India’s Rising Purchasing Power To Boost India-China Trade, Future Fall In Chinese Manufacturing Subsidies Could Balance Trade

Among the agreements reached between India and China on Monday during Chinese Premier Li Keqiang’s visit to New Delhi was a promise to balance the bilateral trade that has long been in favor of China.

Li, who chose India as the first destination in his maiden foreign trip since taking charge, said only a "dynamic trade balance" can be sustained between the world’s two most populous countries.

“China never has the intention to pursue a trade surplus,” Li was quoted as saying by news reports, during a speech to Indian business leaders in New Delhi. “I am confident we have the ability to mitigate the trade imbalance between our two countries,” he added.

With India’s exports to China -- amounting to $18 billion -- failing to keep up with the surge in Chinese imports, India’s trade deficit with China in the 2011-12 financial year stood at $39.5 billion, up from only $1 billion in 2002.

The two countries have set a trade turnover target of $100 billion by 2015 and the measures laid out in the latest joint agreement seek to smooth out the imbalance and include promises of cooperation on pharmaceutical supervision and stronger links between Chinese enterprises and the Indian IT industry.

However, these goals are not new and were part of a India-China strategic dialog, held in New Delhi in November, between delegations led by India’s Deputy Chairman of the Planning Commission Montek Singh Ahluwalia and China’s National Development and Reform Commission Chairman Zhang Ping.

Indian analysts say China continues to place restrictions on India’s pharmaceutical industry as well as on India’s software exports despite promises to improve trade links.

But, the positive boost that Indo-China relations seem to have received from Li’s visit, coupled with expectations that the Chinese manufacturing industry could suffer a cut in government subsidies, analysts believe, can help India narrow the trade deficit.

“Chinese government subsidies that were in place for the past 15 to 20 years, and made low-cost manufacturing viable, is facing a withdrawal in the near future,” said Irfan Alam, member secretary at the India China Economic and Cultural Council (ICEC), a think tank headquartered in New Delhi and Beijing.

“Without the subsidies, the costs of production are bound to go up, which leaves the manufacturing industry with two apparent options: Move the manufacturing to Western China, where the subsidies are likely to continue for another 4 to 5 years, or shift their base to India, a move that will cut the shipping costs and will prove beneficial in the long term,” Alam said.

As the U.S. and the EU struggle to tackle slowing growth, India’s emergence as China’s most important trading partner is inevitable, Alam said.

“India's potential to absorb Chinese production is promising, as the Indian purchasing power continues to rise, driving bilateral trade,” he added.

Meanwhile, the booming trade between the two countries has also made China a target of Indian anti-dumping measures, which have limited Chinese exports to India to a significant extent.

However, protectionist measures by India to balance trade could help and hurt Indian traders at the same time, according to a research paper on India-China trade by Belgium-based Institute for Economic and Social Research.

India’s anti-dumping policy, which is applied to a large extent in the food and beverages industry, but also in chemicals, plastics and rubber, and textiles, were beneficial for its producers that file for anti-dumping protection, the report noted.

But, because the anti-dumping policy is primarily applied on intermediate products coming from China, Indian importers and input users are likely to be affected by the policy, presumably in a negative way, it said.