IDSA COMMENT

India-China Economic Engagement: Time to insert COINs

December 9, 2010

The year 2010 marks sixty years of diplomatic ties between India and China. The year also symbolizes an important milestone in their economic relations, with bilateral trade expected to breach US$ 60 billion. Businesses from the two countries are also slowly establishing collaborative ventures to tap into the two-billion plus market. Nevertheless, just under the surface of this burgeoning economic engagement, cracks have started to develop—some minor and others that could cause structural damage. After briefly discussing their growing economic engagement and delineating the various fault lines, this commentary proposes areas that could further enhance India-China economic relations.

The significance of India-China bilateral trade lies not just in achieving the US$ 60 billion mark but that it increased by 18 times in 18 years—in 1992, it was only $ 339 million; a growth rate that further consolidates China’s position as India’s largest trading partner. India’s ascent, though not as spectacular, did manage to make it China’s tenth largest trade partner; in fact, India-China bilateral trade is growing faster than China’s trade relations with its other top nine partners. Chinese companies are also involved in contracts worth around $ 40 billion in the power industry and another $ 10 billion to establish telecom-related infrastructure. More than 250 Indian companies have set up shop in China doing business in IT, banking, engineering, pharmaceuticals, etc.

However, this burgeoning economic engagement has certain fault lines. First, although bilateral trade has recorded an impressive rate of over 40 per cent growth in recent years, total trade pales in comparison with China’s trade (in 2008) of $ 425 billion with the European Union and $ 333 billion with the United States. While this comparison borders on being inequitable, it reinforces the fact that the trade potential of a $ 7 trillion plus market (India and China combined) is more than $ 60 billion. Second, India’s exports to China are heavily tilted towards trade in commodities; iron ore alone constitutes almost 53 per cent of Indian exports to China. This narrow trade basket (partly owing to non-tariff barriers in China) betrays India’s established service industry and growing manufacturing competence. Third, is mushrooming trade imbalance. Last year India registered a trade deficit of $15.8 billion; a $ 4.1 billion increase compared to 2008. Lastly, the absence of an established business model inhibits deeper engagement between Indian and Chinese entrepreneurs. This situation primarily emerges from a lack of sufficient awareness as well as limited business collaborations in the past.

In recent years, New Delhi and Beijing have initiated several measures in consultative, procedural, and administrative areas to facilitate better economic engagement. However, the mentioned lacunae transcend the procedural and administrative issues requiring a long-term project-based public-private partnership. A 10-year multi-billion dollar economic roadmap with emphasis on collaboration and innovation (COIN) in the following four areas could lead the way: energy, health, infrastructure, and knowledge-intensive industries (K2I). These sectors are not only crucial for sustainable development, but also have the potential to increase the trade volume, diversify the trade basket, and reduce the trade deficit. Additionally, more joint ventures (JVs) facilitate the creation of better understanding of their “complementarities and competitive strengths” leading to the development of a “Chindia” business model.

In recent years, companies from both countries have made noticeable progress at the sectoral level in the four areas identified above; however, they also have comparative advantage in different sub-sectors. The task before the two governments is to identify these niche capabilities and leverage their strengths. One way to perform this task is for China to take the initiative in establishing energy farms and infrastructure corridors, while India takes lead in creating medical cities and K2I innovation hubs.

To maintain the current economic trajectory, India and China are required to double their electricity production by 2020; a situation that requires them to source 85 and 61 per cent, respectively, of their oil needs from foreign markets. Simultaneously the two countries are also in a race to occupy the unenviable position of the largest emitter of CO2 after the United States. Thus, the challenge before them is not only to sustain the current growth momentum but also fuel this growth with green energy.

According to BP Statistical Review, in 2009, China and India produced 16 and 7 per cent, respectively, of total wind energy in the world. Additionally, in the next ten years they plan to install more than 20GW of solar power. Although slightly ahead in this journey, China suffers from the problem of “excess baggage.” India has the potential to share. Over-enthusiasm to tap into this emerging green revolution, Chinese companies undertook a rudder-less expansion of wind and solar power equipment production, resulting in overcapacity. There is a 46 per cent overcapacity in wind-power equipment and similar problems bedevil the Chinese solar industry. A sensible option is to establish JV energy farms in India and transfer some of this overcapacity.

Last year Thomson Reuters noted that China is in the forefront of developing green technologies; between 2006 and 2008, Beijing filled the “largest number of original patents pertaining to wind, solar, and marine energy.” As production costs of per kW from solar and wind energy are still higher than of fossil fuels, India and China must also channel their research in reducing the economic costs of green energy.

In healthcare, China fares relatively better than India; however, both countries face similar challenges including lack of universal access, expensive treatment, and absence of social security net and/or low insurance coverage.

China has recently initiated a $ 125 billion plan to provide affordable medical care for the entire population by 2020. In 2005, the Indian government announced plans to expand health care related facilities and appoint qualified medical personnel in rural areas. A prerequisite for the success of these schemes is the availability of reasonably priced medicines and diagnostic equipment. Modest progress has been made in recent times. A medical ECG machine, which usually costs $ 2000, is being offered for $ 400 by GE India. China’s largest medical equipment producer Mindray is also in the forefront of producing affordable medical equipment. Bharat Biotech sells a single dose of its hepatitis B vaccine for 20 cents.

India and China confront similar health challenges that involve common solutions; therefore, it is prudent to harness their resources and competence collaboratively to overcome these problems. One such collaborative approach could be establishing networked medical cities that master the art of affordable medicine and also train medical personnel in virtual classrooms. These cities should also emphasize upon innovation and localization of affordable medicines and diagnostic equipment.

Infrastructure development has become the buzzword in contrasting China with India. India requires over a trillion-dollar in infrastructure-related investments over the next ten years, with a substantial contribution from the private sector including foreign investments. Recent examples include Japan’s investment commitment for the $ 50 billion Delhi-Mumbai Industrial Corridor (DMIC).

The telecom and power sectors already lead the way in defining the potential for cooperation between India and China. Currently, Chinese companies are involved in contracts worth around $ 40 billion in the power industry and in contracts worth another $ 10 billion for establishing telecom-related infrastructure. Also in recent years, Chinese companies have emerged as the largest suppliers of power industry-related equipment to India. The challenge and opportunity lies in mimicking this success in other infrastructural projects.

A potential area for China’s “going abroad” strategy is to invest and develop a Chennai-Hyderabad-Bengaluru Knowledge Industrial Triangle (CHB-KIT). These three cities in south India have already proven their K2I prowess and offer numerous venues for investment and collaboration. An India-China partnership in CHB-KIT should move beyond the development of infrastructural facilities into establishing JVs in K2I.

Finally, India and China must work towards networking and nurturing their “frugal innovators” by creating innovation hubs. From $ 3,000 cars to $ 300 laptops to $ 30 mobiles, these innovators are leveraging technology and economies of scale and scope to produce low-cost goods and services. This new business model requires small capital input and sustains on small profit margins. Two of the most promising areas for brining the “frugal innovators” from India and China together are biotechnology and information technology—growth industries of the future. As China develops CBH-KIT, Indian companies should also venture further into China through JVs.

Sixty years ago, China and India rediscovered each other. The time has come to reinvent the essence of their economic engagement to establish a truly win-win partnership that also facilitates realizing their national priorities of inclusive growth and harmonious development. Moreover, to emerge as developed economies, it is imperative that they transition from the current model of global assembly and BPO centres to global centres of innovation; and through ‘COINS’ this journey could be more profitable and sustainable.