The Hindu Business Line : Wiring up Sino-Indian trade

An FTA with China that assures a reliable supply of intermediate inputs may help boost India’s manufacturing efficiency and international competitiveness.

Suparna Karmakar

For reasons good or bad, the large emerging economies of India and China are increasingly linked in popular commentaries. Comparing their relative strengths appears to be a favoured parlour-game these days.

The focus ranges from politico-strategic issues like ‘Is India a rival or partner to China?’ and ‘Which will be the more important power in the 21st century?’ to analysis of economic issues like ‘Which nation can grow fas ter?’, ‘Which has a better model for growth?’ and ‘Can economic cooperation overcome border tensions?’

It is only lately that the two emerging Asian giants have embarked on closer economic cooperation and integration, really an aberration when one considers the close economic relation that first-mover China has enjoyed with the other Asia-Pacific economies over the past few decades.

Rapid trade growth

Notwithstanding the late start, trade between India and China has accelerated rapidly in recent years amid continuing high growth and trade liberalisation on both sides. Since China joined the World Trade Organisation in 2001, Sino-Indian bilateral trade has grown from $2.3 billion a year to $40.6 billion — an average annual increase of 50 per cent.

It is likely to touch $60 billion by the year end, according to a CII estimate.

Since 2003-04, Sino-Indian bilateral trade has grown at almost double the rate of their trade with other countries.

China is now India’s largest trading partner while India is one of its important partners; in terms of trade value, China is the third-largest destination for exports from India.

But just like China’s trade with the G3, Sino-Indian bilateral trade is also highly imbalanced. Against bilateral exports of $9.26 billion, India’s imports from China totalled $31.33 billion in 2008-09.

This deficit has been growing over the past few years; since 2005-06, India’s imports from China have been increasing at a faster rate than its exports to that country.

Robust Indian imports

Recent research at the Institute of South Asian Studies, National University of Singapore, shows that Indian imports have been the main driver of the robust increase in Sino-Indian trade.

China is now India’s biggest source of imports, accounting for 10.7 per cent of its total imports.

The top five Indian imports from China (at two-digit level) comprise electrical and electronic machinery, organic chemicals, iron and steel, mineral fuels, and waxes; they constitute two-thirds of the total imports.

Notably though, about 45.85 per cent of the imports last fiscal comprised electrical and electronic machinery, and this share remained unchanged from the year before. Further, in these two product categories (which are among the most dynamic export sectors for India), China supplied nearly 30 per cent of India’s total imports last fiscal.

On the other hand, India’s exports to China are dominated by resource-based and labour-intensive products. Mineral products (for example, ores, slag and ash, salt and sulphur, and mineral fuels and oil) are prominent exports; ores comprise more than half of them.

It is also notable that India’s major exports to China are different from its main exports to the rest of the world.

If Indian exports were categorised in terms of their value-based significance from a global perspective, then the Chinese market, until now, remains a less important destination for the most significant exports such as gems and jewellery and refined petroleum products.

Scope for FTA

So what could this imply for the future of Sino-Indian trade and, in particular, the trade imbalance? What threats will a bilateral FTA (liberalisation of the goods trade) hold for India?

It may be remembered that Indian industry associations remain extremely wary of the proposed Sino-Indian goods FTA and have, in fact, been lobbying for a cautious approach to protect domestic industry.

In 2008, the Government also agreed that an FTA with China was not a ‘priority’ owing to ‘deep divisions’ within the Government and opposition from the industry.

The Government has also taken safeguard actions against Chinese exports; of the 68 antidumping actions initiated by India from January-June 2009 alone, the bulk is against China.

A detailed analysis of the costs and benefits for consumer and producer welfare is needed to assess the net impact of a Sino-Indian FTA.

A quick analysis of trade data shows that the increasing trade deficit of India vis-À-vis China emanates in the very product categories which in value-terms are among India’s top five exports (at two-digit level) to the rest of the world. China is an important supplier in these key product categories, namely, mineral fuels, electronic and electrical machinery, iron and steel, and organic chemicals. Given the high intra-industry investment, production and trade in these key export industries, an FTA with China that assures reliable and assured supply of intermediate inputs may help boost India’s manufacturing efficiency and international competitiveness.

(The author is a Visiting Research Fellow with the Institute of South Asian Studies, National University of Singapore. The views are personal. blfeedback@thehindu.co.in)

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