Monday, July 15, 2013

The elusive smoothness of the silk route

The elusive smoothness of the silk route by S JAISHANKAR in HINDU 13/7/13

Though bilateral trade between India and China has grown impressively, imbalance and restricted market access are among the roadblocks to achieving its full potential

India and China have a long history of economic collaboration, probably the oldest among nations today. In the contemporary era, however, that relationship is more recent and much thinner. One of the consequences of the border conflict in 1962 was to bring our economic interactions to a standstill, and it is only in the last 25 years that normalcy returned. We have sought to make up for lost time as part of the rebuilding of our ties. Trade volumes have grown steadily, as have different facets of economic interaction. New mechanisms and agreements have emerged which facilitate that process. The most favoured nation agreement of 1984, border trade agreements of 1991 and 2003, avoidance of a double taxation agreement of 1994, customs cooperation agreement of 2005 and the bilateral investment protection agreement of 2006 together provide us the framework to do so.
Four issues
Far from being complacent about the state of our economic cooperation, we are today confronted with serious concerns on this front. There are four big issues that we are facing. The first pertains to the trade imbalance and challenges of market access. The second relates to economic complementarities and how they could be exploited. The third centres on investment possibilities and perceived impediments. The fourth is to reconcile the characteristics of two very different systems so that we can find common ground.
Bilateral India-China trade has certainly grown very impressively in the last decade. In 1995, trade turnover was only $1.16 billion. Even as late as 2003, it stood at $7.6 billion. Thereafter, it took off, peaking at $73.9 billion in 2011. We have hopes of crossing the $100 billion mark by 2015 although recent trends are not encouraging. A combination of a global slowdown and sectoral challenges has brought trade down to $66.6 billion in 2012. Figures up to May 2013 point to a further 26 per cent decrease in India’s exports, mainly in iron ore, copper and cotton. More than the uncertain turnover volume, there are two key issues that today drive our discussions: the large trade imbalance with the prospect of India’s deficit aggravating even further, and second, the composition of the two trade baskets, with India importing machinery and manufactured goods from China while only exporting commodities in return.
These issues have a common root in the growing perception in India that our trade balance, instead of reflecting the competitiveness of our national industries, is actually the outcome of restricted market access. Let me amplify: if we are to pick two sectors where India is regarded by the rest of the world as competitive, this would undoubtedly be pharmaceuticals and IT services. In China, however, neither has made a significant impact. In the case of pharmaceuticals, Chinese product approval timelines that used to be 3-4 years have now been further extended. Limitations on generic versions of innovator drugs make hospital listing harder. Bio-equivalence studies for oral drugs and clinical testing for injectables have to be repeated in China. Such regulatory impediments make Indian pharmaceutical exports to China very difficult.
IT services
In the IT services sector, our companies can participate in system integration projects only if they have SI certificates and the requisite security clearance, neither of which are readily forthcoming. IT-BPO companies are hobbled by withholding tax that impact negatively on an industry reliant on inter-company billing. There also seems a reluctance to use Indian IT services in third country markets. The situation is no less encouraging for engineering goods, where India does have niche strengths. Those who question if we are competitive in China should note how local procurement conditions have affected, for example, the import of gasifiers from India. Sectors like auto components face hurdles of closed procurement loops. Our agro-product negotiations are perhaps symbolic of the state of commerce. After more than a decade of negotiations, only three out of 17 items on the table have cleared the phytosanitary barrier. The contrast with the situation in India, where Chinese products enjoy relatively unrestricted access, cannot be sharper.
We recognise that trade is driven by self-interest and China would expand its import basket only if it is advantageous to do so. In our view, there are significant complementarities between the two economies that bear better exploitation in mutual interest. Pharmaceuticals itself is the notable example as China’s medicine costs are significantly higher than India and are becoming a serious budgetary strain as its health coverage expands. IT services from India are similarly a value waiting to be realised in a country aggressively promoting urban services and whose companies are now going out in the world without their own IT support.
On its part, India too has demands that can be more efficiently met through the involvement of Chinese companies. The most obvious area is in the improvement of infrastructure. Chinese companies already have significant market shares in power generation and telecommunications. In fact, India is China’s largest overseas market for project exports. There is considerable scope for further business in highway construction, power transmission and railway modernisation. As a growing supplier of heavy machinery, there are also opportunities for those companies that are able to accurately assess Indian demand. Though there are branding issues, Chinese automobiles and consumer goods clearly have a future in a price sensitive market. But there are also challenges that Chinese industry confront in India, including the impact that variable quality may have on their reputation. Equally important is the maintenance and upkeep of equipment already supplied to India. Chinese companies need to do more, including setting up service centres in India, if they expect second generation orders.
One way forward is through a strategy of cross investments that could build linkages and address other shortcomings of our current situation. China, I believe, is the sixth largest exporter of capital today. From an initial focus on resources and technology, its overseas direct investment has now begun to look more at creating global market shares. The size of the market and its current stage of development make India a natural destination. A Chinese presence that creates employment, improves technology levels and expands capacity fits into our National Manufacturing Policy. Over a period of time, as China’s own experience with incoming FDI has demonstrated, it will lead to backward linkages. Part of the solution to our trade predicament may well lie in the domain of investments. The overall foreign direct investment climate in India is getting more welcoming and China should take more advantage of this situation.
Investing in an economy so different from China’s has its own challenges. But there are a number of pioneering Chinese enterprises that are an example to others. Among them are Lenovo in personal computers, Sany in construction machinery, TBEA and BTW in transformers, Liugong in earth moving equipment, Haier in white goods, Xindia Steel in pipes, Huawei and ZTE in telecommunications and Yapp Motors in fuel tanks. A number of large Chinese enterprises are currently poised to make decisions on India. While there are these examples of successful Chinese investments in India, there are still significant gaps in both information and understanding about India. Even the impressive project export situation has had a limited impact on the knowledge deficit because it was driven by the demand side rather than the supply one.
Indian market
Chinese companies, therefore, need to have a proper appreciation of the extent of support and facilities that industry in general and FDI in particular get in India. They must not confuse it for their domestic experience. Entry conditions in India will be different because the Indian economy is very different. It is also important to be conversant with local conditions and practices, including on the labour front. Companies engaged in project exports are already aware that there are justifiable limits on sending large-scale personnel from China. An ability to collaborate with local companies is vital to success. An accurate understanding of legal rights and responsibilities is also essential. A current shortcoming is the absence of a significant Chinese banking presence in India. That situation should also improve in the coming years.
When Chinese Premier Li Keqiang visited India in May, measures to address the trade imbalance were discussed and much depends on the seriousness of the follow-up. Investment by Chinese enterprises in India, including participation in infrastructure development, was welcomed by the Indian side. Project contracting cooperation is also to be enhanced. We are currently discussing establishment of industrial zones to provide a platform for cluster-type development of enterprises. The Chinese Premier’s visit has brought out clearly that both India and China are committed to expanding their economic cooperation, particularly in trade and investment.
(S. Jaishankar is India’s Ambassador to China. The article is an edited version of a speech delivered in Beijing to members of China’s top 500 foreign trade enterprises.)

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