It is difficult to believe that India and China were friendly neighbours, once upon a time, living in harmony with strong economic and cultural ties. It is claimed that Buddhism went to China from India. The famous Silk Route was a major conduit for international trade between the two nations. The colonial phase drove a wedge in that relationship. But even after the formation of the People’s Republic of China in the mid-twentieth century, the Indo-Chinese friendship had flourished for a while, till China’s annexation of Tibet. Since then, political relationships have soured along with border skirmishes, rising mutual distrust, and an absence of focused, bilateral, economic cooperation.
There are differences in terms of domestic economic policies followed by the two nations. China, after a tumultuous period of revolutionary fervour, settled down to a market-friendly strategy, which has paid handsome dividends to its economy. Today, China has become an economic giant and is a major producer of industrial manufactured goods. It also controls the most important global supply chain for modern manufacturers. On the other hand, India, after a rather sluggish experience with mixed-economic planning, opened up its economy with the economic reforms of 1991. Today, India has improved its economy impressively but is yet to reach anywhere near China, both in terms of the level of economic activity as well as the depth of manufacturing capability.
In the contemporary world economy, it is well nigh impossible to remain completely cut off from the Chinese economy. Thus, India too, despite the ongoing diplomatic and border tensions, has become dependent on the Chinese economy. China is now India’s largest trading partner. The total volume of trade in 2022-23 was around $117 billion, with India’s exports amounting to $15 billion and the import bill being $102 billion. The trade gap was very large at $87 billion in 2022-23. Out of India’s total imports, 40% comes from China. This is indicative of a very high trade dependency on China from India’s point of view. On its part, China has been gradually reducing its demand for Indian exports. The deficit with China ($87 billion) is about 40% of India’s overall trade gap of $226 billion. Given this state of affairs, India faces a number of challenges and needs to make some critical policy choices.
One option to tackle the burgeoning trade deficit and its implied dependence on China is to try and push India’s exports. Currently, India’s export basket to China consists mainly of mineral fuels, chemicals, fish products and cereals. Expanding trade in these items is difficult since China is already reducing its demand. Expanding in relatively new product categories like iron ore or cotton, in which India is estimated to have some comparative advantage, is going to be equally difficult because that would mean competing in China’s market. India has restricted access to this market and a deeper penetration would be quite time-consuming and costly.
A second strategic possibility would be to shift India’s imports away from China and into ASEAN countries like Singapore, Malaysia, Thailand and South Korea. These nations do give China a run for its money in their ability to produce sophisticated manufactured goods at competitive prices. In fact, China sources a lot of imports from these nations. India’s import basket from China consists primarily of electrical machinery and equipment, organic chemicals, nuclear reactors, plastic items and fertilisers. There appears to be a large potential to switch imports. It is relatively easy to change import-sourcing than to push new exports into a tricky market.
Finally, the third possibility would be to promote the production of the goods currently imported, providing some tariff protection to domestic producers. If the desired objective is to be attained within a reasonably short span of time, there has to be an extraordinarily large volume of investments, that too at a rapid rate. The volume of fresh investments required may not be possible through domestic savings alone. In this context, India must be able to attract a lot more of foreign direct investments. However, there is a problem here. India, unlike most countries of the world, is not yet fully plugged into the global supply chain controlled by China. Unless that happens, much of the potential foreign investment may turn shy in coming because of the restrictive ability of the investments to capture full value. This possibility requires the opening up of India’s domestic market to Chinese foreign direct investments in a big way. This is anathema to the security establishment in India. There continues to be a deep mutual distrust between the two nations. Let alone allowing Chinese FDI, India has not been able to reduce tariffs on Chinese imports in any significant way. China has, on the other hand, been accused of dumping steel in the Indian market. India has recently turned a net importer of crude steel.
The policy dilemma is sharply cut out. India can reduce trade dependence on China by switching imports. This can be done relatively easily, but reducing India’s market for China might bring about many geopolitical issues to the fore. The dilution of China’s stake in the Indian market is likely to reduce the economic stakes and make political hostilities more acute. India can hardly afford this, engaging with an economy five times in size and with a powerful modern military. Little wonder then that India’s recent actions in reaching out to China are not entirely delinked from Narendra Modi’s ‘Make in India’ programme. Chinese investments are a necessary condition for complementary investments from other foreign sources and, thus, the fostering of rapid growth of modern industries in the domestic economy. Incidentally, the Indian foreign minister, S. Jaishankar, has held two recent meetings with his Chinese counterpart in Laos and Kazakhstan.
There have been voices in the Indian government that have been calling for a return to business as usual with China. The latest Economic Survey suggested that India should allow Chinese imports and investments to boost Indian manufacturing and link India to the Chinese supply chain, which is the biggest supply chain in the world. Indian companies are constrained by the business restrictions with China. India, most believe, is on the cusp of a rapid growth phase. China, however, is experiencing a major slowdown and Chinese companies are keen to boost their exports. The moment is ripe for both economies to benefit by doing more business. The core problem lies with genuine security concerns. Would the larger set of economic interests in the Indian economy deter or encourage territorial and military skirmishes by China? There is no easy or obvious answer. Going forward would require a lot of diplomatic tact and enormous political acumen. Letting things drift would neither be of great economic gain nor offer greater national security.
Anup Sinha is former Professor of Economics, IIM Calcutta