India and China in 2007

India and China in 2007
Comparisons between India and China and the relations between the two countries are once again in the spotlight following the recent visit to India by the Chinese President, Hu Jintao. Compared to the expectations, the visit has not produced any major breakthroughs. The goal of doubling bilateral trade in the next four years, translates into an annual growth rate of only about 20 per cent, which is less than the rate at which India's total external trade has been growing in recent years. On the border issue, China maintains its stubborn stand while India has not mobilized adequate political support that will facilitate any territorial concessions. A number of agreements have been signed, like the setting up of a working group on river waters. The two countries will open consulates in Kolkata and Guangzhou. There will be bilateral investment promotion and protection and protection of intellectual property rights. Agreements have also been signed with regard to commodity futures regulation and phyto-sanitary requirements for exporting rice from India. The two countries plan to open new routes to Kailash-Mansarovar and also encourage bilateral tourism.
Even as India and China look for ways to strengthen bilateral relations, they continue to attract the global media attention. China accounts for two-thirds of all the shoes produced in the world, two-fifth of personal computers and 85%[1] of the world’s toys. Shanghai attracts global manufacturing giants like General Motors, ABB and Agilent Technologies. The Indian offshore IT and ITES sector employs around one million people[2]. This number is expected to go up to 2.3 million[3] by 2010. Bangalore is emerging as an innovation hub for tech companies like Google, Hewlett-Packard and Motorola.
Bilateral relations between the two countries are also attracting media attention. Where do the two countries stand today? Trade between the two nations hit $18.7 billion in 2005-06, jumping 38%[4] year-on-year. While imports from China are diversified and dominated by value-added products like electronic goods, India’s exports generally consist of low-cost inputs like, iron ore, primary steel, plastics and minerals. Achievements on the investment front are also not very impressive. In the last 13 years, the Indian government has cleared $67.15 billion[5] of foreign direct investments (FDI). China’s share is a minuscule $231.7 million (0.3%). Again, during the same period, India granted 7,878 technical collaboration approvals to different countries with China accounting for just 70.
Lack of trust between the two countries continues to act as a big impediment to trade, investment and more bilateral cooperation. India’s suspicions are fuelled not only by the border problem but also China's traditionally cozy friendship with Pakistan, and its support for that country’s nuclear-weapons programme. India is also watching with apprehension, China's military ties with India's other neighbors in South Asia, including Bangladesh, Sri Lanka, Nepal and Myanmar.
Meanwhile, the Chinese have been put off by India’s bureaucracy. The Chinese are complaining that Indian approval for Chinese investments can take between six months and a year, requiring the endorsement of various layers of the bureaucracy. In contrast, investments from most other countries are being approved much faster. Chinese businessmen operating in India are also grumbling about the difficulty of getting visas for Chinese workers even as Indian IT companies are scaling up effortlessly in China.
Not surprisingly, the Indians are finding it difficult to swallow Chinese criticism. According to seasoned journalist and Business Standard editor, T N Ninan[6], Indian’s defensive reasoning reflects the full range of emotions and attitudes that can be expected from the junior partner. At one end, there is plain fear ("we will get swamped by Chinese products"), the past legacy (defeat in the 1962 border war), and suspicion ("they are encircling us"). Simultaneously, there is a state of denial ("China's growth numbers are exaggerated"), a combination of defiance and bravado ("we are no less than them"), and euphoria (eg. Goldman Sachs' forecast that Indian growth rates will eclipse China's in 15 years).
As Ninan correctly mentions, it is wrong to belittle China. The Chinese civilization has traditionally enjoyed a special place in world history. As Chinese society has greater homogeneity (unlike India where caste and religious tensions are common) there are less social tensions. China is on its way to becoming a global power, its views being taken far more seriously than India’s in the global arena. China is a permanent member of the UN Security Council and of the Nuclear Five, whereas India is still trying to gain entry into these clubs.
Specifically looking at their economies, China is clearly ahead. Its economy is thrice the size of India’s. India’s labor laws remain far more rigid compared to those of China where workers can be hired and fired at will. Power in China costs just Rs.2 per unit against Rs.4.50 to Rs.5 in India. A trucker can do a 600 km stretch in China in 10 hours, while in India it takes nearly 30 hours. In 2005, Chinese textile exports stood at nearly $113 billion, contributing to nearly 22%[7] of the global trade, compared to India’s $17 billion, or less than 4% share. In 2004, when India exported $2.4 billion[8] worth of leather and leather products, comprising 2.44%[9] of global trade, China’s share was $21.5 billion, or nearly 22% of the global trade.

The Economist[10], recently reported that in the year to the second quarter, India's GDP grew by an impressive 8.9% while China's grew at an even more breathtaking growth of 10.4% in the year to the third quarter. But China's double-digit growth looks more sustainable. Inflation is only 1.4%. China has a widening current-account surplus, a clear indication that there are no serious supply side bottlenecks. Average house prices have risen by less than 6% in the past 12 months, while, share prices have risen by only 42% in the past four years.

In contrast, in India, consumer-price inflation has risen to almost 7%, well above Asia's average rate of 2.5%. Many firms seem to be operating close to or above their optimal levels of capacity utilization. There is a serious shortage of skilled labor and wages are rocketing. The RBI has raised interest rates over the past two years, but inflation has risen by more. So real interest rates have fallen and are historically low. Meanwhile, the government is putting pressure on RBI not to raise interest rates. An asset price bubble is also a major concern. India's share prices are almost four times their level in early 2003. The price/earnings ratio of 20 is well above the average of 14 for all Asian emerging markets. House prices have gone through the roof.
The problem with India seems to be its lower investment rate, particularly in infrastructure. The latest government figures, for the year ending in March 2005, put total investment at 30% of GDP, compared with over 45% officially reported in China. Considering that India is focusing on knowledge intensive industries, there is also a shortage of skilled labor.
Indian supporters argue that China’s inefficient use of investment will drag down the future growth rate. They feel that there has been over-investment in some sectors such as cars, steel and property and that some of the projects will prove unprofitable. China’s banking system is also burdened with non-performing loans (Some say it’s close to 50%[11] of the country’s GDP). China’s is also a more rapidly ageing society compared to India’s.

Meanwhile, India seems to be more in tune with the demands of globalization than China, thanks to a more open and rules based system. If India can demonstrate political will and determination and graduate from “reforms by stealth” to “reforms by conviction”, the country can give China a run for its money.

Meanwhile, some small steps can improve the situation significantly. The two countries can open up their markets to each other. There are still only six direct flights a week from Delhi to Beijing. More business and tourist travel will help dispel the lingering suspicions.

Instead of viewing themselves as competitors, the two countries must look at opportunities to collaborate, as they did during the multilateral trade talks in Doha 2001. At the level of companies too, there is scope for cooperation. In October 2005, China National Overseas Oil Corporation (CNOOC) outbid Oil and Natural Gas Corporation (ONGC) in Angola[12]. India also lost out to China in Kazakhastan and the Akpo field in Nigeria. But when ONGC and CNOOC joined hands to bid for Petro Canada’s stakes in the Al-Furat Petroleum Company in Syria, they won hands down.

So far, few Indian companies have chosen to think positively and look at China as a great opportunity. But the situation is now changing. Bajaj Electricals and Bharati are making China a sourcing base for low-cost electrical appliances and telephone instruments. J K Tyres is using China as a base for exporting tyres to Southeast Asia and West Asia, while Videocon is manufacturing Internet TVs. Meanwhile, Chinese companies like Haier, Bird and Huawei are looking to scale up their Indian operations. Hopefully, these companies will change the current mindset from competition to coopetition if not collaboration.

References
Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.
Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.
Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.
“Slow Dance with China,” Business Standard, 23rd November 2006.
“Clarity, not emotion,” Business Standard, 25th November 2006. T N Ninan
“Still treading on India's toes,” The Economist, 18th November 2006, pp 43-44.
“Too hot to handle,” The Economist, 25th November 2006, pp 73-74.

[1] Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.

[2] March 2006.
[3] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[4] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.

[5] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.

[6] “Clarity, not emotion,” Business Standard, 25th November 2006. T N Ninan

[7] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[8] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[9] Gupta, Ashish, “Will Get you in the End – India & China” Outlook Business, 5th June 2006, pp 37-45.

[10] “Too hot to handle,” The Economist, 25th November 2006, pp73-74.

[11] Gupta, Ashish, “The Asian Century – India & China,” Outlook Business, 5th June 2006, pp15-20.

[12] Gupta, Ashish, “Power of One – India & China” Outlook Business, 5th June 2006, pp 54-59.