THE YUANING GAP
Despite recurring border tensions, trade, bilateral investments and visits between India and China are breaking new records. What’s missing is parity. China exports and invests way more than India does. Reason: China’s GDP is $ 8.3 trillion versus India’s
In October 2010, industrialist Anil Ambani- owned Reliance Power ordered $ 10 billion worth of power equipment from Shanghai Electric Group to generate 32,000 MW of power, in the biggest ever business deal between an Indian and Chinese company. The deal, which also meant Shanghai Electric would set up plants in India to make power equipment, was signed on the eve of a meeting between Prime Minister Manmohan Singh and the then Chinese premier Wen Jiabao in Hanoi. The timing was not coincidental. It underlined an understanding between the two countries that one way to bridge India’s trade gap with China would be to allow the latter to invest heavily in export- oriented sectors in India.
BRIDGING THE GAP
The trade gap between the two countries is glaring. India’s trade with China grew 14- fold over the last decade, from $ 4.77 billion in 2002- 03 to $ 67.83 billion in 2012- 13. Of this, $ 54.3 billion comprised goods imported from China and only $ 13.53 billion worth of goods was exported to the neighbour, leaving a trade deficit of $ 40.77 billion. “That’s half our current account deficit,” says D. K. Joshi, chief economist with rating firm Crisil, “It’s alarming.”
Moreover, there is a colonial pattern to the trade, where much of imports to China are in ores, cotton and yarn, precious stones and raw materials, while its exports to India are highvalue finished goods. As iron ore exports dried up because of a Supreme Court- imposed ban on mining and export from Goa, China’s imports from India dipped 19.6 per cent year- onyear in December 2012. “As much as 93 per cent of India’s exports to China are raw materials and intermediates. This has created a negative trade balance. The only way to restore the balance is by encouraging China to set up bases in India to export,” says Biswajit Dhar, director general, Research and Information System for Developing Countries, a think tank under the Ministry of External Affairs.
The rising trade deficit will figure in talks between China’s Vice- Minister of Commerce Chen Jian and Indian Commerce Secretary S. R. Rao in New Delhi ahead of Chinese Premier Li Keqiang’s India visit on May 19. India wants China to ease regulations in order to ramp up exports of pharmaceuticals, IT and more agriculture products. A free trade agreement ( FTA) with China would have strengthened economic relations, but that has been evasive. Crisil’s Joshi says methods such as allowing trading in local currency between the two countries must help.
The invasion of Chinese goods over the years has been dramatic— right from electrical goods, to household products and garments to even fire crackers during Diwali— but investments on the ground leave much to be desired. Chinese firms have invested just $ 725 million in India till 2012, while India has invested $ 486 million in that country.
INDIA IN CHINA
China is feeding its appetite for services, and is encouraging Indian IT and BPO firms as well as banks in a big way. IT firms such as Infosys, Aptech, Wipro, TCS, Mahindra Satyam and NIIT, and banks such as Punjab National Bank, State Bank of India, Allahabad Bank and ICICI Bank have set up bases in Beijing and Shanghai.
Other prominent Indian companies in China include Dr. Reddy’s Labora-
tories, Bharat Forge, Aurobindo Pharma, Reliance Industries, Mahindra & Mahindra ( M& M) and Tata Sons.
The Tata Group’s connection with China dates back to 1859, when a young Jamsetji Tata, the founder of the Tata Group, was sent to Hong Kong to open a branch for his father’s banking firm. Tata relocated a few months later to Shanghai to trade in cotton, silk and tea, and remained there till 1863.
Indian firms find
that sourcing from China saves costs. The Godrej Group sources all its microwave
ovens and baby diapers from there.
Today, the group has 10 Tata companies operating in China, including Tata Steel, Jaguar Land Rover, TCS and Tata Global Beverages.
The Tata Group’s revenues from China grew from $ 1 billion in 2007- 08 to around $ 3.7 billion in 2010- 11, as it sold more Jaguar and Land Rover vehicles in China, which overtook the US as the world’s largest car market in 2010. M& M, which has a presence in the Chinese market through its two joint venture companies— Mahindra ( China) Tractor Company and Mahindra Yueda ( Yancheng) Tractor Company— has a 10 per cent market share in the sub- 75 HP tractor segment there. “Companies should be patient with their Chinese investment, and not expect break- even to happen quickly,” says Madhav Sharma, chief representative of the Confederation of Indian Industry ( CII) in China, adding, “Labour prices are rising, so companies need to look at moving into the interiors from the coastal areas.”
Coimbatore based Lakshmi Machine Works set up a wholly owned arm in China, LMW Textile Machinery ( Suzhou) Company in 2008, and makes 500,000 ringframe spindles a year, used in spinning. “China provides good infrastructure facilities, fast government clearances and ample scope for sourc- ing locally,” says R. Rajendran, director, finance, LMW. The market, however, is highly price- sensitive, he adds. Foreign companies need to better understand investment requirements of China in order to succeed there.
“US direct selling firm Amway, for instance, had to reinvent itself in China by opening retail stores, since direct selling is not allowed,” says Sharma. It’s a lesson that will keep Indian companies in good stead.
CUTTING COSTS
Indian companies find sourcing from China generating high cost advantages. For instance, handset maker Micromax has saved 40 per cent on costs by getting handsets manufactured in China by large contract manufacturers there. The Godrej Group sources all its microwave ovens and baby diapers from China as well as some air- conditioners, Chairman Adi Godrej told INDIA TODAY in an earlier interview.
According to the Indian Embassy in China, close to 100 Chinese companies, including state- owned ones, have operations in India. India’s policy needs to be less restrictive; Chinese telecom firms have been at the receiving end of Indian authorities’ scrutiny because of security concerns. Recent reports say the National Security Council Secretariat has warned of the risks to the country’s security from awarding projects to Chinese vendors like Huawei and ZTE, as they were also vendors to the Chinese army.
But Huawei is upbeat on India. “Over the last decade, Huawei has taken leadership position in a sector traditionally dominated by western vendors,” says Suresh Vaidyanathan, its India spokesperson. “Our experience here has been generally good.”
However, frequent calls for scrutiny and control may well stifle Chinese investment here. “We should do away with the fear syndrome. We can’t choose our neighbours,” says Dhar. India must develop a strategy to compete with China rather than control it.