The India-China Strategic Economic Dialogue

Author: Suman Bery, IGC

Following the torpor of the August holidays on both sides of the Atlantic, each September marks the revival of the international diplomatic calendar.

On the political side, the centrepiece is the annual meeting of the United Nations General Assembly in New York; on the economic side, a similar marker is the Annual Meetings of the World Bank and the International Monetary Fund, held in Washington twice every three years.

Amid all these comings and goings, it would be easy to miss an important bilateral event of perhaps greater consequence for India’s economic prospects: the 2011 inaugural India-China Strategic Economic Dialogue. The talks will be held in Beijing, starting today, and led on India’s side by the deputy chairman of the Planning Commission and on China’s side by Zhang Ping, chairman of China’s powerful National Development and Reform Commission. The two countries agreed to institute such a dialogue on the occasion of Chinese Premier Wen Jiabao’s visit to New Delhi in December 2010. At the bilateral level, the two sides already have a great deal to talk about. But as their economic relationship evolves and deepens, it will also grow in significance for the rest of Asia, and, in time, for the global economy.

Taken together, India and China constitute a major growth pole in an otherwise anaemic global economy. Though some analysts might disagree, most economists would judge that the rapid growth of both countries has been substantially driven by their increasing integration with the global economy, most of all in trade (both goods and services) and through direct investment. China’s commitment to such global integration over the last 20 years or so is one of the important factors responsible for its sustained, rapid growth and its now commanding position in the global merchandise trade.

While India’s external liberalisation is successful within its own terms, it has been much more halting and hesitant. On account of its policy choices, India’s economy is today dwarfed in size by China but is arguably better balanced between consumption and investment, and between net exports and domestic demand. There is worry about the size of India’s deficit on merchandise trade, running at about 7 per cent of GDP, but the strong performance of merchandise exports suggests that this does not represent a generalised competitiveness problem; rather it reflects the adjustment of the economy to its underlying comparative advantage, and to the savings–investment balances in the economy, where the government’s fiscal position represents a major distortion.

Notwithstanding these asymmetries, deeper integration of the two economies is both inevitable and economically desirable. China is already India’s largest trading partner and India is slowly becoming a significant market for China — not a mean achievement given that China is now the world’s largest exporter. Both countries also agree at the policy level that such integration should proceed for the mutual benefit of the two economies, even as security tensions (border issues, Tibet, Pakistan, the South China Sea and Indian Ocean) persist and even intensify.

More critical than these political issues is the ambivalence felt by both the corporate and official sectors in India towards greater economic engagement with China. This ambivalence has stalled any progress towards a trade agreement at a time when most of India’s large Asian neighbours are negotiating preferential access to the Chinese market. Addressing the issues that underlie this ambivalence will no doubt be a key goal of this and subsequent economic dialogues. Among these issues is the current imbalance in the goods trade where, of a total volume of US$60 billion in two-way trade in 2010, China’s exports to India exceeded India’s exports to China by a wide margin. There is also the commodity composition of trade in each direction, with China’s exports to India representing significantly more sophisticated manufactures than trade in the reverse direction. Finally, there is the global concern with China’s exchange rate regime.

Focus on bilateral trade imbalances with a particular country partner, either in volume or in composition, makes relatively little economic sense. Regarding China, a basic concern for India is that such trade is driven by strategic rather than purely commercial considerations. India points to its globally-competitive pharmaceutical and IT sectors’ lack of success in the Chinese market as an example of ‘hidden’ non-tariff barriers. It may be noted that the US has long complained about similar barriers to the import of foreign cars into otherwise open economies such as Korea and Japan, and it is not immediately clear whether China particularly discriminates against imports from just India. China’s apparent ‘hyper-competitiveness’ in supply of project imports, particularly in the electricity sector, also causes disquiet. Slightly different issues arise in the sourcing of telecommunications equipment from Chinese suppliers, in that there is no existing Indian supplier of comparable equipment. Here the concerns are of embedded security risks in China-sourced equipment, even though the leading manufacturer of this equipment, Huawei, now operates a significant research facility in Bangalore.

Trade issues like these remain the proximate irritants in the economic relationship at present, but there are equally important issues involved in foreign direct investment and other forms of financial cooperation. India has enormous needs and opportunities in the infrastructure sector and China has both skills and finance available in this area. China, in turn, stands to improve its own productivity by benefiting from areas in which India is a competitive supplier, including the sectors mentioned above. Accordingly, an important goal of this first Strategic Economic Dialogue should be to put in place mechanisms to enhance mutual understanding and transparency on these thorny issues between the two sides. This can be done by dialogue, and also through detailed joint research to validate and demonstrate non-discriminatory treatment. In time, the goal should be to develop sufficient interpenetration of the two economies, so that economics tempers insecurity, rather than the other way round.

Suman Bery is Country Director, India Central, at the International Growth Centre, New Delhi.

A version of this article was first published in the Business Standard.