Who benefits, who loses

Updated: Apr 20 2005, 05:30am hrs
While a lot has been written about the possibilities of India-China economic cooperation, there is very little in the way of a Swot analysis of the competitiveness of the major export commodities. One exception is a McKinsey report that examined the competitiveness of textiles and garments and found the two countries were on par.

It is important to identify the strengths and weaknesses of export-oriented sectors of the Indian economy, by conducting sectoral studies on the impact of the increase in Chinese exports. In addition, it is vital to examine the negotiating spaces that these industries would have in their operation in the World Trade Organisation (WTO) regime. Thus, status reports of the sectors would be useful. These should also examine the existing subsidies in China, their permissibility within the WTO, the cost data for anti-dumping and competitive pricing, labour standards, etc.

The first step for cooperation is to strengthen the information base in India on the Chinese economy. Anecdotal evidence and off-the-cuff remarks show that businessmen find it difficult to make profits in China, yet Chinese investment appears to be rising.

One has heard horror stories about Chinese capital markets, as well as fears of overheating. Yet, the global economy has still to see significant inflation in prices of Chinese goods. Basically, too little is known about the macroeconomic situation of China to make any meaningful comparison with India.

Foreign direct investment (FDI) in several sectors, including infrastructure, would be a necessary input into improvements in productivity in India. In recent years, the share of foreign enterprises in China equals 14% of the national industrial output; that in trade is 46.9%; their tax payment occupies 12% of the government total taxation income; and they account for about 15% of total employment.

In India, most of these figures are less than 2%. Thus a comparison between India and China, in the context of economic cooperation, appears to be that of two unequals. Indias exports are roughly a third of Chinas and FDI roughly a tenth of Chinas.

Indias experience with FDI is roughly at the same stage that Chinas was in the early 90s. This would imply that in terms of the development stage, India is roughly 15 years behind China. The realised investment amounts to an annual average of $3.61 billion in 1991 in China. From 1992 to the mid-90s, Chinas investment grew to about $25 billion per annum on an average. This high rate of growth was accompanied by more emphasis on management control and ownership by transnational corporations. New ways of using foreign investment, such as build-operate-transfer mechanisms were also explored.

After the mid-90s, Chinas focus shifted from quantity to quality. Thus, while the number of projects has declined, the realised investment and average amount of investment is greater. The number and amount of investment towards high and new technology and infrastructure have increased rapidly. For example, in recent years, the share of hi-tech projects like electronics and communication equipment occupied 25% of total industrial investment.

Foreign investment makes up for the capital shortage in Chinas construction and production sectors. More important, it brings in advanced and applicable foreign technologies, equipment and scientific management. FDI is a very important factor in Chinas rapid economic growth. Looking at the export of just one product, textiles and garments, after the end of MFA. Indias exports have declined and Chinas have increased by over 20%.

The possibility of increasing bilateral trade and economic cooperation should not be based on exports of raw materials from India in exchange for finished goods. The possibilities for vendor development of small firms in India with large firms in China need to be explored. This would improve the efficiency of operations as well as expand the market base of a number of these firms.

Integrated product development with TNCs investing both in China and India can also be looked at. If only goods are to be the target of economic cooperation, it is unlikely that India will come out with a positive balance. It is important to include other areas of cooperation like services and investment.

The writer is India Programme Coordinator, Unctad, Delhi