India and China have had strong trade linkage over the years and this relationship dates back to as early as 114 BC during the reign of Han Dynasty. Fast forward to the 21st century, China has emerged as India’s largest trade partner.10 years back in 2005, bilateral trade between China and India was atUSD 16.39billion. India’s export to China stood at USD 6.47 billion and India’s import from China was at USD 9.93 billion. Both countries were keen to improve this figure, the obvious advantage for India being increased foreign exchange inflows, thereby boosting forex reserves.

However, devil lay in the detail. India was importing far more from China than exporting to China, with trade deficit of USD 3.45 billion in 2005. While China was exporting capital goods (and therefore value-add items), India was primarily exporting raw material and mineral ore. Out of total exports to China in 2007, mineral products constituted 55.4%, followed by textile and textile articles at 10.4% and chemical products at 10.3%. India was primarily importing machinery and mechanical appliances (46.08% of total imports from China), chemicals (15.65%) among others. Among India’s mineral imports to China, iron ore took the lion’s share. India exported about 90 million tonnes of iron ore in 2007, majority of which went to China.

The key factor that drove Indian companies to import capital goods from Chinese manufacturer was the price advantage. Chinese capital goods like power plant machinery were available at significant discount than similar equipment from Europe, US or Japan. A part of this discount was subsidised by financing made available to Indian companies from Chinese banks through the Export Credit Agency route, where funding was secured either directly from a Chinese bank like Exim Bank of China or with the support of a credit guarantee provided by Sinosure.

Have Indian companies gained in such deals? While the jury is still out, many companies are now feeling the need to compare lifecycle cost of such equipment as a key part of the purchasing decision, which involve answering important questions like spares availability, technology transfer, access to trained engineers from equipment suppliers and the equipment lifespan

The above factors have dampened the hype that got created when the trade momentum started to build in 2005. While the two-way trade stood at USD 65.85 billion in 2013-14, the trade deficit had risen to USD 36.22 billion. Indian government has started taking this issue up at various levels with the Chinese government, especially highlighting the fact that cheaply priced products are being dumped in the Indian market, adversely impacting Indian businesses, especially the small and medium firms3.

There is no denying the fact that each of India and China has its own competitive advantages and when appropriately used, can be of immense benefit to both the nations. From India’s perspective, the solution remains in attracting foreign direct investments (FDI) from China, which has not been much to talk about. Cumulative FDI over the years from China into India was about USD 500 million till 2009 and still remains at this level. While Indian companies have handed over lucrative Engineering, Procurement and Commissioning (EPC) and capital goods purchase contracts to Chinese companies, with the later moving in lock-stock and barrel (including bringing in unskilled labour from China to execute such contracts), contribution to local economy has not been significant in terms of indigenisation of manufacturing capabilities, growth of medium and small scale industries and local job creation. Government of India is waking up to this and has taken this up at various levels with its Chinese counterparts. Steps taken by India in highlighting its strength as an attractive investment destination includes the “Make In India” campaign by the present government and pushing Chinese companies through positive communications at various industry forums to bring in FDI as part of EPC contracts, to set up manufacturing facilities in India either singly or through joint ventures, to indigenise a significant part of equipment procurement and/or to help generate local employment.

It is also encouraging to note that China and India has taken up development of infrastructure facilities in India as an area of cooperation. This will help capital surplus state-owned Chinese infrastructure and construction companies to deploy capital and at the same time, will help improve infrastructure facilities in India, a win-win scenario for both countries. This will directly drive FDI flows from China into India and will help reduce trade imbalance in India’s favour. Indian infrastructure companies are also expected to gain technical competence in setting up and managing mega infrastructure projects when they collaborate with Chinese companies in India through joint ventures in executing such projects, as Chinese companies’ expertise in this area is well demonstrated. During President Xi Jinping’s state visit to India in September 2014, China agreed to invest about USD 20 billion in building and augmenting India’s railway network, establishment of two industrial parks, other infrastructure and manufacturing projects (projects to be executed through joint ventures between Indian and Chinese companies). This has been followed through with some serious action, with teams from Indian Railways visiting Chinese counterparts to evaluate technology and identify concrete areas of co-operation.

Economic cooperation between two nations was one of the core agenda during our Prime Minister Mr. Narendra Modi’s visit to China from May 14th to 16th. 24 agreements were signed between two countries at various government levels resulting in investments of about USD 10 billion. These 24 agreements are aimed to enhance co-operation between two nations across sectors like education, skill development, co-operation on space program, tourism, agricultural commodities to name a few.

Mr. Modi chose Shanghai city in China as the arena for inking business among corporate entities from the two nations, where Mr. Modi led a business delegation comprising CEOs of Indian companies. On May 16th, Indian and Chinese companies signed 21 MOUs aggregating USD 22 billion after Mr. Modi addressed a strong gathering of business leaders from both countries, stressing the point that India is open for business for Chinese entities looking to set up operations in the country. As a key part of this agenda, IL&FS Group signed two important Memorandum of Understandings, one with ICBC Limited, China’s leading bank, where ICBC will consider providing financial support of up to USD 1 billion equivalent to IL&FS Group and the second with China Huaneng Group, the largest state owned power producer in China, to jointly develop and operate a 3960 MW coal based power project in Gujarat in India
The visit by Mr. Modi has set the agenda for enhanced economic co-operation between the two nations and has also started the groundwork for Chinese investments into India. There is growing focus among Chinese companies to look at opportunities in India across infrastructure and energy sectors. Earlier, Chinese companies have been hesitant to come to India. With Mr. Modi providing assurances during his visit to China that India will welcome investments from China, the ball has been set rolling. The future looks bright and this is expected to go a long way in correcting the trade imbalance between the two countries, which today is estimated at USD 72 billion and remains skewed in favour of China at an estimated USD 45 billion (according to provisional figures, in 2014-15, India’s export to China stood at USD 11.95 billion and imports from China were at USD 60.39 billion)


Tanmoy Adhikari

Chief Executive Officer, IL&FS Global Financial Services (Hongkong) Limited -IGFSL HK. IGFSL,HK is a 100% subsidiary of IL&FS Financial Services
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Opinions expressed by the Contributors are their own and do not reflect any opinion of IL&FS Financial Services on the said subject

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