Deficit of trust

Between 2008-09 and 2012-13, India’s trade deficit with China has almost doubled from $22.82 billion to $40.81 billion. It is not surprising that Prime Minister Manmohan Singh made a mention of the “unsustainable trade imbalance” to his counterpart Li Keqiang during his three-day official visit to China. The joint statement issued by the two sides made a general pledge to promote “a balanced growth of bilateral trade”. While the virtually one-sided direction of trade is a cause of worry, it is a mistake to see this as an India-specific problem. Globally, China runs a trade surplus with most countries; it was $315 billion with the US in 2012. The only exceptions are countries such as Australia, Brazil and South Africa, which are massive exporters of mined commodities and do not have large enough populations to be significant markets for Chinese goods.

India has never been a major supplier of raw materials — barring iron ore and cotton — to China. At the same time, a large population experiencing growing incomes has made it a natural market for Chinese goods. If India’s imports in the process have far exceeded the value of its shipments to China, the reasons for it are structural. China today has become the factory of the world thanks to first-class infrastructure. Its firms have leveraged this to establish world-scale plants employing economies of scale to manufacture everything from dolls to telecom equipment at competitive costs. Rather than blaming China for a widening trade deficit, India should seek to learn from it by investing more in roads, power plants, railways, ports and human capital. While China certainly can do more to open up its markets in information technology and pharmaceuticals, where Indian firms have a competitive advantage, the structural constraints hobbling our manufacturers cannot be ignored.

Equally, India needs to look beyond trade in its economic relations with China. India is today a capital-starved economy requiring trillions of dollars of investment in infrastructure to sustain growth. China has accumulated foreign exchange reserves of $3.7 trillion for which it has few investible outlets other than low-yielding US Treasuries. There is a natural fit between the two economies, one desperate for long-term capital and the other keen on diversifying investments. To the extent that the Chinese trade surplus with India is re-exported as capital, it will serve as a means to finance the imbalance. But Chinese investments cannot happen without resolving the biggest deficit of them all: trust. This is where foreign policy has a huge role to play.

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