12% and -8.5%).

If one goes by the $10-billion deal that Reliance Power has struck with China?s Shanghai Electric and the promise of more such transactions between Chinese and Indian companies in power plants and telecom equipment, it is clear that the two countries would easily outdo the pre-crisis growth levels from this year onwards. If Chinese exports to India show the trend of sequential doubling for the next few years, few trade experts would be surprised.

India?s exports to China are also growing faster than that to the US. In the two years prior to the crisis, India?s exports to the US grew at 8-10%, and in the crisis years (2008-09 and 2009-10), the growth easily slipped to negative territory (-11.8% and -7.6%). As against this, India?s exports to China grew at 23% and 31% respectively in 2006-07 and 2007-08, before showing a 14% decline in 2008-09 and recovering quickly to a 24% growth in 2009-10.

Of course, the US has been a much larger investor in India than China. But this could also change soon. In their eagerness to increase their share of the Indian market, Chinese companies like Shanghai Electric are also planning to set up manufacturing bases in India without insisting on jobs for Chinese people in India and putting any other conditions like the US firms do. (Remember the US pharma majors? reluctance to make big investments in India unless New Delhi tweaked patent laws to their liking).

There are other things that put the US at a disadvantage vis-a-vis China when it comes to future trade relations with India. Recently, four Chinese financial institutions including the Exim Bank of China agreed to finance transactions worth $12 billion involving Chinese exports of power equipment to India (which includes the $10 billion deal between Reliance Power and SEC). Contrast this with the fact that before it finally okayed $910-million loan guarantee for Reliance Power?s purchase of mining equipment from Wisonsin-based Bucyrus International, the US Exim Bank had raised concerns over the project on environmental grounds.

Of course, India?s exports to the US is more diversified than that to China which imports mostly raw materials like iron ore from India. But a greater engagement with China in the years to come could help re-configure this product mix to a a large extent. In recent years, India has made some headway in exports of pharmaceuticals, auto components and certain textile items to China.

On the other hand, the US exports to India are likely to depend increasingly on bulk deals to sell aircraft where Boeing would have to face tough competition from France?s Airbus and India?s emerging nuclear power market. To Washington?s benefit, the rapidly expanding Indian power industry will have to source gas turbine equipment from General Electric.