India-China Economic Relations: A New Beginning?

By the time this article appears in print a new US President will be in place. Whether Trump or Harris the direct implications for the Indian economy will not be clear for some time: depends on who holds the portfolios of trade, secretary of state etc. However, it makes sense to take stock of the Indian economy especially on the trade side as here it is unlikely anything will change dramatically in the next one year due to changes in the American presidency.

A more useful development in recent weeks is the emerging thaw in Indo-China military relations and a return to the 2020 status quo. As observers have rightly noted, this thaw is a consequence of China’s declining economic fortunes in the last one year, strained relations with the US the last few years and a desire to not fight too many external battles at this time. One thing is clear. Whether Trump or Harris, the economic relations between China and the West-EU are not going to improve dramatically for at least the coming year. Technology theft bothers the US the most as it has been running the largest trade deficits for the last decade or so based on its huge surpluses in technology exports. On the other hand, the EU finds its eastern borders again unsettled in Ukraine and is forced to support the US anti-China stance.

So how do these geo-economic realities affect India? The first takeaway is the increasing importance of economics in determining international conflicts. Consider the Ukraine issue. When the Ukraine war started about two years ago the main worry was the disruption to world supplies of grain as Ukraine and Russia account for almost 30 percent of world exports. The Russians were quickly persuaded by all countries not to blockade Ukraine exports as that was in no one’s interest. Similarly, US embargo of Russia allowed (in 2022) exceptions to Russian oil trade as long as the export price did not exceed $60 per ton. This was greatly beneficial to Russia’s largest trade partners, the EU, while India was able to build a good stockpile of oil for domestic inflation controls. Finally, despite Netanyahu’s desperation to close the Hamas war, he was told to leave Iran’s oil depots and nuclear facilities alone in any retaliation to Iranian bombings.

How does this impact India? All indications are that the post Covid pent up demand is now winding down. In addition, personal consumption financed by liberal bank loans (the biggest example is real estate) is now also winding down. There is also a limit to how long government expenditure can keep the economy afloat. The one silver lining is the export growth of mainly electronic items as some companies like Apple have chosen to diversify their supply chains away from China. Whichever President is chosen, the best inflation control strategy of the USA has been import of cheap manufactured goods from China. No US President can change this strategy at least in the next few years.

Here is where India comes in. In terms of large assembly stations, the only alternative to China is India. But it is also clear that India is not ready in terms of labor skills or technology to replace China exports to the USA. The next best strategy is FDI.

One cannot but sympathise with the view expressed in the recent Economic Survey, that it might be time to start considering Chinese FDI in India with all the security restrictions necessary. I have written extensively in these columns that FDI and trade are two sides of the same coin. FDI in fact tends to promote trade in the long run. In the case of Apple, its entry into India had to be facilitated by allowing a Chinese investor whose parts were critical to the final assembly of the iPhone.

On the one hand, India worries about its burgeoning trade deficit with China yet is unwilling to allow Chinese companies to produce here! At the same time, whenever it negotiates an FTA its primary concern remains that Chinese imports may sneak in via that route. It is common sense that FDI (which entails setting up or acquiring producing units in any country) can hardly exit as the investor can’t pick up and take the factory away! Xiaomi products are everywhere (phones, air purifiers, fridges etc) anyway. How would FDI hurt?

As far as India is concerned, traditional exports like oil, jewellery, machine tools etc are unlikely to be the basis of an export boom which is more likely to be led by electronic products. Incidentally, China’s principal exports are electronics and office machines. A China plus one strategy is India’s best bet in the next few years. But this cannot work on Apple exports alone. A more broad-based strategy would need Chinese technology for some time. Maybe it’s time to let in Chinese FDI?

The Americans are willing (they don’t want their cheap imports to stop), the Chinese need to keep the export engine going, India needs to move to an 8-9 percent growth. Allowing politics alone to prevent a happy “triumvirate” emerge would be silly.

Manoj Pant
Visiting Professor, Shiv Nadar University