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| Zorawar Daulet Singh: India's delusions with the dragon | | The current discourse over the country?s economic relationship with China is nothing short of self-deception |
| Zorawar Daulet Singh / Sep 17, 2010, 00:16 IST |
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The trade trajectory between India and China has dazzled the observer in recent years. Since 1990, two-way trade has increased 230 times to the $60 billion target for the year ending March 2011. For two countries that are often portrayed as rivals, this is nothing short of remarkable. Despite the euphoria over a globalised age, nation states still care about the relative effects of their economic interactions. The prudent ones learn the art of keeping their books balanced. India, it seems, has been doing neither, especially vis-à-vis China.
Over the past five years, India has been drifting into an unsustainable trading arrangement with China. China is now India’s biggest source of imports, accounting for 11 per cent of the total imports. For every dollar that India exports to China, it imports merchandise worth $2.6. China also accounted for 18 per cent of India’s overall trade deficit last year.
Only an artist could paint the picture above as one of “interdependence”. India is probably the only Asian economy that runs a trade deficit with China. China’s other neighbours are running manufacturing surpluses that are then rerouted via China to western markets.
To be sure, it would be far-fetched to classify China’s relationship with its east-Asian neighbours or the West as one of symmetrical interdependence. This is because the sophisticated R&D and various high-tech components that feed China’s assembly factories continue to be manufactured in Japan, South Korea or Taiwan or by US multinationals operating on the mainland. Also, since approximately 40 per cent of China’s exports flow to North American and European markets, China’s current model is so far dependent on the OECD (Organisation for Economic Co-operation and Development) economies. Nevertheless, China has given itself the opportunity to reverse-engineer and, ultimately, even acquire the capabilities to build its own sophisticated industries.
India is altogether absent from these manufacturing supply chains that have connected the rest of Asia. Over the past decade, foreign direct investment in the Indian electronics sector has touched a paltry $750 million, underscoring India’s perceived competitiveness.
Let’s turn to the quality of trade between the two Asian powers.
For outbound merchandise, iron ore has been the top export item to China. Last year, iron ore accounted for $5.1 billion or 44 per cent of India’s total exports to China. Almost all of India’s iron ore exports go to China, averaging 115 million tonne per year or about 25 per cent of China’s total iron ore imports.
Why should India be selling unprocessed commodities to steel producers in China or elsewhere? That the Indian state receives next to nothing for the limited natural resources that are leaking from India makes this even more appalling. To top it all, India imported $1.3 billion worth of steel from China — it accounted for 16 per cent of India’s total iron and steel imports last year.
The Karnataka Lokayukta report on illegal mining is instructive. At an export price of Rs 7,000, the state was receiving Rs 27 in royalty. That’s a royalty rate of 0.39 per cent! Lokayukta estimated the total cost for an iron ore exporter could not exceed Rs 427 per tonne, giving the miner a 94 per cent profit margin. For India, this lost revenue could have been dedicated to the welfare of the displaced tribal population, for improving infrastructure in resource-rich regions, and perhaps even investing in R&D in the steel industry.
On inbound trade, electronic goods top the list of imports from China. Last year, India imported $9.4 billion, or 45 per cent of its total electronic imports, from China. If this continues, India would be importing 55 per cent of its total electronic imports from China by 2012. The second-largest category is machinery products. Last year, India imported $4.5 billion or 23 per cent of its total machinery imports from China. One in four new power plants in India currently rely on Chinese equipment.
India’s qualitative and quantitative trade imbalance with China is now abundantly clear. The blunt truth is that India’s economic relationship with China is also a reflection of its distorted domestic economy. Last year, India recorded a merchandise trade deficit of over $115 billion, suggesting the problem lies at home.
Why does India’s manufacturing sector lag its peers? Manufacturing, especially in labour-intensive sectors, is underpinned by fundamental prerequisites that apply to most successful manufacturing locations: a basic literacy in the workforce upon which further skills can be imparted, physical infrastructure (i.e. power, roads, railways and access to ports), access to financial capital and, crucially, policies that encourage the allocation of resources towards export-oriented manufacturing. Since all these structural attributes are absent in India’s case, it does not receive the amount and type of investment that the rest of Asia has witnessed over the decades.
India’s services sector, in contrast, has performed relatively better because it had access to the nation’s small pool of qualified workers and did not require too much physical infrastructure. Thus, while India’s share of services in overall gross domestic product (GDP) has increased from 37 to 49 per cent in the last two decades, the share of manufacturing has remained at 16 per cent. In contrast, the share of China’s manufacturing sector to its GDP is 35 per cent; it is 30 per cent for South Korea, Malaysia and Indonesia; even Argentina and Brazil’s manufacturing sectors contribute 24 per cent to their national economies.
Services inherently require a skilled workforce and, therefore, cannot absorb the majority of the “youth bulge”, thus, laying the burden of job creation upon the manufacturing sector. This developmental pattern has historical precedence: the rise of the European great powers, America at the turn of nineteenth century, Russia in the first half of the twentieth century, East Asian tigers after the 1960s, Japan in the 1980s, and China in recent times. All these economies demonstrated manufacturing growth that restructured the erstwhile agrarian polity.
India’s low-end manufacturing — the type that can provide mass employment — has become so inefficient that, as The Economist recently noted, “It is currently cheaper to export plastic granules to China and then import them again in bucket-form, than it is to make buckets in India.” The same is probably true for organic chemicals, steel and a variety of processed commodities. No wonder Indian iron ore is being dumped into ships that transport it to China’s 700 million tonne steel industry.
Despite all these systemic flaws, countermeasures are available. First, if natural resources are going to be unwisely exported, a reliable system of collecting royalties supplemented with an export tax must be erected to re-alter the perverse incentive structure that prevails in the mining industry.
Second, diversifying our exports by pushing for greater market access in China in sectors where India Inc claims it is competitive — pharmaceutical, IT-enabled services and higher-value engineering products. If China’s telecom companies like Huawei and ZTE can earn $3.5 billion and $2 billion respectively in revenues (2010 estimates) in India alone, surely we can use that to leverage reciprocal advantages for Indian companies in the mainland.
Third, focus on manufacturing R&D: according to the ministry of science and technology, India spends an irrelevant $100 million (1.4 per cent of its total R&D spending) a year on research in the electronics sector.
Fourth, link Chinese FDI to tie-ups with Indian state- and private-sector firms (a practice followed scrupulously in China) and create conditions for technology transfers and job creation.
Finally, China’s manufacturing juggernaut is buttressed by massive implicit subsidies in the Chinese economic system that have lowered the opportunity cost of the major factors of production — the value of the yuan, financial capital, electricity, transport infrastructure, natural resource use and labour costs. Competing with such a system requires a combination of superior innovation, strong public policy support for labour-intensive manufacturing sectors and a commitment to address India’s infrastructure woes.
India’s current discourse over its economic relationship with China is nothing short of self-deception. To correct course, let’s recognise the problem.
The author is a research fellow at the Centre for Policy Alternatives and co-author of Chasing the Dragon: Will India Catch up with China?, Pearson Education, New Delhi, 2009
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