India and China: Friend, enemy, rival, investor

How can India make its economic relations with China less lopsided? – Published on The Economist, June 30, 2012.

DEALINGS between India and China are stunted in many ways. Rich cultural links once existed long ago, from the study of eclipses to Buddhist chanting, but hardly anyone remembers that today, laments Amartya Sen, a Nobel-prize-winning economist. After a love-in during the 1950s, China thumped India in a border war in 1962, and the two have continued to growl over their high-altitude frontier since. Indians envy China’s economic rise, but console themselves by pointing out that it is no democracy.  

Aside from stiff displays of fraternity at summits, most recently the G20 bash in Mexico on June 18th-19th, China seems not to think much about India at all. Investment flows are negligible. There are still no direct flights between Beijing or Shanghai and Mumbai, India’s commercial hub.

And yet a huge shift has taken place in the make-up of Indian trade. When India began to liberalise its economy in 1991, the West still dominated the world economy, and it was to the West that India turned for trade. China’s rise has now changed everything—for India, too. China is now its third-largest trading partner in goods, and the biggest if you include Hong Kong. For China’s East Asian neighbours a dominant trade with China is a given, but Indians are still trying to digest the development.

Rising trade with China has been good for India. It mainly imports Chinese capital goods, with firms benefiting from cheap and decent gear. The giant Reliance Group has bought kit for power stations and telecoms networks—partly paid for with competitive Chinese loans. Chinese firms have often strived to win such business. Pan Song of Shanghai Electric, which makes power equipment for Reliance, among others, recounts years of hard slog in India.

But for India the China connection is also disconcerting. For every dollar’s worth of exports to China, India imports three, leading to a trade deficit of up to $40 billion in the year to March 2012, or about 2% of GDP (see chart) … //

… Despite the usual cold sweats foreigners have about India (nightmarish red tape, a cultural gap), Chinese executives agree that more local production will take place. Sun Haiyan of Trina Solar, a solar-equipment firm, says that, as a global company, it has to manufacture locally. Wu Rong of ZTE, a telecoms concern, says it employs mainly locals and is producing more in India. Huawei, its India problems notwithstanding, is building a new research campus in Bangalore. Niu Qingbao, China’s consul in Mumbai, says Chinese firms are mustard-keen to invest in infrastructure, if also a little daunted.

Might this be the start of a wave of Chinese investment? India needs outside capital, and expertise in manufacturing and infrastructure. China must invest its surplus funds abroad, ideally not just in government bonds—as mostly happens in America—and ideally in countries that are not about to go belly up, as may happen in Europe. Chinese investment in India is an idea whose time has come, if only the two sides can conquer a legacy of mistrust. (full text).

Links
:

Neo-classical economics: A trail of economic destruction since the 1970s, on Real World Economic Review, by Erik S. Reinert, Issue no. 60, 20 June 2012: download the pdf. Index whole Issue 60;

The world’s shifting centre of gravity: How the world’s economic centre of gravity has shifted, on The Economist, June 28, 2012.

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