India needs to open up, leverage Chinese market

You can choose your friends but not your neighbours. But if your neighbour is four times bigger, is the second largest economy in the world, and growing nearly as fast as you, then that would be a recipe for your export bonanza. China’s domestic consumption market is greater than the size of India’s entire economy. Both these giant neighbours of Asia will be the world’s two largest economies in the next four decades. 

Hence, there is great promise of a dynamic and robust economic relationship, never mind other mutual geo-political concerns. India-China bilateral trade was supposed to race to $100 billion by 2015.  This target was missed partly because of the recent global slowdown. But more worryingly, the trade instead of showing balanced and healthy growth has become extremely lopsided. India’s trade deficit with China is now close to $50 billion. Its exports to China were less than $10 billion last fiscal, whereas Chinese imports into India kept galloping. 

Everything from electronics, mobile phones, even pharmaceutical API’s is coming in. There’s also a glut of steel and non-ferrous metals pouring in, prompting Indian authorities to swing into action. A few years ago, when capex spending was robust in India, we also saw big Chinese imports of telecom and power equipment, capital goods and machinery coming into India. And of course, there’s also sundry stuff like Ganesha idols and Rakhis that are imported. 

It is possible that as e-commerce companies flourish, a lot of the consumer goods they sell might very well be sourced from China and sold in India. No wonder the Chinese giant Alibaba has taken a strategic equity stake in companies like Snapdeal and Paytm. Of course, it doesn’t have to be this way. The Chinese domestic market, served increasingly by their own e-commerce companies, is 10 times as big.  

On November 11 (it is 11/11 and hence called Singles Day), Alibaba alone raked in sales of $15 billion last year, which is ten times bigger than the biggest single day sale in America. Surely Indian exporters can grab a share of that big pie? The fact is that in the past 10 years, since 2006, India’s exports to China have grown just about 22% in total. On the other hand, China’s imports into India have grown by more than 500% during that same period.

China’s economic development rode on export-led growth. It was the world’s factory, offering cheap labour, special economic zo-nes and welcoming FDI. Real wages stayed constant for nearly three decades even as GDP and investments grew spectacularly. That single-minded focus on domestic inves-tment and job creation led to massive overcapacity in all sectors, ranging from steel, cement, mining to textiles and chemicals. But China’s ticket to prosperity was trade with the world. Hence, it came knocking on the doors of the World Trade Organisation. After a five year wait it, was allowed entry to WTO but not given the “Market Economy Status” (MES). This meant that the rest of the world was not convinced that China’s internal economy was working on market principles. Even as China exported everything from toys to tyres, there was always a suspicion that the government was subsidising inputs and helping producers. 

Hence, the argument goes, the “low cost manufacturing” story was based on subsidised credit, electricity, energy and currency. Some of this may be exaggerated, but is supported by the hundreds of “trade remedy” measures that have been initiated against China by other members of WTO. 

Anti-dumping duties
These include anti-dumping duties (ADD) and anti-subsidy duties. The ADD requires the importing country to prove that the selling price is below the domestic cost of production. In China’s case, the accusing country is allowed to use data from a third country, since Chinese data is “unreliable” and not market based, which means it does not have MES.  

Recently, the flood of Chinese steel imports has spurred India to slap ADD and also special safeguard duties. India has also imposed a Minimum Import Price requirement on China’s import of steel that ensures that the price is not undercut below a threshold. Much of these trade actions against China are made easier due to its being non-MES. Similar action has been taken or expected in textiles, non-ferrous metals and chemical sectors. The excess capacity in these manufacturing sectors in China puts pressure and hence leads to undercutting of prices, which eventually earn anti-dumping duties.

This year China completes 15 years of its WTO membership. According to the conditions of its entry, it was guaranteed an MES latest by the end of 15 years, no matter what. Many members of WTO, especially the European Union and the US, are uncomfortable about granting MES to China (even though the rules might force a fait accompli). China says it has undertaken market reforms and has fulfilled conditions and deserves MES. And simultaneously, having grown weary of WTO delay, China has launched the Silk Road Economic Belt and Maritime Silk Road initiative to link countries in trade, commerce and investments. These initiatives increase connectivity, build (Chinese funded) infrastructure and will surely boost trade.

India is a focus country for China, and is now the sixth most important export destination. India needs to leverage this to its advantage, and use it to pry open the Chinese market for export of IT services, pharmaceuticals and healthcare. Much of this involves procurement by their government or state owned enterprises. 

India also has great potential in taking a large slice of China’s huge outbound tourism. Some of the bilateral trade deficit can also be offset with inflow of Chinese capital into India’s infrastructure. The world’s second largest economy beckons our exports, and we can’t afford to scorn it with our protectionism. As China turns more market oriented, these opportunities will only get better.

(The writer is a senior economist based in Mumbai)
(The Billion Press)