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India & China: basis for cooperation
June 30, 2003
The fear of China must be replaced by the realisation that both India and China have their respective strengths and over the next 50 years will emerge as global economic powers.
There is no gain saying that there will be areas where the two countries will have stark disagreements.
By encouraging cross-border trade and investment, active measures to reduce border disputes, goodwill gestures can clear the air for broader economic ties.
This article will focus on the understanding of the scope for trade and finance to link these two economies, the sharing of knowledge between the two countries to progress, replicating successful ideas and implementation. Finally, it will emphasise the role of India's private sector in taking the initiative to forge lasting ties with China.
China embarked on reforms in 1978 and has been growing at an average rate of 8 per cent. While many are sceptical of China's high growth rate, suffice to note that the foreign direct investment at an average of $40 billion, massive exports to the West and a modern infrastructure have been driving growth.
Rather than just submitting to the tyranny of numbers, sceptics can actually cross-check the export numbers of China with the import statistics of developed countries. China's core problems are declining government revenues, restructuring loss making enterprises and non-performing loans of the banking sector.
The most formidable challenge for China is to deal with the 110 million strong workforce, a significant portion employed by bankrupt state owned enterprises. The problem of vast redundant labour and non-performing loans is well recognised and are being dealt with.
India's economic liberalisation began in 1991. While substantial progress has been made, the large fiscal deficit, low employment generation and poor infrastructure continue to deter India's high growth prospects.
India derives its strength from its very efficient private sector, high quality human capital and slow but functional institutions. The global success of the software sector has raised the aspiration level of India's manufacturing sector, which is gearing towards export.
China can be a large market for Indian exports. Foreign investors' perception of the strengths and weaknesses of the two regional powers is worth highlighting, to identify areas of possible cooperation. Bernard Lapointe, portfolio manager at S.A.E.F. ( A French global equity fund) has been investing in Asia for seven years and is also a firm believer that the 21st century will be an Asian century.
His comparison of India and China reveals some interesting aspects. India has a well-established and professional management talent, which is being organised to build world class companies.
In contrast, most upper level managers in China come from bankrupt state owned enterprises, with very little exposure to market discipline. Despite China's astounding macroeconomic success, it has very few world class companies to offer international investors.
He notes that India's physical infrastructure is at least 5 to 10 years lagging behind China's modern roads, airports and railways, which enable an efficient movement of people and goods.
Another key distinction is that China has a craving for 'grandiose' projects such as -- the Gorge dam, the 2008 Olympics and the world's tallest building under construction in Shanghai. India does not seem to have an inclination for such 'mega' projects.
India and China should build strong trade and finance links that will build business relationships and dramatically reduce the probability of conflict.
Given the size, proximity and economic structure of the economies, the scope for expansion of trade is immense. India's exports to China have grown at the rate of 14 per cent and imports at the rate of 23.8 per cent. The total volume of trade has more than doubled over the last four years.
India's exports to China is a very small portion of its total exports. India's imports from China is also an insignificant portion of India's total imports. Overall it indicates the vast potential to increase trade.
The low penetration across major items imported by China, indicates India is missing a major opportunity to participate in China's growth. A special task force needs to be formed to explore ways and means to increase India's exports to China. Russia, China's northern neighbour exported $8.4 billion in 2002, while India exported close to $1 billion in 2002.
Asia is integrating rapidly in economic terms. China is the growth dynamo of Asia. In 1980, approximately 6.3 per cent of China's imports came from East Asian countries (Hong Kong, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand), by 2000 it was 39.5 per cent.
As a per cent of its total imports, China was importing more from East Asia than either the USA or Japan. By taking a longer-term view and supporting India's role in the Asian region, China can ensure the growth and stability of the entire region. India can be the auxiliary engine, driving regional growth.
While the trade links are strengthening, investment links are non-existent. There is hardly any large Chinese investment group registered as a foreign institutional investor to invest in India.
India can help China in terms of TRAIning its people in various areas such as software, accounting, finance and legal systems, which will be in great demand as China becomes an increasingly sophisticated economy.
China can offer valuable guidance to India on the infrastructure side. As a part of the 10th Five-Year Plan, China is embarking on four projects.
The Qinghai-Tibet Railway ( 1,956 km long, the highest and longest railway in the world), the west -to-east power transmitting project ($15 billion), west -to-east natural gas pipeline (4000 km long pipeline) and south-to-north water diversion project ( 44.8 billion cubic meters of water will be diverted from Yangtze to North China -- an investment of $ 60 billion).
India's private sector while targeting the opportunities in China must be cognisant of the challenges and take a long-term view for operating in China.
The CII study highlights the potential in software, pharmaceuticals and biotech and the ongoing activities of Indian companies. NIIT already runs 112 computer TRAIning centers in China. Bharat Forge is emerging as a leading supplier of crankshafts for trucks in China and aspires to capture a 60 percent market share.
Aurobindo Pharma has a joint venture and a plant in China with an investment of $50 million. Ranbaxy, Dr Reddys and Orchid are already in China. Sundaram Fastners is planning to set up a $12.5 million plant and Essel Packaging has invested $40 million in four factories. CII has already set up an office in Shanghai to facilitate Indian companies' plans to expand to China.
China needs to make a strategic decision to breakaway from its policy of strategic containment. The recent visit has successfully explored various possibilities of cooperation and goodwill between China and India, particularly in economic relations.
An economically prosperous and self confident India will be a large market for Chinese goods and add to the growth and stability of the region. For its part, India should remain sensitive to China's concerns, be it Tibet or Taiwan, and focus on building a multi-dimensional relationship with China.
The recent visit has made tangible progress which needs to be sustained. The basis for strategic cooperation will emerge with growing trade and financial ties. As both countries have a stake in each other's progress, the possibility of conflict will diminish.