Indian Defence Review

The Asian economies occupy a central position in the global economic and trade affairs. Although, each Asian economy has its own political paradigm, patterns of domestic growth and international projections of wealth and capital, their interests often overlap. Competition has been an integral part of Asian growth. While the impact of China’s rapid economic growth is felt globally via international trade, India’s recent attempts to embark on a path of capital accumulation and industrialization has been significant. India’s rising trade has benefited China as well and so it would also not wish to sacrifice the economic benefits it draws from countries like India. The most pressing questions are: does China’s economic power facilitate or deter the industrial development of India? Is the imbalanced trade between India and China a threat to India? Do Chinese, with their stronger supply networks, outnumber the Indian manufacturers and suppliers in its immediate neighbourhood, Asian and the international market?

Economic engagements: Good, bad or worst?

From 1940 to 1978, India and China witnessed severed economic ties. Despite resumption of economic ties in 1980s, the bilateral trade and investment remained insignificant. The practically non-existent India-China trade started shooting up from the year 2000. It was only in the 2000s, that both witnessed a jump in their bilateral trade and investment. This transformation in the trade pattern can be attributed to a number of factors including the growth of their respective economies with a shift to outward-oriented development strategy towards the end of 20th century and a deeper economic integration with the world economy. Besides these factors, both the countries also share comparative advantages in trade.

The rising commercial engagement with China cannot be only attributed to its manufacturing capacities; at the same time, India’s trade appetite had also evolved and helped the bilateral trade to grow. According to Ministry of Commerce and Industry (Government of India 2016)¹, China tops the list of countries with the largest amount of bilateral trade with India in 2015-16, with total trade (excluding investments) of US$65 billion (exports- US$8 billion; imports – US$57 billion; trade balance approx. US$49 billion). The straight forward cost-benefit analysis favours China, which also triggers apprehensions among Indian observers that the trade is actually a ‘China threat’. It is hence worth analysing how far this ‘threat’ is existential and valid and if it could actually be called a ‘threat’.

Given its size, the huge trade deficit of US$49 billion is a big loss for India and to put it in the broader context of trade losses, the deficit with China amounts to 43 percent of India’s total trade deficit (Government of India 2016)². However, India suffers a trade deficit with its 17 top trading partners, with China topping the list (Government of India 2016)³. One of the reasons for increasing trade deficit, as emphasised by Indian Commerce and Industry Minister is that the major share of China’s exports to India consists of manufactured goods (The Economic Times 14 March 2016)⁴. It is evident that, in early 2000, when the Indian industry started to pool its indigenous resources together to bolster domestic manufacturing, it was not easy to meet the rising expectations. China being experienced and the main supplier to most of the tier I and tier II economies of the world, it was an open choice for the Indian buyers to go for Chinese sourcing. To make it even simpler, Indian suppliers’ choice of Chinese products allowed them to mitigate losses easily in a highly price-sensitive market such as India. Since the Chinese had the experience of supplying to varied markets and according to varying standards, the Indian vendors and traders found China an obvious choice. This marked the starting point for the Indian industries to test and validate their Chinese experiences. Today, Indian industries have near-sufficient hands-on experience to deal with Chinese industries. Perhaps, a narrow alleyway of trade deficit was unavoidable and while it is not going to disappear in next ten years or so, it is also certainly not a perpetual threat.

Chinese Investments – Threat or Economic Boost?

There is a general agreement that, in all countries, the process of economic growth and investment-led capital formation is closely interconnected. Both neo-classical and Marxist economists emphasize on capital accumulation as the engine of economic growth. This is evident from the series of events which occurred in China during the Shanghai Stock exchange crash in June 2015, causing alarm across Asian markets. Investments play a critical role in the resurgence of the Indian economy. Along with Western investors, Chinese have shown keen interest in investing sizable amount in Indian industries. The investments from the Chinese side got further stimulated when the Chinese president Xi Jinping and Indian Prime Minister Narendra Modi exchanged visits in 2014 and 2015 respectively and India was assured a total investment of more than US$30 billion. It is a fact that in recent years, the share of foreign investment in Indian industries and start-ups has surged and this includes growing amounts of capital investments from the Chinese. While the Chinese are crowding to invest in India, some of the capital investments by the Western companies in China are already looking for optional markets and India happens to be one of those. What does this mean for Indian businesses and the economy as a whole?

The Chinese economic engagement with India has been primarily involved bilateral trade. This trade is something which has a shorter lifecycle and also often seasonal in nature. Thus, trade can be unreliable in building the national economy. On the other hand, an investment in the form of capital accumulation in business (whether private and state-owned) has somewhat longer and sometimes extended break-even period but also likely provides returns for an extended period. The reality is that Chinese investment in India has remained a trickle — US$1.2 billion between 2000 and September 2015, which was only 0.47 percent of the total foreign direct investment inflow into India (The Times of India 27 January 2016)⁵. China ranked 17th in terms of FDI in India during this period. During this period, the automobile industry (60 percent), metallurgical industries (14 percent), electrical equipments (4 percent), industrial machinery (4 percent) and power (3 percent) have managed to be the top sectors in India receiving Chinese investments (The Economic Times 15 April 2016)⁶. Recently, Chinese investments have also been found to be exploring areas such as textiles and food processing.

Going by neo-classical principles, growth always attracts investments and the Chinese are not an exception to this as rising rising investment flows from China in last couple of years show. Wanda – China’s largest commercial real estate developer – has announced an investment worth US$10 billion in Haryana, while SAIC Motor – China’s largest carmaker – has put forward a proposal to buy General Motor’s Gujarat facility (The Times of India 7 January 2016)⁷. In addition, there are several small and medium Chinese enterprises that have planned investments. Chinese companies such as the internet and online content service provider, Baidu Inc (a Chinese web service company and the travel-related service provider, Ctrip (a Chinese provider of travel services) have both decided to enter in Indian market through tie-ups with local Indian brands. Ctrip has stakes worth US$180 million in the Indian travel portal called Makemytrip (Business Standard 8 January 2016)⁸. Currently, there are more than 300 Chinese companies in India including the top Chinese brands such as Alibaba with its high profile investments in Snapdeal and Paytm, and Tencent Holdings which has invested in Bangalore-based healthcare firm, Practo. The State Administration of Foreign Exchange (SAFE, a fully owned subsidiary People’s Bank of China) Didi Kuaidi, Hillhouse Capital, Huawei, TBEA, ZTE, Sany, Liugong Machinery, and the Haier Group are also prominent Chinese investors.

As the Chinese investments have grown, so have the challenges of managing them, and these are many and varied. The ever-increasing number of Chinese mobiles is a case in point as most of these mobile instruments come with built-in customized Operating Platforms. For instance, Meizu and Xiaomi come with their own operating systems which give them an access to user profile and consumer behaviour. Moreover, Chinese authorities are increasing pressure on Chinese mobile operators and mobile companies to avoid over-dependency on US-based operating systems (Pagliery 2014)⁹. A good example is Alibaba’s YunOS mobile operating system (Kan 2014)¹⁰. Against the backdrop of increasing number of Chinese smartphones in India, these issues would require serious attention from both business and national security perspectives. Chinese companies have been awarded Supervisory Control and Data Acquisition System contracts in Rajasthan, Madhya Pradesh, Tamil Nadu and Puducherry and the issue has been debated at a number of times (Singh 2015)¹¹.

If Indian companies, partners and states decide to let the Chinese companies continue investments in qualified sectors, the regulatory mechanism needs to be standardised and strengthened to avoid conflicts and potential business hazards. On the economic front, threats may not come overtly but it could well be the poor management of these investments that may trigger the real threat to Indian businesses. For example, a consortium of power engineering companies, led by a top Chinese firm – Central Southern China Electric Power Design Institute – dragged the Tamil Nadu Generation and Distribution Corporation to court, against its attempt to award the contract for 9,207-crore 2 x 660MW Ennore SEZ supercritical thermal power project to Bharat Heavy Electricals Limited (BHEL) (Subramani 2014)¹². As Chinese investments are still exploring several new areas of investments in India, the number of challenges for Indian enterprises and regulatory institutions will continue to grow.

Are Chinese Economic Engagements Super-essential? –
Re-assessing Dependency

Trade is often good but the impact can have multiple contours. Looking at the figures and China’s pole position in India’s network of international trade and economic engagement, could we say that India has developed a dependency on China on the economic front? For example, the Indian ICT (Information and Communication Technology) companies are building inroads in the Chinese market but one of the potential hazards of polarising the Indian suppliers around a single vertical could be that China could take a page from the sanctions playbook that the big Western countries have developed against vulnerable partners. Regardless of whether China follows through on its threat or not, India needs to be ready for a new normal in which it must defend against all extremes. External collateral damage is not only the eventuality. The level of dependency may further weaken India’s potential in manufacturing. For example, in March 2016, while replying to a question in the Lok Sabha (lower house of the Indian Parliament), the Commerce and Industry Ministry commented that Chinese exports consisting of manufactured items are critical to India’s fast-expanding sectors like telecom and power (The Economic Times 14 March 2016)¹³. Despite this, India-China trade has not achieved a stage where the voluminous trade and investments deter India.

The case of trade relations between Taiwan and China is instructive. A major share of Taiwan’s investment goes to China and if China threatens to take punitive measures against Taiwanese on political grounds, it would adversely impact Taiwanese economy and balance of trade. Another illustrative example could be, China’s threat to impose sanctions against U.S. companies. The threat may force U.S. companies to choose between defense sales to Taiwan and access to the Chinese economy that is nearly 20 times larger. While U.S. companies do not currently sell military equipment to China, many U.S. defense contractors do sell civilian passenger aircraft, aviation parts and other civilian equipment in China and could find their ability to continue those sales cut off by Beijing (Harrell 2016)¹⁴.

This is not yet the case with India-China economic trade and the trade deficit with China nowhere reflects Indian economy’s dependency on China. The investments are still minuscule and do not add any muscles to Chinese position vis-à-vis India. Next, India still continues with its focus on restricted but institutional protectionism and its new ‘Make-in-India’ program, where it insists on boosting its manufacturing sector in a bid to safeguard its local markets. Further, there are still other products, which the Chinese wish to sell in the Indian market. If the volume of China’s exports to India continues at its current rate, India could prove to be the best market for China.

China in the South Asian Region: Economic Threat Perceptions

In the recent past, China also emerged as a significant economic player in the subcontinent. China’s growing economic presence has been perceived as a strategy and certainly poses a challenge to India’s substantial regional influence and its comparative economic might across South Asia. The Chinese economic influence is just not limited to trade but goes beyond to include investments. The significant value of Chinese investments can be judged by the China-Pakistan Economic Corridor, a pet project of China with a budget of US$46 billion (Pakistan Times 2016)¹⁵. China shows a great amount of interest in strengthening its political ties by using capital as soft power. As mentioned earlier, investments have a tangible and longer-term role to play and hence these kinds of investments seem to be driven by strategic interests and not by mere economics of supply and demand. China’s economic maneuvering around India is possibly the greater challenge to India. Apart from Pakistan, China has also become a significant economic partner to countries throughout the sub-continent by forging strong ties with smaller states through trade, diplomacy, aid, and investment.

As per available statistics, China is currently the largest trading partner of Pakistan and Bangladesh, and the second-largest trading partner of Sri Lanka and Nepal (Kelegama 2014)¹⁶. Despite several manner of controversies including over non-payment of loans, China has invested US$5 million in Sri Lanka (Pattanaik 2015)¹⁷, a number which has grown in the light of reaffirmed commitments to increased Chinese investments, and further the bilateral FTA talks during the Sri Lankan Prime Minister’s visit to China in April 2016 (China Daily 2016)¹⁸. China has been the top investor in Myanmar with its FDI in Myanmar growing from US$92 million in 2007 to US$876 million in 2010 (CNBC n. d.)¹⁹. Though China’s investment in countries in South Asia has not witnessed as much growth as in the bilateral trade, it can be observed that the investments are growing despite the not-so-positive business prospects in some of the states. The growing concern for India is that even if it still lags behind Indian investments, China has emerged as a major financier of projects in most of the small South Asian countries in recent years (Kelegama 2014)²⁰. The Chinese have intensified their ‘pivot to South Asia’ through investments.

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Conclusion

As India’s appetite for investments and markets growing, the Chinese intend to meet the demand. And this is the case not just in India but also in the rest of South Asia. Chinese state and non-sate actors are engaged in a number of economic diplomacy endeavours and most of these trajectories are building on the potential of untapped Indian markets. The saturation of European markets and the risks of remedial trade measures provided an added advantage to the Indian market in Chinese eyes. Specifically, Chinese investments in Indian states have been a significant source of sub-national economic drive in India, with the states and their political leaderships giving immense importance to attracting Chinese investments. The visits of delegations from Indian states to China have become more common in recent years (Government of India various years)²¹ and these new forces have adopted more adventurous approaches to build synergies with Chinese. The sense of threat from China appears to be absent in this segment and is unlikely to dominate India’s multi-pronged approach to engage with its neighbour. With its US$49 billion trade deficit with China, India has to learn ways to deal with the challenges by building capacities and not act under pressure of over-generalised threat perceptions.