Toasting times ahead: Indian PM Manmohan Singh with his Chinese counterpart Wen Jiabao

It's a story that R.K. Dhawan, former Additional Director General in the Directorate General of Foreign Trade, likes to recount very often. The Chairman of the Federation of Indian Export Organisations (Northern Region) recently sought an appointment with the Chinese Ambassador, Sun Yuxi. On his wishlist were visas for a delegation of businessmen who wanted to visit China. He was pleasantly surprised when the Ambassador not only granted him an audience the very next day, but also promised to clear the visas within two hours of the application.

"Such a gesture would have been unthinkable even a year ago," says a visibly impressed Dhawan. He should know; as a senior official in the commerce ministry, he has had many occasions to interact with Chinese officials. They weren't this warm or courteous in the past. But they weren't serenading India Inc. then, either!

The dragon is dancing with a purpose... but more on that later. In the immediate context, it is Chinese Premier Wen Jiabao's four-day visit to India, beginning April 9 (around the time this issue is released), which seems to have imparted a sense of urgency into these dealings. "The Chinese Premier is expected to sign agreements on agriculture and civil aviation, and also push for the early establishment of a Free Trade Agreement (FTA) with India," says Yuxi.

The FTA proposal (bringing customs duty levels on all goods down to zero) is, clearly, uppermost on the Chinese agenda and has been since former Prime Minister Atal Behari Vajpayee visited Beijing in June 2003 and signed the first-ever India-China Joint Declaration. Consequently, Rakesh Mohan, former Deputy Governor of the Reserve Bank of India, and Bo Xilai, Chinese Minister of Commerce, jointly chaired a Sino-Indian Joint Study Group (JSG) with officials and economic experts from both sides. The mandate: Study the feasibility of signing a bilateral FTA and a Comprehensive Economic Cooperation Agreement (CECA) to cement the booming commercial ties between the two countries. The JSG has since submitted its report to the two governments.

Though no one is willing to disclose the contents of the report, the moot question is: Should there be the mother of all FTAs between India and China? The Indian government has not yet taken a decision on this issue. Pointing out the necessity for such a move, N. Srinivasan, Director General, CII, says, "People used to say it was China and not India, then it was China against India, but if you look at any number of sectors, the real story is more likely to be China and India.''

Arvind Virmani, CEO of Indian Council for Research on International Economic Relations (ICRIER) and a member of the JSG, however, is categorical that India should adopt a graded approach to opening up trade (Rs 7,007 crore in 2003-04) with China. "First remove the barriers (visa and language constraints) that limit Sino-Indian commerce and reap an additional $6 billion (Rs 26,400 crore) in potential trade, then think of the next step," he says, adding: "Given the current costs of production in the two countries, it would be foolhardy to enter into a zero tariff arrangement with a country like China." (See Impact Analysis).

This argument has many takers in India Inc. Says S.P. Oswal, CMD, Vardhaman Group: "We cannot compete with China." He backs his statement with stats: China invested close to $30 billion (Rs 1,32,000 crore) in the past five years on modernising its textile mills; India, by comparison, invested only $3 billion (Rs 13,200 crore). China exported textiles worth $97 billion (Rs 4,26,800 crore) in 2004 against Indian exports of $14 billion (Rs 61,600 crore). And China's production of man-made fibres was around 12 million tonnes in 2004, 10 times India's output. It is clearly an unequal battle.

Then there is China's non-market economy (read: non-transparent nature of government dealings), cheap power (Rs 4.92 per kilowatt hour compared to Rs 7.38 in India) and world-class infrastructure that make it an obvious winner. And it's not just the textile industry that's wary of allowing the dragon a free run. The proposal on the FTA is giving companies producing toys, plastics, chemicals and a host of other products sleepless nights as well. "Such an agreement will hand over the entire Indian chemical market on a platter to the Chinese," warns Deepak Mehta, President, Indian Chemical Manufacturers Association. Even in the existing scenario, the Indian government has had to slap anti-dumping duties on Chinese chemicals in order to protect domestic companies. "So the import duty protection actually only balances the higher cost of production emanating from higher energy, transportation and other infrastructure-related costs," he says.

However, a senior commerce ministry official contends: "While tariffs may no longer be a safeguard mechanism for Indian products, the government will still have anti-dumping and rules of origin clauses to protect Indian players."

Surprisingly though, the possible entry of Chinese consumer durables manufacturers via the FTA route does not seem to faze the domestic players. Venugopal Dhoot, CMD, Videocon International, argues that an FTA is no threat to Indian players. "The quality of our consumer durables is much better," he asserts. "We are the largest manufacturer of glass shells-an important component of TV sets-in the world; this gives us that added edge." The confidence is well founded; the entry of Haier, one of China's largest consumer durables companies, has had little impact on the domestic market.

"The quality of our consumer durables is much better. We are the largest manufacturer of glass shells in the world; this gives us an added edge" VENUGOPAL DHOOT CMD/ Videocon International

However, if India does sign the FTA, it must ensure that this is done simultaneously with the signing of a CECA with China. This is because the CECA includes "free trade in services", an area where India has a definite edge over China. Such an agreement will not only allow Indian software companies unfettered access to the $10-billion (Rs 44,000-crore) Chinese it market, but also allow Indian players to jointly bid with their Chinese partners for a share of government contracts. It is little wonder then that Sunil Mehta, VP, NASSCOM, believes that a CECA with China offers the Indian software sector significant opportunities.

But Dhoot and Mehta are obviously in a minority. R. Seshasayee, MD, Ashok Leyland, too does not see much reason for India entering into an FTA with China. He maintains that the only successful ftas are those with "complementary competencies, such as NAFTA (North American Free Trade Agreement), where the US brought in capital and technology while Mexico contributed cheap labour. India and China, on the other hand, hardly have any complementary competencies. The fact is that we are competing partners".

"We cannot compete with them. China exported textiles worth Rs 4,26,800 crore in 2004 against Indian exports of Rs 61,600 crore" S.P. OSWAL CMD/Vardhaman Group

China's heightened interest in the FTA has as much to do with its geo-political and strategic considerations as with economics. Accor-ding to Manoj Pant, Professor, School of International Studies, JUN, China needs all the help it can muster to fulfil its ambition of emerging as the leader of Asia and the Third World. Japan, Singapore and Malaysia are wary of China's impending integration into the ASEAN by 2011. Having the world's largest democracy on its side is expected to assuage these fears. Hence, the need to engage with India, which is seen by many as an alternative pole to China. It also needs new markets for its products. The US, Europe, Japan, Taiwan and Singapore are already bursting at the seams with its products. India offers the only major untapped market.

For Chinese ambassador Yuxi, an FTA is a win-win situation for both countries. "India and China and increasingly complementing each other not only in healthcare, agriculture and services sector, but also in multilateral FORA," he says.

The writing on the wall is clear. The FTA with China is an idea whose time has, perhaps, still not come. And without a simultaneous agreement on services, the results can be potentially devastating. Indian industry needs more time and preparation before it is ready to take on its trans-Himalayan rival. For now, the two sides will do well to remove the hindrances that are hindering normal bilateral trade flows. The rest will axio-matically follow.