India has many domestic bottlenecks and structural constraints which stymie efforts to increase exports and integrate more deeply with global markets. Over time, this has resulted in a shallow export basket, consisting mostly of raw materials and intermediate goods. There also are growing trade imbalances — particularly with one of India’s key trading partners, China. As talks of a FTA between China and India continue, India needs to acknowledge that increased trade cooperation will do little to boost growth until it addresses domestic structural constraints, trade structure and policy.
India’s bilateral trade with China grew from $34 billion in 2007 to $66 billion in 2012. Bilateral trade data from 1980–2011 suggests that India essentially exports low value-added products to China and imports high value-added and technologically sophisticated products, or that Indian imports are capital-intensive while exports are mostly intermediate products.
There are two broad reasons which may explain the different export patterns of both countries. The first is the focus of the reforms that each country has implemented. In China, reforms were initiated to take advantage of trade liberalisation as part of its WTO commitments. China’s accession to the WTO was motivated by its firm commitment to liberalising its trade and opening its economy to external competition through many domestic reforms, including labour laws.
By contrast, Indian reforms were implemented hesitantly and in a piecemeal fashion. The reforms implemented in the 1980s reduced license controls in some industries and initiated exchange rate reforms. The 1990 reforms focused on domestic industrial policy, private investment in the industrial sector, trade and exchange regimes, and foreign investment regulations. These actions improved the investment environment generally but were not directed at taking advantage of specific trade opportunities.
Even today, India remains hesitant to liberalise key sectors of its economy, such as retail, banking, and insurance. Second, although Indian reforms have been industry-based, industries have grown at a slower rate than overall GDP. This is in contrast to the industrial sector in China, whose growth has far outpaced the country’s GDP growth.
Given India’s growing bilateral trade with China, the proposed FTA could be used to address some of India’s issues. The pharmaceutical and the IT industries are two sectors that could derive particular benefit from FTA-based reforms. A memo issued by the Indian government in 2011 highlighted trade barriers faced by Indian corporations in both sectors. These include regulatory requirements around clinical trials and the process of registering new drugs, which can take up to 10 months in India compared to only 90 days in China, along with rigid certification requirements in bidding for government-sponsored IT projects. These are issues that can be addressed bilaterally.
Both governments are also moving to prioritise their bilateral economic interests. In 2013, China and India signed a Memorandum of Understanding to improve India’s export of priority items such as pharmaceuticals and meat. Following the 2014 Strategic Economic Dialogue (SED), both sides are also looking to increase investment in infrastructure such as high-speed railways. Given that high-speed railways feature prominently in the electoral manifestos of leading political parties in India, this is an important avenue for cooperation.
Besides bilateral issues, a major reason for China and India to improve trade is to ensure smooth negotiations of regional trade agreements, which have a prominent place in both China’s East Asia policy and India’s ‘Look East’ policy. Recent examples of regional agreements include the Bangladesh–China–India–Myanmar (BCIM) trade corridor and the Regional Comprehensive Economic Partnership (RCEP). The BCIM trade corridor could be hugely profitable to both China and India, particularly for bilateral trade between China’s Yunnan province and India’s northeast region.
Similarly, the RCEP could create an ‘integrated market’ for 45 per cent of the world’s population, a bloc that currently has a combined GDP amounting to a third of the world’s annual GDP. It is also a reasonable assumption to make that China and India’s rapid increase in exports has resulted in growing imports from other neighbouring countries such as Indonesia and Australia. To the extent that it will deepen these trade links, RCEP will allow both countries to play a larger role in the Asian subcontinent.
If India is to use a potential bilateral FTA with China and regional trade agreements as an opportunity to deepen its export basket, it must review its trade structure and related policies. India needs to adopt a conscious policy of encouraging value-added exports, particularly to China. As most of India’s trade basket consists of raw materials and intermediate goods, India needs to promote high-end manufacturing, which will require concomitant economic reforms in labour markets and other domestic areas. This is a challenge which the next government will have to confront.
Keya Chaturvedi is a Research Associate at the Lee Kuan Yew School of Public Policy, NUS. This is a revised version of a Policy Brief published as part of the ADB Asian International Economist Network.