Prospects for India-China trade after Galwan

Forty years ago, India and China had roughly the same economic size, measured as GDP in dollars. Today, China is five times bigger. This growth has been mainly due to China’s single-minded focus on exporting to the West. It opened the doors to foreign direct investment, created large-sized special economic zones for such investment, fast-tracked approvals, built necessary infrastructure to ensure port and airport connectivity, even large-scale dormitory-style accommodation for millions of workers. As a result, foreign companies rushed in, created large-scale employment for Chinese workers, and made China a low labour cost source for exporting to the whole world.

Of course, this is a highly simplified version of a complex story. It wasn’t only foreigners who were investing. It was State-owned Chinese enterprises, too. The GDP was growing at 10% per year, but wages were held nearly constant. So, most of the gains of economic growth was going to capital, not labour, which meant the State. Since the economy had a high savings rate, thanks to a repressed financial sector, the entire amounts saved were re-invested. Thus, China had an investment to GDP ratio at a peak of more than 50%, and even today it is around 44%. As a result of high and sustained growth, the per capita income of a Chinese citizen is five times that of an Indian. The official poverty rate, defined as spending less than two dollars a day, is only 0.5%, whereas in India it is 20%. The massive shift of labour from agriculture to industry moved nearly 200 million workers in one generation.

This is the kind of growth story that India would like to emulate. But our political systems are totally different. Even then, India implicitly put its faith in investment-driven growth, setting up of special economic zones, building infrastructure albeit as public-private partnership, and so on. These policy efforts have yielded less bountiful results here than for our northern neighbour. But the unspoken desire to emulate Chinese economic growth remains in the minds of policymakers and Indian businessmen.

This was reflected in the growing trade, commercial and investment ties between the two countries. In 2001, India was ranked No. 19 as an export destination for Chinese exports. But 15 years later, India’s ranking rose to six, inching closer to even 5. It showed that the Chinese producer was giving importance to India. Even the Indian entrepreneur was sourcing more and more from China, mainly for the huge cost advantage as compared to Europe or America. In 1999, only 5.8% of India’s imports came from China, but that climbed to 41% by 2015. So, not just electronics, chemicals, telecom or power equipment but also everything from readymade garments to agarbattis and Ganesha idols were being imported.

Most tellingly, India began importing active pharmaceutical intermediates (API) also from China. The APIs are crucial imports required for India’s dynamic and world-leading pharmaceutical industry, which exports generic drugs (i.e. those whose patents have expired). These low-cost generics help keep healthcare costs low for India as well as for our trading partners.

The import dependence on China continues. Across sectors, India’s China dependence for its imports is as follows: in electronics 45%, in capital goods including boilers and turbines 32%, in organic chemicals 38%, in furniture 57%, in fertilisers 28%, in automotive parts 25%, and in pharmaceuticals API 68%. This import dependency will be very difficult to shrug off in a short while.

India-China trade is more than $100 billion but asymmetrically in favour of China. Similarly, despite a bitter trade war, Sino-US trade is still about $650 billion, though the Americans seem to have been able to tilt it somewhat in their favour. It is not possible for India to do the same with China. That is simply because while India’s dependence is about 35%, China’s reciprocal dependence is not even 2%. So, we cannot withhold certain key export items, like America can. The only option for India is to wean dependence away from China. This will unfortunately increase the cost for the consumer in India. Even if China is selling below cost (which is called “dumping” according to WTO rules, and is a crime), the end-user in India enjoys lower-priced goods.

It is also important to note here the statement by Tim Cook, the CEO of Apple, the world’s most valuable company. Apple’s value of production in its Chinese factories is about $220 billion, of which about $185 billion is exported. But Cook said that he is in China not because of lower cost, but because he cannot source that talent anywhere else. So, while it may be true that China’s 40 year history of export-led growth was initially all about low-cost labour, an undervalued currency, and perhaps all kinds of subsidies like cheap power, land and capital, the fact now is that China has got an edge in technology and quality as well. In fields like Artificial Intelligence, electric cars and solar energy, it has emerged as one of the top global players.

So, for India, this poses a difficult challenge. The border conflict, and the death of soldiers in Ladakh, has triggered trade sanctions against China. The banning of Chinese apps was swift and has supposedly hurt the parent Chinese company. A Chinese newspaper quoted a damage in value to the tune of $6 billion. But clearly, border conflicts cannot be solved by trade sanctions. It is not clear what the Chinese stand to gain by their expansionism. They will certainly stand to lose access to a market which is ranked fifth or sixth for them. In a world facing a recession, and slowing international trade, why would they hurt their own exporters? Even then, the Indian strategy of moving away from Chinese dependence is not going to be easy. Ironically, we had started reducing the trade deficit in the past three years, which was a hopeful sign. All that will have to be reset, in the light of the Ladakh hostilities.

(The writer is an economist and Senior Fellow, Takshashila Institution) (Syndicate: The Billion Press)