Chinese PM Jiabao: Eyeing India

This story can't be explained by a sum of parts analysis. Too many riders make such linear equations impossible. And too many variables-some of them unknown or unpredictable-mean it can't be called a zero sum game. The headlines are easy enough, though. Chinese Premier Wen Jiabao's recent visit to India got enough of them-and most of them had a rah-rah tone about them. Going by these, it would seem that India and China have kissed, made up and agreed to live happily ever after. But the sub-text makes for more complicated reading. The questions that arise are: Why is China wooing India? What does it want? What is it offering in return? And most importantly, why now?

At the crowded "India-China Business Cooperation Conference" in New Delhi on April 11, 2005, the Chinese Premier candidly admitted that sluggish agricultural growth and an acute shortage and, consequently, higher prices of coal, iron ore and crude oil could trip the Chinese miracle. "So what could be a better option than looking at resource-rich India, which could also double up as a huge market for its products?" asks B. Bhattacharyya, former Dean, Indian Institute of Foreign Trade, and one of the authors of the Comprehensive Economic Co-operation Agreement with Singapore. Besides, by linking its robust hardware sector with India's booming software industry, China could leapfrog its way to the top rungs of the global space, information and maritime technology sectors. And the icing on the cake, from China's point of view: an India-China combination could act as a counterweight to the US, at least in Asia. That's clearly what Premier Wen had in mind when he said: "If India and China co-operate, we will be able to lead the world it industry. When that day comes, it will signify the coming of the Asian century." Echoing these sentiments, Union Commerce Minister Kamal Nath says: "Economic partnership between India and China can unleash forces that will realise the goal of a larger Asian Economic Community. This is what can make the 21st century truly the Century of Asia."

That's not all. Partnering with India will give the Dragon much greater say in the World Trade Organization, as was exhibited by their united stand on the Singapore issues and the creation of the Group of 20 countries as a counterweight to the developed world. Charan Wadhwa, Research Professor at think-tank Centre for Policy Research, places the issue in perspective: "The Chinese Premier's visit is a recognition of the fact that India counts in the global community."

COOPERATION AND CONFLICT As the two Asian giants compete for the leadership of the developing world, there are major areas of concern.

Friends & rivals: Wen and Singh Information Technology COOPERATION: India's software capability and China's hardware strength could produce a formidable combination. Indian companies can service the huge Chinese domestic market and also form joint ventures for entering other markets such as Korea and Japan. CONFLICT: The fear is that over a period of time China will become our competitor in standard types of software and rampant piracy will make it difficult for India to maintain its supremacy. Pharmaceuticals And Auto COOPERATION: India can become a major supplier of cheap medicines to the vast Chinese market. It can also hope to capture a significant share of the Chinese market for automobiles and auto-components. CONFLICT: Limited scope for rivalry. World Trade Organization COOPERATION: Since India and China have similar positions on agriculture subsidies, non-tariff barriers on industrial goods and free movement of professionals, a co-ordinated position on international negotiations can be highly fruitful. CONFLICT: There is a danger of China using its alliance with India to extract concessions on issues important to itself, leaving India high and dry. Oil COOPERATION: Since both the countries are major importers of crude, the two can join hands while acquiring oil equity abroad, thereby reducing risks and securing better terms from oil exporting countries. CONFLICT: China pursues its energy security needs with a single-minded determination that is lacking in India's case. Ask ONGC Videsh! China has used every trick in the book to outbid and outmanoeuvre India in the global hunt for hydrocarbon assets. Indian oil mandarins are still waiting for the first signs of cooperation from across the Himalayas. Tourism COOPERATION: Both countries have massive tourism potential and cooperation between the two can result in a doubling of bilateral tourism every three years. CONFLICT: China is already a major player in the global tourism sweepstakes. The question is: Will it cooperate with India and, thus, give a leg-up to a potential rival? IMF and the World Bank COOPERATION: Since both countries have huge foreign exchange reserves, they can push for a more decisive say in the decision-making process at the Brettonwoods twins. They can also push for reforms of the international financial architecture. CONFLICT: Like at the WTO, India has to guard against becoming an appendage to China's quest for great power status. AREAS OF CONFLICT These are sectors where China has a decisive lead over India. So, the Dragon is unlikely to lend us a helping hand. Textiles and Garments: The biggest threat to India is in this sector because of the scale of China's operations and its preparedness for the post-quota regime. Chemicals: Again, China's scale of operations and the inverted duty structure of the country make India vulnerable to cheap (dumped?) Chinese exports. Small-scale Sector: The Chinese industry is clearly a threat to Indian small-scale industry. Toy, lock and mobile phone manufacturers are the most vulnerable.

But the primary purpose of Wen's visit was to boost bilateral economic ties. This was underlined by the fact that he first touched down at Bangalore, the country's software capital, and his strong insistence on signing a Free Trade Agreement (FTA) with India. This proposal, which envisages zero customs duties on bilateral trade, was fortunately cast aside for a five-year pact on comprehensive co-operation in economy and trade (see An Idea Before Its Time, BT, April 24, 2005). Says Omkar Singh Kanwar, Chairman, Apollo Tyres: "It is important to first sign a preferential trade agreement and then graduate to an FTA. It should be a gradual process."

The growth of two-way trade between India and China has, however, been anything but gradual. Bilateral trade, which was barely $338 million (Rs 878.8 crore at the then exchange rate) in 1992, touched $13.6 billion (Rs 61,200 crore) in 2004-05, a 79.1 per jump over the previous year's figure of $7.6 billion (Rs 34,200 crore at the exchange rate prevailing then). But India's exports to China are heavily skewed in favour of raw materials like iron ore (53 per cent of total exports), plastics, slag, ash, and hides and skins. This is both a cause for concern and a huge opportunity. Says Nath: "If the current momentum is maintained, China will become India's largest trading partner in two or three years. (Bilateral trade is projected to touch $20 billion, or Rs 88,000 crore, by 2008 and $30 billion, or Rs 1,32,000 crore, by 2010). But the composition of the export basket needs to change. There is a need to broadbase Sino-Indian trade in favour of value-added items, especially for India's exports." This will offer huge opportunities for India Inc., both in trading and for setting up manufacturing bases in that country. India's knowledge-based sectors such as information technology, biotechnology, health, education and financial services can play a major role in helping to diversify the country's export basket, says a recent Confederation of Indian Industry study. But Indian software giants are cautious about the Chinese market despite the red carpet being rolled out by Wen himself. "In the absence of a Foreign Investment Protection Act and poor implementation of IPR (intellectual property rights) laws, it is advisable for Indian companies to enter into joint ventures only," warns Wadhwa. Adds Raymond J. Lane, General Partner, Kleiner, Perkins, Caufield & Byers, a leading US-based venture capital firm: "If you don't have good IPR laws, then it is impossible to grow a software industry," obviously referring to the rampant piracy of software in China. The Indian pharma, automobiles and auto components industries can also take advantage of the prevailing bonhomie to set up production bases in China.

But this is easier said than done. Even today, many Indian companies are sceptical about investing in China because of the absence of a good legal system for redressal of grievances, language and cultural issues and a sense of distrust. "The biggest stumbling block is China's non-market economy (state-controlled economy)," says Arvind Virmani, CEO, icrier and a member of the Indo-China Joint Study Group on Comprehensive Trade and Economic Cooperation. It is little wonder then that bilateral investments have remained abysmally low despite the explosive growth in trade (see table on Trade and Investment). Elaborates Sanjiv Sanyal, Director (Global Markets Research), Deutsche Bank: "Investments require a greater degree of trust and comfort than trade because they imply sunk costs that cannot be reversed easily." Others like Nagesh Kumar, Director General at the New Delhi-based Research and Information Systems for Developing Countries, point out that 55 per cent of Chinese exports come from multinationals that have set up bases in special economic zones, and not from global-sized Chinese companies. "There are few Chinese companies that can set up subsidiaries abroad," he informs.

Despite that, China is clearly streets ahead of India in the global economic game (see How They Stack Up). And China has made no secret of its ambition of using its considerable economic clout to assume the leadership of the Third World. Warns Brahma Chellany, well known defence expert and strategic thinker: "China is clear-headedly building hard power, both economic and military. India needs to do likewise. A widening economic and military disparity between the two has restricted India's strategic space vis-à-vis China." India will have to correct this imbalance to stay in the game. And as China's recent doublespeak on India's Security Council ambitions showed, it is not about to let the spirit of neo-Panchsheel override its long-term geo-political goals. "China is simultaneously following a policy of engagement with and containment of India," contends Chellany (see Cooperation And Conflict). Nath has a different take, though. "The world tends to juxtapose India and China in a one-versus-the-other debate. I disagree with this view, and see India and China as twin engines of growth in Asia. If poverty is to be banished from the face of the earth, then it must be banished from both China and India," he says. Wen, too, steers clear of the debate on China's Great Power ambitions. "The visit has produced important results that are very far-reaching in character and sets the pace for much more accelerated developments in our bilateral relations," he said shortly before emplaning for Beijing. What all this means is that trade ties are fine, but we should tread with caution.