Need to diversify exports to China

China is looking towards internal consumption for propelling economic growth.

India-China trade is growing by leaps and bounds. It has already moved from US $7 billion in 2003-04 to US $75.6 billion in 2011-12. We may reach the target of US $100 billion fixed for 2015 much earlier. The rapid growth in India-China trade coincides with India’s most robust period of GDP and manufacturing growth. In all these years, the GDP growth was over 7.5 per cent and manufacturing over 8 per cent occasionally touching double digit growth. The rising trade deficit with China is a cause of concern as it has already touched US $ 40 billion last fiscal with imports reaching US $ 57.6 billion while exports were at US $ 18.1 billion. However, the trade deficit is widening due to huge demand of the Indian economy, and therefore, we need to internally assess for bridging the deficit.

The telecom revolution and unavailability of adequate telecom equipment led to huge imports from China. The increase in imports could be gauzed from the fact that the country is adding two million mobile subscribers every month. Focus on IT coupled with limited domestic capabilities in computer hardware has led to sizable increase in import of electronic and electronic components. The new focus on power generation has added to demand for power generating plants. By a rough estimate, Indian companies have already placed order to the tune of US $ 75 billion on the Chinese companies for power generating plants. High demand for active pharmaceutical ingredients and low capacity of domestic active pharmaceutical ingredient makers have led to increasing imports of salts and formulations from China.

Geometrical growth

Unfortunately, Indian exports have remained confined to raw materials and inputs ranging from iron-ore, cotton, copper, to iron & steel. The restrictions on iron-ore exports, dip in cotton prices and lesser demand for construction material have affected the exports as well. The real challenge, therefore, lies in moving to value added segments of exports. Fortunately, exports of pharmaceuticals, auto-components and end-products of plastics have shown geometrical growth in their exports.

We should realise that China is an emerging market for India because of various reasons. Structural changes are happening in China and the country is looking towards internal consumption for propelling economic growth. This would imply rises in the wages in China.
So far, rising wages have not affected the competitiveness of Chinese products as they have been offset by increasing productivity. However, in the last two years, wages have outsmarted the productivity. With a view to give more purchasing power to the population, the Chinese Government would be increasing the wages on a sustainable basis over 12-15 per cent in the next few years.

With the same objective in view, the deposit rates will move upward which will have direct bearing on the lending rates. Chinese currency is all set to appreciate in the near future. However, till now, the currency appreciation has not affected their exports as can be seen from the recent trade data. China’s exports during April-Nov, 2012 was US $ 1,420 billion, a growth of 7.27 per cent, despite 1.1 per cent appreciation in their currency during the same period. On the contrary, Indian rupee depreciated by 6.75 per cent during April-Nov, 2012 but we witnessed a decline of 5.9 per cent in our exports which touched US $ 189 billion in the same period.

The demographic change in China will compel it to move from labour intensive sector of productions to medium and high technology manufacturing. This can provide huge import demands in China for products having intensive labour requirement. Hand-knotted carpet production has already been stopped in China and soon few other products may follow suite.

Looking at the possibilities, India should explore demand of such products in China. Increasing participation through exhibition, trade fair, and field visits by companies would be ideal for them to get a feel of the market. FIEO is participating in Canton, Kunming and Chengdu fairs on a regular basis. The exposure has helped the Indian companies not only to get new business opportunity but also look at joint venture possibilities.

Both the countries need to leverage their advantages for mutual benefit. Some of the Indian companies in auto-component sector are doing their R&D and innovations in India and passing on the prototypes to China for mass production both for catering to Indian and Chinese markets. These kinds of experiments would be successful in many other categories as well. India can look for opening services trade with China besides, IT and ITES. Joint venture possibilities in tourism, alternative systems of medicine, and consultancy could be such areas of services. However, we would require to address our domestic regulation as well.

It’s fair to say that India’s exports basket to China will change with structural changes in Chinese economy but balance of trade would be continue to be in China’s favour due to economy of scale in China and the capacity constraints in India.

(The writer is president of Federation of Indian Exports Organisation)