Manufacturing Danger

While the sporadic three-decade long Sino-India border talks have floundered recently on the subject of China claiming 'indisputable sovereignty' over the South China Sea and the fracas over the international Buddhist Conference that Dalai Lama addressed, there are clear indicators that the rivalry between the two Asian giants is moving increasingly into the economic sphere.

In the latest twist to the ongoing Indo-China battle of wits, the National Security Council Secretariat (NSCS) has raised a red flag expressing apprehensions over the two way trade. According to the NSCS, this rising trade has blinded India into overlooking its adverse economic impact.

The NSCS, which recently hosted inter-ministerial consultations on the Indo-China trade gap and its strategic implications, has circulated a note on the subject.

Says the note, "The high level inter-ministerial consultation held by NSCS to examine trade and economic relations with China (was meant to) ensure that these relations evolve in a manner that does not create strategic dependencies."

Detailing its concerns, it says the booming two-way trade and economic relations is fraught with 'serious' and strategic implications.

China is one of India's largest trading partners and the two way trade between them is expected to reach $100 billion by 2015 from $61.74 billion in 2010.

According to experts, the conduct of the two-way trade between India and China during the last five years reflects a clear example of inadequate foresight and understanding of ground realities that has resulted in a trade deficit of $23 billion in 2010-11.

What is startling is that this deficit is estimated to rise three folds from what it is today and is slated to touch the $60 billion mark by 2014-15.

In 2010-11, the bilateral trade between the two countries was pegged at $63 billion of which China's share was worth $43 billion.

Says Zorawar Daulet Singh, Research Fellow at the Centre for Policy Alternatives, "China’s interdependence on other Asian countries is of a different category. Its trade relations with India remain primitive as we export the raw material from here and buy China's finished goods.'' A situation akin to the East India Company's policies during the 19th and 20th centuries.

According to Zorawar, Chinese electronic goods constitute 45 per cent of the total trade which is not just hampering India's own manufacturing capabilities but has the potential of making it dependent on Beijing as a single source.

The NSCS has noted that heavy machinery import is pegged at 23 per cent of our total import leading to a situation where ‘one in every four power plants in India is being built on Chinese made and imported machinery.'

Says Ramu S Deora, President, Federation of Indian Exports Organisation (FIEO), "Our trade deficit with China is a concern. It has increased from $9.1 billion in 2006-07 to $20.8 billion in 2010-11. A balanced trade is needed for long term, sustainable and harmonious development of economic cooperation between the two countries."

Apart from being symptomatic of the overall weakness in India's manufacturing sector, officials in New Delhi say Chinese have priced their products much lower – at times 70 per cent cheaper – and this has killed competition from other vendors.

Industry analysts say that apart from making Indian industry self-reliant, there is also the need to identify strategic sectors, which have to be secured against unfair competition from its bigger economic neighbour. It says when it comes to strategic sectors like telecom and power, India has dropped its guard and China has used the situation to dump ‘malware’ and ‘virus’ laden telecommunication equipment on the Indian market.

Its strategic and geopolitical implications are beyond what India can visualise. “The implication of this imbalance will lead to an erosive effect on our capacity to counter China, in case of contingency. The footprints can be clearly seen in Asia-Pacific and in India’s own periphery,” points Zorawar.

Zorawar also says that India Inc's imperative to maximise profit was taking precedence over country’s ability to develop power.

A recent FICCI study has pointed out that between 2000 to 2008, FDI in India's manufacturing sector was to the tune of $3.4 billion. In the same period, China attracted a whopping FDI of $40 billion on an annual basis.

So what is the possible solution to secure India's strategic sectors and also widen Indian basket of importing nations? Experts say that free trade agreements with countries such as South Korea and Japan that could provide cheap manufacturing inputs, will help bring the tariffs down.

The other remedies, they add, includes imposing imports restrictions, especially in the power and telecom sectors, to force Indian companies to diversify sourcing and reduce their dependence on China.

Says the NSCS note, "The government is pursuing market access issues to tackle non-tariff barriers in the Chinese market at different fora. Indian exporters are encouraged to participate in major trade fairs in China to showcase Indian products in their market and increase engagement with Chinese companies.''

Looks like political rivalry between the two biggies is now spilling into the economic turf, which given China's standing as the largest-growing economy in the world with India as the second largest, can be considered, but a natural concomitant.