When Chinese Prime Minister Li Keqiang visited India last month, most analysts expected diplomacy to dominate the agenda. Tensions between the Asian giants were high as Li's first overseas visit as premier came just weeks after a border spat between the two countries.
But that did not overwhelm economic issues during Li and Prime Minister Manmohan Singh's talks, and at the end of the three-day visit, the two nations agreed that China would invest more in Indian infrastructure.
S. Jaishankar, the Ambassador to China, said both countries identified Chinese investment in Indian infrastructure as a pragmatic short-term measure to mitigate the impact of India's massive trade deficit with China. China has been India's largest trading partner in two of the last three years. But their trade relationship is fraught with difficulties.
China exports much more to India than it imports. Consequently, the trade deficit between them was $39.4 billion in 2011/12, which was 21 per cent of India's aggregate trade deficit of $183.3 billion.
Indian policymakers see the trade deficit and its link to the current account deficit (CAD) as a primary risk facing the economy today. India's CAD in the October-December quarter of 2012 was a record 6.7 per cent of gross domestic product. Apart from being concerned about the skewed trade balance, New Delhi also says that Beijing does not give its pharmaceutical and IT companies fair market access. "It's a colonial pattern of trading," says former foreign secretary Lalit Mansingh. "There's a conscious attempt to not allow our companies to expand."
India largely exports primary products such as minerals and imports manufactured products such as electrical machinery from China. According to an Export-Import Bank of India study, ores, cotton, slag and ash accounted for 32 per cent of India's exports to China in 2011. On the other hand, machinery and electrical and electronic equipment are the two largest Chinese exports to India with a combined share of 45 per cent.
Economists say denying market access is a non-tariff barrier countries use to shield domestic companies from foreign competition. According to Abhijit Das, Head of the Centre for WTO Studies, Indian Institute of Foreign Trade, non-tariff barriers are erected through policy measures by governments. For example, exports of services such as software contracts can be curtailed through registration regulations that are designed to inhibit foreign competitors. Some countries also restrict food exports on the grounds of health protection, but it is essentially a way of protecting domestic industry.
Critics say China deliberately restricts access to its pharmaceuticals market by imposing unusually tough standards. However, industry experts say it does not deny market access. According to Swati Piramal, Vice Chairperson of Piramal Enterprises, China has enhanced its regulatory standards to match those of developed countries and has tighter patent laws than India. "It's more complicated," says Piramal. "A generic in India is not a generic in China."
Li acknowledged that India's trade deficit with China was unlikely to narrow soon, but increased Chinese investment in India would help mitigate the problem. "Only a dynamic trade balance is sustainable," he said at a meeting organized by industry lobby group FICCI.
Investing in India's infrastructure is not new to China. Some of the country's largest power producers rely on China for both equipment and funding. Typically, the supply contract is backed by soft loans from Chinese banks. However, the impact of such investment on India's infrastructure has been indirect, primarily through supply of equipment for the power sector.
For example, Shanghai Electric Group Company has a contract to supply power equipment to India's Reliance Power for $10 billion. Similarly, Power Construction Corporation of China announced a $2.4-billion power project in Tamil Nadu last year.
Despite India's infrastructure featuring prominently in talks between the countries, the most intriguing aspect of Li's visit was the identity of the only company he chose to visit. Li visited software company Tata Consultancy Services's software development centre in Mumbai. Given the Chinese premier's acknowledgement of India's software prowess, the visit may be a harbinger of a gradual change in the composition of India's exports to China.
No one on the Indian side, however, expects an overnight change. But Ambassador Jaishankar says this visit has seen the best response in the last few years from the Chinese side on economic issues. Perhaps the two governments' hope of bilateral trade of $100 billion by 2015 is not as farfetched as it initially seemed.