Financial Daily from THE HINDU group of publications
Wednesday, Jul 02, 2003
India-China: Path-breaking initiatives
S. D. Naik
THE Prime Minister, Mr Atal Bihari Vajpayee's historic official visit to China from June 22 to 27 has helped improve trade and business relations between the two countries. The political and economic relations between the two Asian giants, marred by distrust for decades, have now been put on a new footing based on mutual trust and co-operation.
Quoting the former Chinese leader, Deng Xiaoping, Mr Vajpayee said: "The 21st Century can only be the Asian century if India and China combine to make it so". After all, the two countries together constitute a third of humanity.
Mr Vajpayee was accompanied by a strong business delegation under the umbrella of CII, FICCI and NASSCOM, which had fruitful interactions with the representatives of Chinese industry and trade. An important landmark of the visit is the signing of the Border Trade Agreement between the two countries and the reopening of the Nathu La pass in Sikkim (the ancient silk route), which was closed for 40 years after the 1962 border conflict.
While it may be too early to call it a `great leap', it is certainly a new beginning in strengthening the bilateral economic and trade relations between the two great nations. Indian industry has decided to leverage the complementarities between the two countries for mutual benefit.
While China is a manufacturing powerhouse, India is a knowledge-driven power with services accounting for half its economy. The dragon has the hardware while the elephant has the software.
Fortunately, the time also appears quite opportune to forge a new partnership between the two countries. India Inc has grown in confidence over the past two-three years to engage the dragon in fruitful co-operation.
Evidently, the efforts put in by the corporate sector at restructuring, cost cutting, improving productivity and technology upgradation over the last five difficult years appear to be finally yielding results. Over the last two years, Indian manufacturing has not only done well domestically but globally as well.
Even two years ago, the Indian industry was worried about the growing threat of cheap Chinese manufactured goods flooding the Indian market.
It may be recalled that in 2000, the FICCI and CII had taken up the issue of cheap Chinese imports with the Government, particularly in such products as tyres, cement, textiles, consumer electronics and toys both through official and unofficial channels.
They were also concerned over the growing competition from China in exports to neighbouring markets such as Sri Lanka, Bangladesh, Nepal and Myanmar as also the South-East Asian countries.
Today the mood is opposite. Not only is India Inc confident of increasing its exports to China, the number of Indian companies wishing to set up shop in China is growing each month. Some are even considering acquisitions of state-owned enterprises in that country.
The official trade between the two countries has grown more than tenfold over the past decade to nearly $5 billion in 2002 from $338.5 million in 1992. Now the two countries have agreed to double it to $10 billion by 2005. China has announced the establishment of a corpus of $500 million to facilitate achievement of this trade target.
Prominent Indian companies that have set up base in China include Aurobindo Pharma, Reliance Industries, Aditya Birla group, Sundram Fasteners, Essel Packaging, and Contest2win.
The companies sourcing from China include Videocon, Onida, Tube Investments, Nitco, Apollo Tyres, JK Tyres, Aegis Safety, TVS Motors, L.M Thapar group, United Phosphorous, Hero Cycles, and Bajaj Electricals. Major exporters include Bharat Forge, Reliance Industries, Steel Authority of India, Ispat Industries, Indo Rama Synthetics, and Mamata group.
The experience of all these companies in doing business with China has been quite encouraging. Further, according a survey conducted by CII, there are considerable opportunities for Indian companies to do business with China in sectors such as telecommunications equipment, energy, medical equipment, automotive components, agro-chemicals, plastics and packaging equipment.
There are also tremendous possibilities in information technology, pharmaceuticals and bio-technology. In the energy sector, there are opportunities for foreign participation in natural gas, infrastructural development and off-shore oil exploration and production.
A CII survey also points out that Indian companies have a huge potential market in China in knowledge-based sectors like IT, bio-tech, and drugs and pharmaceuticals. The Chinese offer huge incentives for investment in these sectors, including tax holidays, reduced land rentals and lower import duties.
Small and medium enterprises (SMEs) account for 30 per cent of the Chinese market. IT products and application consumption in SMEs is expected to touch $27 billion by 2006, says the CII. Similarly, China is expected to emerge as the fifth largest pharmaceuticals market by 2010, with revenues of over $24 billion. The CII wants Indian companies to aggressively pitch for these opportunities.
The CII survey also finds that the focus of the Indo-Chinese relationship is shifting from "trading" to "manufacturing" and that some of the Indian companies, in the long-run, would like to use a base in China to enter the Association of South-East Asian Nations (ASEAN) markets.
China's attitude towards India has also changed dramatically after it joined the WTO in 2001. Earlier, Chinese businessmen only wanted to talk about trade shipping low-cost kits and assemblies for sale in India but not investment or collaboration. But now they want to invest in India and explore synergies. In particular, they are highly impressed by the strides made by India in information technology and software services, and are looking for collaborations.
Major Indian software companies such as Tata Consultancy Services and Satyam, as also the software training outfit NIIT, have their presence in China. Now Infosys has also decided to set up shop in the Shanghai-Pudong software park. Some more Indian software players are also expected to set up base in China in the coming days.
To give a fillip to greater investment and trade by Indian companies in China, local banks have been looking at entering into counterpart agreements with Chinese banks so as to provide a suitable support to companies in both countries.
Business leaders have also requested the Reserve Bank of India and the Central Bank of China to collaborate closely to ensure a synergy in banking policies of the two countries. At present four Indian banks have their representative offices in China and they, along with other banks, are now planning to set up full-fledged branches there. This is expected to lead to closer bank-to-bank co-operation and form an important component of economic co-operation between the two countries.
It is also significant that for the first time the two countries have agreed to co-ordinate their strategies in support of the developing countries within the World Trade Organisation (WTO). The two countries are likely to explore the possibility of initiating co-ordinated action on specific issues of mutual interest.
A key aspect will be the search for special safeguard mechanisms on behalf of developing countries in the field of agriculture. The other identified areas pertain to TRIPS with reference to public health issues. Developed countries will find it difficult to arm-twist developing countries if India and China come together and co-ordinate their strategies in the WTO.
While all these developments are no doubt promising and will add to India Inc's new-found confidence in engaging its powerful Asian neighbour, it will have to redouble its efforts to catch up with the dragon if the economic ties between the two countries are to sustain and grow on a continuous basis. Otherwise, it will be a race between two unequal economic powers.
True, India is ahead of China in IT, financial services and perhaps, in industries like pharmaceuticals, but in almost every other economic parameter, China has surged ahead of India over the last two decades.
In 2001, China's per capita income was $890, nearly double that of India's $450. Adjusted for purchasing power, the Chinese were 70 per cent wealthier than Indians. Only 5 per cent of Chinese now live below the national poverty line, compared with 29 per cent of Indians.
The share of manufacturing in China's GDP is 38 per cent as compared to only 15 per cent in the case of India. China is way ahead of India in terms of presence in the global market place.
China's share in world exports is nearly seven times that of India's. The disparity in terms of FDI volumes received is also huge even after adjusting for some exaggeration in the numbers reported by China.
True, the World Bank and the IMF have lauded India for emerging among the fastest growing economies in the world now but our average GDP growth of six per cent in recent years fades into insignificance when compared with China's over eight to 10 per cent over the past two decades.
Consequently, despite its late entry, China is better prepared for the WTO challenges than India. Closer economic ties with China should help India to learn some valuable lessons, set new benchmarks and step up its rate of economic growth to at least eight per cent as targeted by the Tenth Five Year Plan.
Much will depend on how India plays its cards in the coming days. According to Dr. Linda Yueh, an Economist at the London School of Economics, India's prospects in the coming days are bright as it shares many of the features of the Chinese economy.
Both countries have large population, mostly rural with urban centres of industry, and a commitment to education, even if only a portion of the population possesses high levels of human capital. But, perhaps most importantly, both countries share a focus on the importance of science and technology, and promote industries that incorporate advanced skills.
Dr Linda adds, as technology is the key to growth, with continued commitment on this front, it would not be unexpected for India to become the next success story.
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