Sunday 11 November 2012

$150 billion trade with India can silence China’s army (Sunday Times)


An ethnic minority delegate is seen next to the Great Hall of the People, the venue of the 18th National Congress of the Communist Party of China on November 8. reuters.
"Hindi Chini Buy Buy" was the theme of a book pointing out the economic complementarities of two countries which together contain 2.5 billion people and counting. During the past decade, trade between the two has risen by 50 times, to $74 billion, and is headed for $150 billion by 2016. However, there exists a significant bump on the economic highway, which is that there seems next to no chance of India gaining a competitive edge sufficient to equalise its exports to China with imports from that country. The present deficit has crossed $24 billion and is likely to climb. This will spur calls for protectionist policies in India that would seem superficially sensible, while actually giving the benefit to companies headquartered within the NATO bloc. An example is electric power equipment, on which — if whispers from Yojana Bhavan are accurate — Planning Commission member Arun Maira has succeeded in slapping a 21% duty that in effect targets only Chinese companies.
As BHEL-Tatra has shown, these days the Indian public sector has become a dumpyard for manufactures from more advanced countries. In the case of power equipment, the so-called "domestic" players are in actuality fronts for German, Japanese and US manufacturers, doing little other than wiping clean the dust from the packages in which such equipment has come from faraway shores. These are more than 30-40% more expensive than the Chinese competition, and hence were delighted at the duty, although they would have preferred it to be even higher. While some in the higher portals of government may have a stake in ensuring that companies in Japan, Germany and the US get a commercial benefit that the normal functioning of the market does not entitle them to, the consumer of electric power in India is the loser, in that she or he will have to pay more for (higher cost) power projects. India is experiencing a debilitating shortage of power. The only way this can be done at a price that is not extortionate is to ensure a level playing field among foreign equipment suppliers. In the guise of promoting domestic industry, what is being done is to favour a few rich countries with friends at the very top of the political pole in India.
What can be done is for more Chinese companies to invest in India and make this country a manufacturing hub for exports to third countries. This way, the balance of advantage will be retained.
However, within China — especially within the multiplying cadre of decision-makers who have studied in rich countries rather than in their own — there is often contempt for India that has shades of Kipling in its chemistry. Such elements need to understand that India is critical to the future economic success of China. In telecom, energy and infrastructure, this country offers the biggest market for Chinese companies, and the door can only be open if China reciprocates. Although sucking in imports from India on the scale needed to even the trade balance seems unlikely if not impossible, what can be done is for more Chinese companies to invest in India and make this country a manufacturing hub for exports to third countries. This way, the balance of advantage will be retained. But for such an outcome, Prime Minister Manmohan Singh will need to wean his security agencies away from the pap that they are daily fed by rich countries seeking to shut the door on Chinese imports using the security argument. Yes, Chinese companies probably indulge in actions that are designed to benefit select governmental agencies, but so do companies based in the US, France or that reliable source of hi-tech to India, Israel.
Certainly the PLA in China views India negatively, and has influenced policy in ways harmful to India in Beijing. However, once two-way trade crosses $150 billion, the folks in uniform in the People's Republic may finally get it into their heads that a friendly India is core to continued Chinese economic success, exactly the way vigorous economic ties with China serve India's. Manmohan Singh seeks growth. Perhaps he needs to go beyond Angela Merkel and look to Li Keqiang.

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