India Today - - UPFRONT -

Al­though In­dia and China granted each other the Most Favoured Na­tion sta­tus in trade re­la­tions in 1984, bi­lat­eral trade be­tween the two coun­tries rose to a mod­est $ 2.9 bil­lion 16 years later in 2000. But as growth in In­dia ac­cel­er­ated to the 8- 9 per cent range and in­dus­trial tar­iffs were slashed, the bi­lat­eral trade ex­panded at as­tro­nom­i­cal pace, reach­ing $ 74 bil­lion by 2011.

One would think that this change would be equally wel­come in both Bei­jing and New Delhi. But it is not. The dom­i­nant view in the of­fi­cial cir­cles and press in In­dia is that there is some­thing deeply un­fair about this re­la­tion­ship. China ex­ports to In­dia two to three times of what In­dia ex­ports to it. There is wide­spread be­lief that China en­gages in dump­ing its man­u­fac­tured goods in the rapidly grow­ing In­dian mar­ket to the detri­ment of In­dia. That view has found ex­pres­sion in a gi­gan­tic 154 anti- dump­ing cases ini­ti­ated by In­dia against China since 1995, by far the largest num­ber of such cases by any mem­ber of the World Trade Or­ga­ni­za­tion against an­other mem­ber.

But is this view grounded in proper anal­y­sis? Not by a long shot. For starters, the United States mer­chan­dise im­ports from China are more than five times those of In­dia and its bi­lat­eral trade deficit more than 10 times that of the lat­ter. Yet, at 112 cases since 1995, it plays a dis­tant sec­ond to In­dia in ini­ti­at­ing anti- dump­ing cases against China.

Good economics tells you that you should worry about the over­all bal­ance in the cur­rent ac­count, which in­cludes trade in goods and ser­vices and re­mit­tances and not any bi­lat­eral mer­chan­dise trade deficit. From a macroe­co­nomic stand­point, there is noth­ing spe­cial about ex­port­ing goods over ser­vices or pay­ing for im­ports from re­mit­tances. Even more im­por­tantly, macroe­co­nomic sta­bil­ity re­quires lon­grun bal­anc­ing of the over­all cur­rent ac­count and not that with ev­ery spe­cific trade part­ner. If In­dia gets the best prices for its goods and ser­vices in the United States and Europe, those are the mar­kets to which it should ex­port. Sym­met­ri­cally, if it can buy the goods and ser­vices it needs the cheap­est from China, it should buy them from the lat­ter. This is no dif­fer­ent than what we do in our house­hold de­ci­sion- mak­ing: Sell our ser­vices to the em­ployer who pays the high­est salary and buy goods from stores that sell them the cheap­est. In­deed, re­strict­ing im­ports from China will do lit­tle to solve the prob­lem of over­all cur­rent ac­count deficit.

A dif­fer­ent pop­u­lar com­plaint is that In­dia’s trade with China ex­hibits a colo­nial pat­tern: It im­ports man­u­fac­tured goods from China but ex­ports raw ma­te­ri­als to it. This is surely an im­por­tant con­cern in terms of In­dia fail­ing to ex­ploit its com­par­a­tive ad­van­tage but not one for which we can hold China re­spon­si­ble. This is a wholly home­grown prob­lem. Whereas China faces se­vere labour short­ages and ris­ing wages, In­dia has a vast pool of labour in the in­for­mal sec­tor that it can draw into the or­gan­ised sec­tor with­out sig­nif­i­cant wage in­creases and pro­duce qual­ity prod­ucts that can out­com­pete the Chi­nese goods not only in our home mar­ket but third- coun­try mar­kets such as the United States and Euro­pean Union as well.

But be­cause of our dra­co­nian labour laws, we have sim­ply scut­tled or­gan­ised sec­tor man­u­fac­tur­ing of prod­ucts that China ex­ports in vast vol­umes. The most dra­matic ex­am­ple is ap­parel. To­day, China ex­ports more than 10 times the ap­parel In­dia ex­ports. In­deed, over time, the share of ap­parel in the to­tal mer­chan­dise ex­ports of In­dia has dra­mat­i­cally shrunken from 12 per cent in 1993- 94 to 5 per cent in 2011- 12.

Highly con­strain­ing labour laws have meant that medium and large firms, which drive pro­duc­tiv­ity, in­no­va­tion and prod­uct qual­ity and also ac­count for the bulk of the ex­ports, have shied away from en­ter­ing the ap­parel in­dus­try in In­dia. In an im­por­tant re­cent pa­per, Rana Hasan and Karl Jan­doc show that whereas tiny firms with seven or less work­ers em­ploy just 0.6 per cent of ap­parel work­ers in China, they ac­count for a gi­gan­tic 85 per cent of ap­parel em­ploy­ment in In­dia. At the other ex­treme, large firms with 201 or more work­ers em­ploy 57 per cent of the Chi­nese ap­parel em­ploy­ees while medium size firms with 51 to 200 work­ers em­ployed an­other 31 per cent of them. The cor­re­spond­ing per­cent­ages in In­dia are just five and two. Two decades af­ter the re­forms were launched, there still re­mains some­thing hor­ri­bly wrong with In­dian pol­icy frame­work.

A fi­nal In­dian com­plaint is that China has ob­structed In­dian ex­ports of phar­ma­ceu­ti­cal and soft­ware prod­ucts. This is a wholly le­git­i­mate com­plaint and one be­hind which the In­dian lead­er­ship should put its weight to seek bet­ter ac­cess to the Chi­nese mar­ket. Arvind Pana­gariya is a pro­fes­sor at

Columbia Univer­sity

SAU­RABH SINGH/ www. in­di­a­to­day­im­ages. com

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