‘Why blame China for India’s failings?’

Ahead of Manmohan’s visit, business leaders in China say Indian policies feed surging trade deficit

HONG KONG: Ahead of Prime Minister Manmohan Singh’s official visit to China, a storm cloud is building up over the only area of the Sino-Indian relationship where the two Asian giants have made significant progress in recent years: their booming trade ties.

Although mutual distrust spawned by the border dispute runs deep despite 11 rounds of talks, the stunning surge in bilateral trade — from barely $5 billion on 2002 to $38.6 billion last year — came to symbolise the new dynamism that characterises the two emerging economic superpowers. China is today India’s largest trading partner; India, in turn, is one of China’s top 10 trading partners. But that sunny statistic has in the past two years been clouded over by the gradual reversal in trading fortunes. The balance of trade, which was in India’s favour until 2004, has decisively turned against it. This has given rise to deep disquiet in India.

“Indian industry’s loss of manufacturing strength has been China’s gain, and is a matter of serious concern,” says M Arunachalam, former president of the Asia Pacific Indian Chambers of Commerce and Industry, who runs a flourishing leather garments export business from Hong Kong. “If this trend continues, India will soon experience the same ‘hollowing out’ of manufacturing capability that has crippled the US economy.” 

The shift in the Sino-Indian balance of trade was facilitated by a concerted effort by the Chinese central and provincial governments, and various companies and trade bodies, to increase exports to India.

“Virtually every week, mayors of Chinese cities and trade missions went for exhibitions in India to tie up deals,” recounts Arunachalam.

The effects of this aggressive export push by China were compounded by the rapid appreciation of the rupee in the past year, which rendered Indian exports less competitive, and provided the incentive for suppliers to import rather than manufacture in India.

At last year’s Canton Fair, the world’s largest trade show and a showcase of China’s exports to the world, Indian businessmen and traders accounted for the largest foreign country representation. In fact, their substantial strength gave rise to an enterprising ancillary industry, with hotels in Guangzhou setting up over 75 ‘Indian restaurants’ to cater to their temporary needs!

“Indian sourcers were there because it made business sense for them to come,” reasons a Chinese manufacturer of building materials, whose company’s sales to Indian builders has shot up in recent years. “If India is losing manufacturing strength in these areas, it is a consequence of India’s policy failings. Please don’t blame China.”

Arunachalam too acknowledges that China has merely seized on an opportunity in India provided by the failure of Indian policymakers to support manufacturers and exporters. “The long-promised export package was first delayed because of the Gujarat elections, and now may not be announced before the Budget,” he notes. “By the time it comes out, the low-end manufacturing industry may well be dead.”

As organised retail chain stores expand their footprint in India, this trend of sourcing from China will only intensify, fears Arunachalam. “Retailers will be happy to source large volumes from China rather than from different companies in India, first because of the China price advantage, and because Chinese companies have tremendous experience in supplying to the West and are better at packaging.”

Indian manufacturers’ inability to quickly ramp up production lines is also working to China’s advantage. “If you take textile machinery, LMW’s delivery dates are two years ahead because they haven’t added to their capacity. If I want to expand, I have no choice but to turn to China,” says Arunachalam.

For the short term, if the rupee continues to rise, the bad times will not end for Indian manufacturers, says an anguished Arunchalam. And although the Chinese yuan too has been appreciating, China’s other pricing advantages may ensure that India’s trade deficit - and its loss of manufacturing strength - will continue.