Commerce to the fore for Delhi and Beijing

Posted in China , India | 14-Jan-08 | Author: Pallavi Aiyar| Source: Asia Times

Indian Prime Minister Manmohan Singh, left, and Chinese Premier Wen Jiabao toast after a signing ceremony held at the Great Hall of the People in Beijing Monday, Jan. 14, 2008.
BEIJING - When Indian Prime Minister Manmohan Singh visits China next week, he will be accompanied by a 25-odd member business delegation comprising the big guns of India Inc from a range of manufacturing and information technology sectors.

Four hundred members of China's business and government community will gather at a January 14 summit in Beijing, organized by the China Council for the Promotion of International Trade (CCPIT), to meet with these captains of Indian industry. Ideas will be exchanged for diversifying the economic engagement across the Himalayas. A few business deals will also be signed.

The highlight of the meeting will be an address by Manmohan, who is expected to spell out his vision of the potentially formidable trade and investment relationship between two of the world's fastest-growing economies. The Indian premier's message will likely emphasize the necessity of developing a multi-faceted bilateral engagement, away from a one-dimensional focus on the two countries' border disputes.

In line with the recent stress on commerce rather than conflict, Manmohan will underline the significance of Mumbai and Shanghai, as much as New Delhi and Beijing, in determining the contours of Sino-Indian ties going forward.

Over the past few years, border negotiations have been limping along, but bilateral trade has been racing ahead. Between January and November 2007, Sino-India trade surged 53% over the same period a year earlier to US$34.23 billion. Trade between the neighbors jumped 33.8% from 2005, and 37% that year from 2004.

When the last Indian prime minister to travel to China, Atal Bihari Vajpayee, made his visit to Beijing in June-2003, the total volume of bilateral trade was $5 billion.

At the time, other than minor trading activity, economic links across the border were negligible. In the five years since, some 100 Indian companies established a presence in China, and Indian banks, industry associations, consultancies and even a law firm have set up shop to facilitate burgeoning business ties.

However, several question marks threaten to push through this rosy surface. Apart from India's long-term concerns over the composition of its exports to China, which primarily comprise low-value primary products, a widening trade deficit is causing furrowed brows in New Delhi. While in 2004 the balance of trade was in India's favor to the tune of $1.7 billion, by 2006 this had turned to a deficit of $4.12 billion. By November of last year, the deficit had further broadened to over $9 billion.

In an interview to The Hindu in mid-2007, India's ambassador to China, Nirupama Rao, stressed that a trade deficit with China was "tolerable only for a finite period", beyond which the risk of seeing a "positive of the [bilateral] relationship assuming negative tones" ran high.

Chinese trade officials say that an Indian trade deficit is likely to continue for the foreseeable future. "Unless Indians make a much more concerted effort to sell in the Chinese market, the Chinese surplus will continue," says Wang Jinzhen, secretary general of CCPIT.

One possible solution, according to Wang, is the early negotiation of a regional trade agreement (RTA) between the two countries, something the Chinese have aggressively been pushing for in recent years.

Wang points to the fact that China has already concluded or is in the process of finalizing about 15 free trade agreements (FTAs) with 29 countries and regions. He gives the example of the Sino-Chilean FTA as an illustration of the mutual economic benefits such agreements purportedly bring for bilateral trade. "Within a year of the FTA with China, Chile increased its exports to China by 100 %," he says.

A joint task force set up by India and China to study the feasibility of an RTA will make public its recommendations during Manmohan's visit to Beijing. It is widely expected to suggest deferring implementation of any RTA while not ruling it out altogether.

The suggested go-slow on the RTA is primarily the result of concerns among Indian business leaders. In India, lingering insecurities about Indian industry's competitiveness vis-a-vis the might of China's manufacturing are coupled with suspicions of the lack of transparency in Chinese pricing and accounting systems.

India is thus reluctant to grant China market economy status (MES), a first step towards the negotiation of an RTA. Currently, India is a leading initiator of anti-dumping cases against China. Were New Delhi to grant MES to China, it would mean that India would compulsorily have to accept pricing figures supplied by Beijing, leading to fears of large-scale dumping of Chinese products.

Harpreet Puri, the founder and head of Business Links, a China-based Indian consultancy, argues that the best way ahead is to stagger a potential RTA, restricting it to certain commodities rather than implementing a full-blown agreement all at once.

He is of the opinion, however, that the emphasis during Manmohan's visit should be on boosting cross-border investments, rather than on trade alone. "India's trade deficit is likely to continue for some time and so it is really important to make investments rather than trade the foundation of the relationship," he says.

Although a gradual beefing up of investments across the Himalayas has taken place, they remain meagre. For example, since 2006, Puri's consultancy alone has helped bring in a $60 million investment from wind energy company Suzlon and an additional $50 million from Everest Kanto Cylinders. However, actual Indian investment in China until March 2007 stood at a mere $178 million (although contractual investment is valued higher, at $565 million).

Chinese investments in India are also less than weighty, with fewer than 50 Chinese companies known to have set up offices there. According to the Indian government, foreign direct investment inflows to India from China between August 1991 and December 2006 worked out to a grand total of $3.61 million. Even the higher Chinese figure of about $17 million for actual investments is unimposing.

When Chinese President Hu Jintao visited New Delhi in November 2006, the two countries signed a bilateral investment protection and promotion pact. Since then, there has been an upswing in Chinese investments south of the border, particularly in the area of infrastructure and other project implementation.

However, CCPIT's Wang explains how lack of information in China about investment and market conditions in India, coupled with India's stringent labor laws and poor infrastructure, don't yet make it an obvious choice for Chinese investors.

Moreover, although the upgrading of economic ties is expected to take some of the heat off the simmering issues of bilateral political contention, such as the disputed border, continuing political suspicions work against unfettered economic engagement.

Thus, New Delhi has for long stymied Chinese investments in certain sectors, such as telecommunications and port development, on the grounds that particular Chinese companies pose a security threat.

Aviation is the latest sector to be affected negatively by political concerns. The Indian government is blocking the entry of Chinese cargo carrier Great Wall Airlines to Mumbai and Chennai, reportedly due to the fact that key nuclear facilities are located near these two airports. New Delhi's suspicions spring from the fact that one of the former owners of the airline in question - China Great Wall Industry Corporation - was blacklisted by the US for alleged transfer of missile technology to Iran.

In a retaliatory measure, Beijing has blocked India's Jet Airways' plans to fly to Chicago via Shanghai.

Sino-Indian economic ties are in fact still in a take-off phase. In January-November 2007 the share of Indian exports in overall Chinese imports was a mere 1.46 %. In the same time period India was only China's 10th-largest export destination and the 15th-largest exporter to China.

This is thus crunch time for identifying and developing mechanisms to manage the bilateral economic relationship in such a way as to minimize potential friction and maximize mutual self interest.

Manmohan has the opportunity to use the business summit in Beijing to move beyond the now cliched niceties of touting hardware/software collaboration and instead address head-on the challenges of promoting cross-border economic ties in all their thorny complexity.

Pallavi Aiyar is the China correspondent for The Hindu.

(Copyright 2008 Pallavi Aiyar.)