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INDIA, CHINA'S TRADE TIES

Silk Route Redux

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India and China have much to gain by ramping up trade ties. A new setup in Beijing appears quite willing.

Chinese premier Li Keqiang's visit to India this week had a distinct economic emphasis, even as the more contentious security disputes made little headway. Such a dichotomy between lively economic traction and frosty political standoff is symptomatic of contemporary relations among most major powers. Suspicion and wariness at the strategic level has not kept the economic gravy trains from crossing borders in the era of globalisation.

Though India framed the border issue as a "core interest", the only significant concession that we got from the Chinese during this visit lay in the economic realm. Addressing our longstanding concern about the worsening trade deficit in India's disfavour, Li promised to "provide facilities for more Indian products to access the Chinese market. "

As the overarching head of the Chinese economy, Li can deliver on his market access commitment by moving the wheels of the state-dominated economic system in his country. One of the monumental tasks Li has set for himself is to curtail the power of state-owned enterprises (SOEs), which are accumulating excessive financial and political clout without delivering the economic growth targets set by the Chinese Communist Party (CCP). The entrenched hold of the SOEs and their bureaucrats has hindered growth of a genuine consumer demand-driven economy in China.

If India is aghast at the trade deficit with China, which currently stands at a whopping $29 billion, the structural cause of this is the export-biased nature of the Chinese economy and the unwillingness of export-dependent SOEs to change track. Since the CCP guides the Chinese economy, Premier Li has the means to accelerate its long delayed 'rebalancing' away from exports and towards domestic consumption. A China that consumes more is good news for India, as it holds the best prospects for narrowing the bilateral trade deficit.

The last CCP leadership duo of Hu Jintao and Wen Jiabao (2003-2012 ) was notoriously conservative and helped entrench the SOEs and their predatory export policies. Their successors will hopefully take a leaf from an earlier era of reforms (1998-2003 ) under Jiang Zemin and Zhu Rongji, when the SOEs were reined in.

India must hold Li to his words and ensure that market access to our pharmaceuticals and information technology (IT) sectors increases fairly, chipping away at the imbalanced bilateral trade. We have also sought more Chinese foreign direct investment (FDI) to flow into India as another way of neutralising the adverse trade balance. Prime Minister Manmohan Singh specifically invited Premier Li to direct Chinese investments into our infrastructure sector. Reliance Group chairman Anil Ambani has pitched for Chinese investment in our insurance sector. The volume of Chinese inward FDI into India is negligibly low, partly because of the bureaucratic red tapism for which India is infamous, and also owing to strategic fears that Chinese money will begin controlling our fates.

But even the United States is wooing Chinese FDI in infrastructure, despite sharing similar anxieties about the dragon taking over vital American national assets. US Secretary of State John Kerry recently welcomed Chinese investment in America's infrastructure sector, assuring Beijing that the security concerns in this regard were "very, very few;very, very little. " Notwithstanding alarms of a well-oiled anti-China lobby in the US, there is a realisation that China's enormous surplus capital can be harnessed to revive economic growth in a stagnating America.

India must be equally self-confident as the US that we can control the flow of Chinese FDI for purely economic win-win deals. The fact that Chinese investors are state-owned corporations, some with direct links to the Chinese military, should not deter us from hosting Chinese capital in desired sectors that are starved of financing. We can set limits on sensitive no-go areas for Chinese investments where there are reasonable apprehensions of Beijing gaining a strategic stranglehold over our communications and information networks. But Chinese-funded roads, ports or industrial corridors are harmless. India has an independent state and a vigilant civil society that will never permit "colonisation" via Chinese money.

In the long run, the composition of trade and investment flows between India and China will determine their respective places in the global economy. We are exporting primary commodities to China and importing finished goods from it. This exploitative dynamic must be redressed so that China does not continue to have an edge in the global terms of exchange. Africans and Latin Americans are also chafing about exporting raw materials to China and importing its manufactured products. Greater industrialisation within India and other developing nations, as well as a shift to services in China, can mitigate this lopsided trading equation.

Premier Li's acid test of revamping the Chinese economy has repercussions for the whole world, including India. We should wish him success when he goes back home.


The writer is dean at the Jindal School of International Affairs

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