Red Star Over India? Xi Jinping in Abad with Modi

- Arun Goyal -

Falling Exports to China: Chinese President Xi Jinping heads to India on 16 Sept as the world’s two most populous countries look to bolster economic ties and resolve a long-running border dispute.

Prime Minister Narendra Modi will receive Xi in his home state of Gujarat. The leaders will share a private meal along the Sabarmati in the moonlight in Ahmedabad and also hold talks in New Delhi on 17 September.

India-China trade has reached $49.5 billion with 8.7 per cent share in India’s total trade, US is second with 8.1 per cent share and the UAE third at $45.4 billion with 8 per cent share during the first nine months of the current fiscal of China, which commenced in September 2013. Indian imports into China are falling, specially after restrictions on iron ore exports. Chinese exports are booming as Indian exports fall.

India and China share an uneasy relationship for more than half a century after the 1962 border skirmishes. Efforts to trade off some 37,244 km2 of Aksai Chin with 83,743 km2 in Arunachal Pradesh to settle the dispute are not on the agenda in the talks between Xi and Modi. India is still stuck with the stand of “not an inch” of land to China.

On the other hand, India feels encircled by Chinese economic expansion in the infrastructure sector in neighbouring South Asia. The Chittagong Port, Colombo Port and Gwadar in Pakistan are official outposts of China. Its overtures to Abe in Japan and the visit of President Pranab Mukherjee to Vietnam are clever moves to counter China and make friends with its enemies. Abe is playing ball with visit to Bangladesh and Sri Lanka to woo the neighbours away from the dragon with cheap finance.

The massive export of cheap Chinese goods has out flanked trading partners from the rest of world. China is the largest trade partner now for all countries of South Asia, including India. Cries of imbalance in trade from the Commerce Ministry make no sense in today’s world of free trade. (In fact, the Indian Government did not put an anti-dumping duty on Chinese Solar Cells even as the findings of the investigation agency recommended the duty. The waiver of the duty means that India wants to develop the downstream solar energy sector based on cheap Chinese Solar Cells. China trade is good for us!).

In a bid to protect industry from cheap Chinese goods, India is using the WTO approved anti-dumping and safeguard instruments to stop the barrage of cheap Chinese goods. (India is the biggest user of these protection measures in the world today surpassing even the US and EU which have economies several times of size of India). The ABS database on anti-dumping and safeguards show that 60% of the actions launched by India till now are against Chinese goods. The score is 112 anti-dumping actions against the Dragon in a total of 187 live cases. The corresponding figure for safeguards is four anti- China actions in a total of six. (India takes resort to the “Non Market Economy” clause of the WTO to rig the domestic price in China to arrive at a huge dumping margin to arrive at stiff duties on Chinese goods. In the event, the users and consumers lose access to low price goods).

The fact is that Indian industry cannot compete with Chinese goods in both price and variety. The quality of Chinese goods is acceptable by Indian standards. The way out for India is to decide the “Make vs Buy” question in favour of “Buy” Chinese goods. In the second round, India will be competitive vis a vis China when it adds value to Chinese goods based on low labour costs which are one third of China. Besides, India enjoys proximity to the growing markets of South Asia, Africa and the Middle East compared to China so it should score well on the export front.

India and China are not competitors. Their economies need each other. China wants India’s raw material like iron ore and cotton. India needs China in electronics, Chemicals and Light Machinery. The two should come together on the trade platform in open friendship.

Investment

India can learn from China in making low interest volume investment. However, we are not ready to give up our policy of high interest rates for “controlling inflation”. (High interest rates are only protecting the inefficient banks and the out of date Indian industry). Once we reduce interest rate to seven or eight percent, investments will flow into manufacturing. We can then fight with China.

The efforts to bring in Chinese investments into industrial parks in Gujarat makes no sense. There is much prejudice against Chinese money. The parks will not survive in the hot house of Indian bureaucracy which need “security clearance” for all Chinese investments from Home Ministry.

The way out is trade, trade and trade. We should step up imports from China to kick off the second round of industrialisation. Co-operation in reducing dependence on the dollar, countering monopolies in energy trade and developing common security measures are the areas where dancing with the dragon is good for both India and China.