Cooperation can far outweigh competition

On several occasions last fortnight, the Chinese Premier called for a broader and deeper relationship in trade and economy between the two countries, emphasising that opportunities for cooperation between the nations far outweigh competition. At Bangalore, he repeatedly talked about the synergies between the software strengths of India and the hardware capabilities of China. Globally, there is keen interest in this visit, and its outcomes.

In part, the interest is due to the fact that Indo-China relations are in very good shape. The statesmanship shown last year in settling the vexing issues of Sikkim and Tibet, to the satisfaction of all, has generated great expectations that other irritants, including Arunachal, can be dealt with. Preliminary discussions over the last two days indicate that the direction and momentum are being maintained.

On the trade front too, significant opportunities are visible. Trade between India and China has grown 13 times in 10 years to reach $13.6 billion, and could touch $35 billion by next decade. Indian exports jumped from $1.69 billion in 2001 to $7.67 billion in 2004. The trade balance favours India marginally, though this could change over the years. Chinese companies have multiplied their presence in India in areas including telecommunications, power, electronics, white goods and consumer-ware in the last four years. Huawei employs nearly 700 Chinese software professionals in Bangalore to develop software for its products, for which a market exists in India. The proposed customs cooperation agreement is to facilitate the rapid growth in trade.

Analysts have focused on China versus India issues, on the slower pace of reforms in India, and the general opinion that China is moving ahead faster. There has been little articulation of the opportunities to work together.

The first of these relates to exchange rate policies. Both countries, in different ways ?manage? these policies. In the case of India, until financial sector reforms are complete, it appears risky to open up the capital account. In China, given the overhang of the NPAs in the financial sector, consequences of immediate revaluation may be serious. Even if China moves to a floating regime, there is no guarantee the rate would move far from its current level. Both countries must, therefore, resist pressures and decide exchange rate policies themselves.

The opponents of outsourcing are recent entrants to the anti-globalisation movement. Demand by the EU and the US for instituting a social clause in the WTO that would permit trade sanctions to enforce labour standards, is also a protectionist response. It would affect both China and India, and must be opposed together. Both should continue to insist that issues not related to trade, such as labour standards, should not be in the WTO mandate.

There are efforts to bring issues like environment and government procurement into the WTO ambit. The legalistic structure of the dispute settlement mechanism favours those with better access to expensive legal expertise. With growing complexity of trade related issues, the system could get overburdened and fall behind. The two countries can explore better alternatives to the present system.

Both countries would remain net importers of crude in the medium term, with almost 70% of their requ-irement sourced from overseas. Given the competition to acquire equity oil abroad, there have been instances of competitive bidding. Instead, the two can work together. With increasing appetite for oil imports, they would account for over 10% of all oil production in a few years. This is a massive economic leverage that could be used as a counterpoise against rapacious increases in oil prices.

Earlier, the threat of Chinese imports weighed heavily on Indian industry. It has since recognised the China opportunity. Software firms, light engineering enterprises and pharmaceutical companies are foraying into China. Indian pharma companies could be looking at China as a market as well as a manufacturing base. Investments of Chinese companies in India are also growing.

Financial markets offer yet another opportunity. Continuous inflows into India?s security markets have established their maturity and transparency. India could help China develop similar markets. Opportunities in other services, like education, healthcare, tourism and basic sciences research, have yet to be fully explored.

Even conservative estimates indicate China would continue to grow at over 8% and India at over 6.5% per annum in the next decade. Their growth needs would determine commodity and consumer prices in the world. The next leap forward should be onto the forefront of technology and innovation. Given their knowledge-based skills in IT, biotechnology and engineering, opportunities for development in hi-tech areas will emerge through cooperation.

There is a great future, and this visit is a chance to envision this. Sustained growth would depend on maintaining high savings and investments rates, as well as investment efficiency. Both countries have persisting regional disparities that need to be addressed. The Common Minimum Programme, the Employment Guarantee scheme, and the rural initiatives of the UPA government are attempts to address this problem. China has chosen to intervene directly by establishing manufacturing facilities in these regions, and skills-training for its population. Both approaches involve substantial public expenditure, and a comparison would be beneficial to both.

This visit could be a beginning. Both countries need to look ahead at opportunities, not behind, at past irritants.

The writer is a former finance secretary and economic advisor to the PM