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 percent 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 percent, and even today it is around 44 percent. 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 percent, whereas in India it is 20 percent. The massive shift of labour from agriculture to industry moved nearly two hundred 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 policy makers and Indian businessmen.

In 1999 only 5.8 percent of India’s imports came from China, but that climbed to 41 percent by 2015.

This was reflected in the growing trade, commercial and investment ties between the two countries. In 2001, India was ranked number 19 as an export destination for Chinese exports. But fifteen years later India’s ranking rose to 6, 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 percent of India’s imports came from China, but that climbed to 41 percent by 2015. So, not just electronics, chemicals, telecom or power equipment but also everything from agarbattis, Ganesha idols and readymade garments were being imported. Most tellingly India began importing active pharmaceutical intermediates (API) also from China. The API’s 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.

Indo China trade is more than a 100 billion dollars but asymmetrically in favour of China.

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.

Indo China trade is more than a 100 billion dollars but asymmetrically in favour of China. Similarly, despite a bitter trade war, Sino-US trade is still about 650 billion dollars, 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 percent, China’s reciprocal dependence is not even 2 percent. So, we cannot withhold certain key export items just 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 Chief Executive of Apple, the world’s most valuable company. Apple’s value of production in its Chinese factories is about 220 billion dollars of which about 185 billion dollars 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 dollars. 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.

(Dr.Ajit Ranade is an economist and Senior Fellow, Takshashila Institution)