It was a hot humid day in April 2005. I was at my desk in office, staring at the desktop screen when the phone rang. The voice at the other end echoed full of excitement saying, “Hey Tanmoy, the trade between India and China is exploding and is expected to grow exponentially. This is a great opportunity and we must capitalise on this as a bank. Let’s discuss it.”

It was true. Bilateral trade between China and India had already touched USD 16.39billion in 2005. India’s export to China stood at USD 6.47 billion and India’s import from China was at USD 9.93 billion. China was keen to improve this figure and India was as well, the obvious advantage being increased foreign exchange inflows into India, thereby boosting forex reserves. Almost all Indian banks, including public sector banks, were closely monitoring this as well as building business cases to set up operations in China and capture this trade flow.

However, the devil lay in the detail. India was importing far more from China than exporting to China, with a trade deficit of USD 3.45 billion in 2005. While China was exporting capital goods (and therefore value-added items), India was primarily exporting raw material and mineral ore. Out of the 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 the total imports from China), and chemicals (15.65%), among others. Out of the total of India’s mineral exports 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. Over next few years, iron ore exports exploded, raising serious concerns even at the Ministry of Steel on such exports reducing the Indian steel industry’s competiveness and reduced access to raw material, environmental damage, effect on illegal mining, etc. These concerns got reflected in the Working Group on Steel Industry Report for the 12th five-year plan (2012–2017). Since 2010, state governments, the central government and even the Supreme Court had to step in to curb iron ore exports through mining bans, increase in export duties and orders to close mines.

The key factor that drove Indian companies to import capital goods from Chinese manufacturers was the price advantage. Chinese capital goods like power plant machinery were available at a significant discount than similar equipment from Europe, the 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 such asExim 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 the lifecycle cost of such equipment as a key part of the purchasing decision, which involves answering important questions such as spares availability, technology transfer, access to trained engineers from equipment suppliers and equipment lifespan.
The above factors have punctured the hype that was created when the trade momentum started to build in 2005. While the two-way trade stood at USD 65.85 billion in 2013–2014, the trade deficit had risen to USD 36.22 billion. The 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 firms.

There is no denying the fact that India and China each have their own competitive advantages and when appropriately used, can be of immense benefit to both nations. From India’s perspective, the solution in my view remains in attracting foreign direct investment (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 been marginal in terms of indigenisation of manufacturing capabilities, growth of medium and small scale industries, and local job creation. The Indian government is waking up to this, with Chinese companies now finding it difficult to get work visas for their unskilled work forces and pushing Chinese companies through positive communications at various industry forums to bring in FDI as part of such EPC contracts, to set up manufacturing facilities in India, 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 the Indian railway network, the establishment of two industrial parks, and other infrastructure and manufacturing projects (projects to be executed through joint ventures between Indian and Chinese companies). While this was significantly lower than the earlier announced figure of USD 300 billion, experts suggest that this would be a good initiative and will result in a long-term advantage to both nations if it actually materialises. We would keep a close eye on how things progress from here and it remains to be seen whether China is able to walk the talk.

India China Bilateral Trade Relationship, Study prepared for the Reserve Bank of India by Prof.S.K.Mohanty, July 2014
Report of the Working Group on Steel for the 12th Five Year Plan, Ministry of Steel, Government of India, 2011
History of India’s move to curb iron ore mining and exports can be found at
India discusses trade deficit, rising imports from China, Business Standard, Jan 17, 2015
China and India: Greater Economic Integration, Anil K. Gupta and Haiyan Wang, China Business Review, Sep 1, 2009
China offers to finance 30 per cent of India’s infrastructure development plan, The Economic Times, Feb 20, 2014


Tanmoy Adhikari

Tanmoy Adhikari is the Vice President of IL&FS Global Financial Services (Hongkong) Limited -IGFSL HK. IGFSL,HK is a 100% subsidiary of IL&FS Financial Services. He is responsible for driving the overall strategy of the firm with special emphasis on business development and deal.

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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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