China-India: Expanding Economic Engagement

Swaran Singh, Research Fellow, IDSA



The bilateral trade and investment between China and India have been the most agreeable as also the most reliable positive link in the history of their not-so-correct relations. Therefore, despite being very negligible compared to their individual growth patterns and especially compared to their potential, economic engagement between these two Asian powers presents one example of how increasing mutual stakes and common understanding flowing from purely economic interactions can contribute to improving of overall inter-state relations. However, while economic egnagement may function as a cushion for absorbing much of their misperceptions or genuine problems at the political level, yet this also shows that not-so-correct relations do have an impact in slowing down the pace of progress in their economic engagement. Therefore, in the context of China and India, the success of their economic interactions must be assessed from the angle of (a) its contribution to improvement in their overall relations and (b) its limitations in achieving its full potential in normal time span. It is in this context that this paper examines the nature and role of Sino-Indian economic engagement.

According to most experts, the coming years will see both China and India join the ranks of the world's major economic powers. This is simply because these large-sized resource-rich countries have a strong market potential and with 1.3 billion and 1 billion people respectively, both China and India have been successfully experimenting with economic reforms that have since increased the purchasing power as well as consumption levels of their large populations. Indeed, calculated on the basis of purchasing power parity (PPP), by the year 2010, both China and India are expected to respectively emerge as the largest and the fourth largest economies of the world. In fact, in terms of PPP, China's gross domestic product (GDP) crossed the $4 trillion figure in 1998 to become the second largest economy of the world.1 And looking through the current trends in the growth rates of their GDP, foreign direct investment (FDI) and foreign trade, these projections sure appear to be fairly accurate and valid.2 (See Table 1) Put together with their evolving business friendly environment, these trends and their projections have already begun to attract major investors both within and outside their respective countries.

Table 1. Comparative Indicators of Economic Growth

Year 1991 1992 1993 1994 1995 1996 1997 1998 1999

GDP Growth

China 13% 13.4% 11.8% 10.2% 10% 8.8% 7.8% 7.6%

India 5.3% 6.2% 7.8% 7.6% 7.8% 5% 6% 5.9%

FDI (Contracted)

China ($ Mn.) 11,977 58,124 111,436 82,680 91,282 73,276 54,004 45,600 40,400

India ($ Mn) 325 1,781 3,559 4,332 11,245 11,142 15, 752 6,975 -

Foreign Trade

China ($ bn.) 135.63 165.53 195.7 236.62 280.86 289.88 325.06 324.00 316.00

India ($ bn) 46.39 40.42 49.42 62.75 75.98 83.08 86.86 81.84 84.95

However, there is one basic difference that needs to be underlined at the very beginning. This is that since China had started her economic reforms as early as 1979 and India only in 1991, China is way ahead in being an economic success though India seems to fully conform to the initial stages of the trajectory of China's economic reforms. Secondly, whatever be their level of economic development, their rise to stardom does not remain without its share of challenges and pitfalls. Apart from their in-built systemic hurdles and outside pressures, what shows up as a curious proposition is that these two rapidly growing large economies share such close physical proximity to each other and yet they have not developed economic interactions commensurate to the pace of their economic growth. This is primarily because of their politico-strategic equations, and these will continue to impinge on the pace of India-China economic engagement. In fact, it is their expanding economic engagement that has come to be increasingly viewed as the most potent panacea for resolving their politico-strategic problems. Indeed, it is this inherent linkage between their gradually expanding economic engagement to their long-standing politico-strategic problems that will continue to determine the prospects of their mutual cooperation in the coming years.3 And, it is against this backdrop that this paper tries to examine some specific aspect of their expanding bilateral trade, investments, border trade and other evolving frameworks of economic engagement which seem to have far reaching implications for regional and even global peace and development.

Experimenting with Economic Reforms

The overall success of their experiment with economic reforms is perhaps the most critical factor that will guide their economic integration. Apart from their domestic factors, external factors like the recent long-drawn financial crisis amongst once booming economies of East Asia, will also have a major role in determining the course of their economic interactions. Experts, for example, have assigned a whole range of factors to explain how the East Asian financial crises have contributed to recent downtrends in these two countries. These include (a) decline in demand from the Southeast Asian countries; (b) growing competition from some countries with devalued currencies, (c) these countries increasingly relying on exports to spur economic recovery; (d) China's export sector maintaining very high annual growth rates of above 15 per cent for over last two decades; and (e) the resultant sluggish domestic market within these countries.4

As a result, in addition to making themselves more competitive with their existing partners and in existing sectors, both India and China have been trying to explore new opportunities in terms of expanding trade in new sectors and with new partners. More specifically, both India and China seem to have gradually diverted towards trading with new neighbouring countries. To cite some statistics, despite China's trade boom with countries like Japan and South Korea, the share of its Asian trade as part of its total foreign trade has grown only by 9.55 per cent during the decade between 1986-1996. By comparison, the share of China's trade with South Asia as part of its total Asian trade has increased by over 26 per cent during the same period.5 Even within the South Asian region, China's trade with India and Bangladesh has witnessed impressive increase while China's trade with all other five South Asian countries has actually declined as their percentage share within South Asia's trade with China. (See Table 2) During these last nine years of the 1990s, China's trade with India, for example, has gone up by 650 per cent. Of this nearly 600 per cent growth had occurred during the first 7 years i.e. before India's nuclear tests in 1998.

Seen in terms of their specific achievements, their economic reforms have created strong fundamentals in both Chinese and Indian economies. While China had already crossed the proverbial hump of double-digit growth rates during the early 1990s and has since stabilised at more credible growth rates around 7 per cent, India's growth rates have only recently begun rising from what was once known as the Hindu rate of growth of about 3 per cent to around 6 per cent per annum. More recent estimates on the growth rates of Indian and Chinese economies have put them respectively at 7.1 and 5.9 percent for 1999-2000 and at 7.5 and 6 per cent for 2000-2001.6 Similarly, China's contracted FDI had peaked at $111.43 billion for 1993. This has since stabilised between $40 to 50 billion per annum. This was $45.6 billion for 1998 and was estimated to be $35.64 billion for the first 11 months of 1999 showing an 18.9 per cent decline though it finally crossed the $40 billion mark before the end of the year.7 India's FDI has also been sluggish and it has continued to climb down from its peak of $22 billion for 1995. From there, it has since declined to $15.75 billion for 1997 and further to $6.97 billion in 1998. Thanks partly to India's decision to exercise its nuclear option in May 1998 the impact has been particularly severe on India's actual FDI inflows. During the last three years these have witnessed a sharp decline from $3.55 billion for 1997, to $2.46 billion for 1998 and are projected to stay under $2.0 billion for 1999.8 But if one were to believe the Annual World Investment Report of the UN Conference on Trade and Development (UNCTAD) for 1999-2000, at least China seems slated to again begin moving upwards. According to this report, in view of China's expected accession to the WTO and its accompanying sweeping market-opening reforms, China's annual FDI is estimated to rise from $60 to $100 billion during the next five years.9

Recent years have also seen China's foreign trade stabilising at around $320 billion and India's at about $80 billion per annum. China's foreign trade was $325 billion for 1997 from where it has come down to $324 billion for 1998 and it was $316 billion for 1999. According to Song Guoqing, chief economist of the China Securities Executive Council, China's trade surplus that stood at $43.6 billion for 1998, was expected to be constrained to $10 billion for the year 1999.10 Even during 1998, though China kept a foreign trade surplus of $45 billion, experts believe that the sum was achieved mainly through import substitution.11 Even the strong Hong Kong budget surplus of HK$86.9 billion for 1997 experienced a budget deficit of HK$32.3 billion for 1998 and it was predicted to reach HK$36.5 billion for 1999.12 India's foreign trade had continued to rise steadily until 1997 from where it has slid from $86.86 for 1997-98 to $81.84 billion for 1998-99. The decline has been witnessed both in India's exports as also in India's imports. China's foreign exchange reserves have also stabilised at around $150 billion. China's foreign exchange reserves had crossed the $140 billion figure during 1997 and were estimated to be $147 billion by end-June 1999.13 The revised estimates, however, have now put it at $155 billion for 1999.14 India's foreign exchange reserves have been far smaller by comparison, but India has since come out of its foreign exchange crisis of 1991. These have gradually grown from $22.37 billion for 1996 to $25.97 billion for 1997, $29.52 billion for 1998 and $31.94 billion for 1999. At the same time, however, both China and India stand as the 3rd and 8th largest debtor nations with their foreign debt alone standing at $146.7 billion and 94.4 billion as of December 1997. All this shows that while any destination may be welcome for steadily growing Indian trade and commerce, China may have already over-exploited its easy destinations and seems to be exploring new partners whereas India seems to quite fit into its requirements.

China-India Bilateral Trade

At the very outset, it must be stated that statistics alone cannot explain the contribution of India-China bilateral trade, which has to be viewed against the backdrop of their problematic politico-strategic equations. Very briefly, nothing perhaps compares to the India-China bilateral trade that has gradually come to be the single most reliable as also single most agreeable confidence building measure (CBM) thereby strengthening their mutual understanding during the last 20 years. Conversely, this rapid progress in India-China trade and commerce has clearly coincided with their overall period of rapprochement since the early 1990s. (See Table 3) The beginning of this process can be traced back to the two sides signing protocols for economic cooperation in 1984 granting each other the most favoured nation (MFN) trading status thus marking a U-turn in their policies on mutual trade and commerce that had been lying suspended since the early 1960s. Since then India has become China's 20th largest trading partner and its largest trading partner from the South Asian region since 1994. Between 1993 and 1997, while Pakistan's share in South Asia's bilateral trade with China declined from 44 per cent to 26 per cent, India's share has increased from 35 per cent to 46 per cent. Similarly, for 1998, following the nuclear explosions in India and Pakistan, while Pakistan's annual trade with China registered a negative growth of nearly 9 per cent, India's trade with China still remained positive showing a 5.02 per cent increase. All these trends have clearly boosted the argument of economic engagement being the most potent tool for resolving their politico-strategic problems. Moreover, since July 1997, with the return of Hong Kong to mainland China, India's trade with Hong Kong (which is generally higher than the annual India-China trade) can also be added to the India-China trade thus doubling their annual figures. Similarly, with the return of Macao since December 1999 and with the eventual return of Taiwan, the future years may completely change the profile of India-China economic engagement.

As regards evolving the framework for expanding India-China economic engagement, both sides had set up an India-China Joint Working Group for promoting mutual trade and commerce in 1984. This Group conducts annual meetings alternately in Beijing and New Delhi and is supported by a Joint Business Council that represents business interests especially of the non-State sectors from both sides. Their efforts have since resulted in many more agreements on evolving the new legal framework for facilitating their trade and commerce and for establishing joint ventures between these two countries. The first India-China joint venture between India's Mideast Integrated Steel Limited and China Metallurgical Import Export Corporation was commissioned in Orissa as early as in January 1993.15 Similarly, on July 18, 1994, during his visit to New Delhi, then foreign minister Qian Qichen had signed a trade agreement on avoidance of double taxation between these two countries.16 Later, in the interactions during President Jiang Zemin's visit to New Delhi in November 1996, China and India signed three other major agreements for (i) putting in place double taxation avoidance mechanisms, (ii) providing MFN status to each others' sea-borne trade commodities, and (c) combating smuggling of narcotics and arms and other economic offenses. Many such agreements continue to be signed between individual Departments and Ministries from time to time.

The two have also since established their banking channels to facilitate their economic interactions. As of 1998, the principle commodities exported from India to China had included mineral products, prepared foodstuffs, lac and resins, inorganic chemicals, textiles and textiles articles, precious and semi-precious stones, granite and articles of stone, organic chemicals etc. The category of prepared foodstuffs has shown the largest growth of 11,251 per cent from a negligible figure in 1996. Similarly, after showing a rising trend between 1995-1997, the export of cotton and cotton yarn and textiles have shown declining trend in 1998. The top inputs in China's exports to India had included chemicals and allied products, which constitute nearly 33 per cent of their total exports to India. Of these the organic chemicals are mostly used for India's vast pharmaceutical industry. The second largest item is mineral products, which constitutes 15 per cent of China's exports to India and the bulk of this includes metallurgical coke. The other items also include raw silk and silk yarn, pulses, mercury and antimony, fresh water pearls, pig iron and newsprint.

China-India Border Trade

Though formally only a negligible part of their bilateral trade, India-China border trade needs special attention for being most effective in improving their politico-strategic equations. The border trade, which has enabled free flow of both goods and services across their disputed borders, has since greatly facilitated the lives of people both inhabiting as also manning these sensitive regions thereby solidifying their overall mutual confidence. As its most immediate outcome, this has reduced their border management expenses and contributed to the scaling-down of their military presence and scaling-up of their economic engagement. But the most lasting advantage has come to their local populations that remain isolated and very unsteadily connected to the urban and industrial centers of their respective countries and have, therefore, developed strong interdependence over centuries of their evolution. Besides, these border regions constitute a rather difficult physical terrain of glaciers, tropical forests and hard rocks and constitute a vast region of over 125,000 sq. km which makes their disputed territories larger in size than many nation states around the world.17 As a result of both sides severing these traditional interactions following their border war during October 1962, many of their local manufacturing trades had simply died because of this disjunction in their historical links between raw materials, manufacturing units and markets. But thanks to their border trade and other CBMs, since early 1990s, the situation has since completely transformed. Indeed, compared to the Indo-Pak border where shelling remains a routine affair the India-China border remains peaceful and the two sides have witnessed only two minor incidents of tension during 1967 and 1987.

However, assessing India-China border trade in monetary terms, it remains extremely low even as a share of this limited volume of their bilateral trade. During the last ten years since the two sides officially resumed their border trade in December 1991, the monetary value of this has stayed less than $1 million per annum. This remains far lower compared to India's border trade with either Bangladesh or Myanmar. India-China border trade was estimated to be $0.125 million for the year 1999, though many estimates have also tended to put this figure much higher by including their unofficial transactions in certain border regions.18 But there are a variety of other factors that explain these low figures in India-China border transactions. Firstly, the items exchanged across the India-China border are traded largely in barter and include items that are not capital intensive value-added manufactured goods of any kind. For example, goods that are traded from the Chinese side to India include wool, goat cashmere, goat skins, sheep skins, yak tail, horses, salt borax, szaibel yite, china clay, butter and silk. Similarly, items that move from the Indian side to China include agricultural implements, blankets, copper products, clothes, textiles, cycles, coffee, tea, barley, rice flour, dry fruit, dry and fresh vegetables, vegetable oil, gur and misri, tobacco, saunf, cigarettes, canned food, agro-chemicals, local herbs, dyes, spices, watches, shoes, kerosene oil, stationery, utensils, and wheat. Apparently, their monetary value can never reflect their actual contribution to India-China economic integration. Secondly, border trade also remains seasonal and even during few operational months it remains vulnerable to the vagaries of nature and other weather conditions as it is generally on human back and mules that these traders carry their goods through these precarious tracks in the Himalayas. Accordingly, the border trade can fluctuate like it has during the last three years. It was Rs.9 million for 1997, Rs. 5.8 million for 1998 and Rs.6.4 million for 1999. And finally, both India and China have allowed free trade in very low-cost 15 local items that, therefore, do not form part of annual statistics by their respective custom offices.19 But to give specific examples of the impact of the encouraging border trade between China and India, the early 1990s had witnessed revival of various cottage industries in border regions. Pithoragarh district in India's Uttar Pradesh province, for example, has revived its carpet-weaving cottage industry that had been virtually closed as it depended entirely on Tibetan wool.20

In view of its contribution to their overall economic interactions, however, both India and China have also institutionalised the framework of their border trade during the last ten years. Starting from the first border trade agreement, that was signed on December 13, 1991 and became effective on July 1, 1992, the two sides had opened their first border trade post in the middle sector at Garbyang (India) and Pulan (China). This was followed by opening of the second border trade post, again in the middle sector, at Gunji (India) in 1992 followed by the third border post (also in the middle sector) at, Shipki La (India) in 1994. At first glance, this clearly shows that their border trade continued to be concentrated in the middle sector which happens to be the most inhabited, smallest, as also least problematic sector while the two sides have not yet opened any border trade posts in the more difficult eastern and western sectors of their border. This, however, does not mean that there is no flow of goods and services in these regions as illegal and informal trade continues to flourish especially with cheap Chinese goods flooding markets in India's northeastern region. Despite strained official channels, these old and ill-maintained road links and other tracks have since sustained their unofficial border transactions. Experts have suggested at least three specific points in the eastern sector namely, Zemithang/Khinzemane in Tawang district, Gelling in Upper Siang district and Kibithoo in Lohit district of Arunachal Pradesh. But, given the fact that territorial claims of China include the whole province of Arunachal Pradesh and India continues to assert it claims to the McMahon Line, border posts in this region continue to be only a distant hope. The same is also true of the western sector which remains further complicated involving Pakistan's claims on Kashmir, Pakistan's transfer of parts of Kashmir to China and China's own occupation of the Aksai Chin region.

A fourth route, in the eastern sector has been agreed-in-principle since the last few years but there remain some basic complications. The problem with this border trade post involves the ticklish issue of India's province of Sikkim that the Chinese continue to regard as an independent state. While the Indian side has been suggesting the route originating in Sikkim, the Chinese have been deliberating on this issue as it implies a formal recognition of Sikkim's accession to India. China, therefore, has suggested an alternate route from Kalimpong in the Darjeeling district of India's province of West Bengal (passing through Sikkim) to Yatung in Chumbi Valley region. The Chinese have also been indicating that such an agreement on this border trade post may include language implying China's official recognition of Sikkim as part of the Indian Union. New Delhi, however, would like China to recognise Sikkim as part of India as a pre-requisite to any such agreement. This is often explained in terms of India's earlier experiences with such trade pacts. For example, in another trade agreement of April 1954, Prime Minister Nehru had traded off entire Tibet for nothing. To break from this intractable deadlock in their eastern sector, the two sides have since expanded their framework and have been exploring possibilities of opening their border trade as part of sub-regional cooperation amongst India's northeast, China's southwest, Bangladesh and Myanmar. The first formal conference for this purpose was convened in August 1999 at Kunming in China's province of Yunnan and it passed a resolution which is known now as the Kunming Initiative. India is preparing to host the second such conference for sub-regional cooperation amongst these four countries during the first week of December 2000 at Delhi. All this clearly shows how despite continuous improvement in their mutual trade and commerce, their economic decisions still continue to be guided by their non-economic motives.

Joint Ventures and Other Investments

Compared to this ancient art of trading goods in terms of selling and buying, joint ventures and wholly owned subsidiaries have been a phenomenon of more recent times. This requires actual capital investment in manufacturing or providing services inside another nation and presupposes greater mutual confidence than what happens in case of normal inter-state trade transactions. The track-record in such long-term investments can, therefore, be described as the perfect barometer that reflects the level of mutual understanding and mutual trust between the involved countries. Accordingly, this also remains far more vulnerable to their politico-strategic equations than any other economic interactions. Besides, the fact that both India and China happen to be developing countries only further explains low levels of their mutual investments. And finally, among the more immediate factors, India's nuclear tests in May 1998 should also be counted for this downtrend in their mutual investments during these last two years. Similarly, there are also factors that have facilitated their economic engagement. Firstly, China's attempts at soft-landing of its overheated economy of early 1990s have been followed by the onslaught of East Asian financial crisis forcing Beijing to explore alternative opportunities. Secondly, the sudden rise in China's foreign exchange reserves during mid-1990s had coincided with negative global trends in trade and investment pushing China's capital investment towards India that witnessed a certain hype during those years. And finally, China's economic reforms during the 1990s have created a small yet fast growing non-State sector that has provided Indian entrepreneurs with new opportunities and confidence to invest inside China. As a result of this new business environment, beginning from Ranbaxy Laboratories in 1993, a large number of Indian companies have already established a foothold in China.21 At the end of it all, therefore, the broad trends in India-China mutual investments do not present a very discouraging picture for the prospects of their economic ties. (See Table 4)

Table 4. Mutual Investments Approved

(in Million Dollars)

Year China's FDI India's FDI China to India India to China

1995* 355,499.00 32242.00 195.11 11.78

1996 73,276.00 11,142.00 3.93 2.4

1997 54,004.00 15,752.00 0.10 3.43

1998 45,600.00 7,935.00? 1.62 4.95

1999 4.77 0.33

* Cumulative Figure until December 31st 1995.

Sources: Ministry of Commerce, Government of India, New Delhi

Confederation of Indian Industries, New Delhi

Indian Investment Center, New Delhi

To briefly deal with China's as yet nascent private sector, this sector has already emerged as the most promising and potent driving force in China's economic opening up exercise. During the decade between 1989-1997, China's private enterprises have grown from 90,581 to 960,726 firms in number, which amounts to an annual increase of 34.3 per cent. To prove that these are not mere paper tigers, the number of their work force has increased from 1.64 million to 13.49 million, an annual increase of 30.1 per cent and their capital has increased from 8.4 billion to 514 billion yuan, an increase of 67.2 per cent.22 Similarly, Hong Kong's return to the mainland has also strengthened the confidence of India's business community, as Indian ethnic communities have lived and operated from here for over one hundred years. Even after India's independence in 1947 much of their investments in this region had traditionally been concentrated in Hong Kong and some of them have made it to the very top of Hong Kong's power elite as also business circles. Besides, considering that much of Indian investments have been in areas of services, Hong Kong has always been the most favoured place for obvious reasons. Indeed, it is from here that most Indian business houses have extended their operations onto the China mainland. This, however, is not true of Chinese investments that have been concentrated in India's mining and manufacturing sectors.

As a result of the aforementioned characteristics of their mutual investments and other external factors, while India's investments have been smaller and efficient, China's investments have been larger in size but slow in their actual performance. Of course, one could cite a whole range of additional reasons and bottlenecks and this can further vitiate their politico-strategic equations. But going by pure statistics, Chinese investments into India have not only continued to fluctuate heavily from time to time but there continues to be a huge gap between their contracted FDI and actual inflows on the ground. To cite statistics for the whole period since India's opening up experiment began, that is from August 1991 to August 2000, while China has contracted an FDI worth $225.07 million with India, the actual inflows have been only $0.56 million. Comparing this with their overall performance in attracting FDI both India and China have fared better which shows that the pace of their mutual investments still continues to be guided by their politico-strategic equations. To first take China's FDI statistics that are now available upto April 2000, China has approved a total of 34,800 foreign ventures involving $628.70 billion worth of contracted foreign investment and has already achieved an actual inflow of $317.5 billion.23 This shows that China has been able to convert over 50 per cent of its contracted FDI into actual investment on the ground. Similarly, India till August 2000 contracted a total FDI of $ 55.11 billion and its actual inflows stand at $11.96 billion which means that the proportion of India's actual FDI inflows compared to India's total contracted FDI stands at 22 per cent. The comparative figure of China's actual FDI inflows into India compared to its contracted FDI over the years stands a mere 0.25 per cent. (See Table 5) Logically, this low share of Chinese actual investments of their contracted FDI cannot be wholly explained in terms of their internal systemic bottlenecks.

Impact of India's Nuclear Tests

Having established the linkage between India-China politico-strategic equations affecting their decisions on mutual trade and commerce, one must also explore how much their economic integration has strengthened itself to deal with their political polemics or skirmishes. And here, their interactions during and following India's nuclear tests in May 1998 perhaps provide one such potent case to evaluate the future prospects of India-China economic cooperation. And here, reinforcing traditional notions of their economic engagement being the most agreeable as also the most reliable pillar in India-China ties, their bilateral trade proved to be the most potent catalyst in facilitating their post-Pokhran-II initiatives towards mutual accommodation. No doubt, this period saw some of the Sino-Indian economic interactions being cancelled or postponed and Indian exports suffering a considerable set back especially during the three or four months around India's nuclear tests in May 1998. Nevertheless, their annual growth rate for the entire year of 1998 did not crash and only came down from an average of 9 per cent during the preceding six years to 5.02 per cent for 1998. Seen against the backdrop of overall decline in China's exports, especially its exports to its potent trade partners like Japan and South Korea, as also its closest ally Pakistan, it did send a very positive message to India's policy-makers. As a result even during those difficult summer months of 1998, India signed agreements for 5 joint ventures (two in China and three in Hong Kong) during 1998 involving an investment of $8 million and other 6 joint ventures (one in China and five in Hong Kong) during 1999 involving investment of $1.9 million.24

Thanks to their well-entrenched economic engagement, the two had already begun to address this political fallout of India's nuclear tests before the end of 1998. China may have cancelled the China Commodity Fair in Mumbai in August-September 1998 and kept a visibly low profile presence during New Delhi's India International Trade Fair in November 1998, which did create skepticism amongst the businessmen on both sides, yet their bilateral trade had begun to normalise sooner than expected by most experts. There were also various academic exchanges and visits that were also very positive by not letting politics overshadow positive economic initiatives. Besides, when seen in the larger context of China's 9 per cent negative growth rates in its annual trade with Asia, the 5.2 per cent growth in Sino-Indian bilateral trade for 1998 seemed very positive for Sino-Indian ties.25 And finally, given the overall regional and international sluggish trends in trade and commerce, India-China economic interactions during 1998 were surely not the most discouraging slowdown. To recall, international trade worldwide had shown a negative growth of 1 per cent during 1998. China's exports which were expected to grow at a respectable 9 per cent (from a heady 20 per cent growth during 1997) grew only by 0.5 per cent and its imports actually fell by 1.5 per cent. China's exports with even its more stable Asian partners plunged sharply; South Korea by 31.3 per cent, Hong Kong by 11.5 per cent and Japan by 6.7 per cent. Against this scenario, Chinese exports to India grew by a respectable 8.9 per cent (though their growth during 1997 stood at 36 per cent). As a result, during 1998, India indeed increased its share of China's international trade to 0.59 per cent from 0.56 per cent for 1997.26 This clearly showed that India's nuclear tests and the political polemics and rhetoric had little impact on India-China economic interactions and in fact these economic interactions only facilitated their political turnaround which surely indicates positive prospects for their economic ties.

Prospects for Economic Engagement

The most cited argument against India-China economic integration paints them as natural competitors in labour-intensive exports where success of one would reduce opportunities for the other. No doubt there remains a certain validity to this line of thinking yet, given the track-record of managing their economic interactions even the most conservative estimates should put a positive picture about future prospects. India's reforms have been positively supported by China's economic reforms which have provided an example of a success story of such a large-sized developing Asian country. Besides, a closer look suggests that India's liberalisation had started nearly two decades after that of China which means that even in its labour intensive exports India's structural patterns are not completely identical to that of the Chinese which have since become relatively advanced, but increasingly less cost-effective.27 The two also continue to have their inherent differences in their strengths and weaknesses. Exploring India's growing expertise in computer software, for example, has since attracted the attention of Chinese leaders especially because it provides an alternative to their over-dependence on Western powers as also provides them alternatives in dealing with Intellectual Property Rights (IPR) problems with Western countries. Other uncharted areas for future explorations can include joint development of aircraft and spares (for civilian needs to start with), ship-building and repairs, railway equipment etc.28 Both India and China have, in fact, been gradually moving forward towards expanding co-operation in more advanced areas of sharing technologies even in more sensitive areas like nuclear technologies and China had supplied enriched nuclear fuel for India's Tarapore nuclear power plant in January 1996. From time to time, China has also shown increasing interest in collaborating in other high-technology areas like joint production of 100-seater civilian aircraft or participating in India's ambitious Light Combat Aircraft project.29 As a result, despite being known to be reluctant in investing in the Chinese market, about half a dozen Indian business houses have established joint ventures and wholly owned subsidiaries inside the China mainland and about a dozen other Indian companies have opened their representative offices in various parts of China.

India and China have also been working together at various regional forums like the Economic and Social Council for Asia-Pacific (ESCAP), the Asia-Pacific Economic Cooperation (APEC) Caucus or Asian Development Bank (ADB) or even more flexible informal initiatives for regional and sub-regional cooperation. One such major initiative currently under serious consideration involves the region that comprises China's Sichuan and Yunnan provinces, India's northeastern states, Burma and Bangladesh which represent one of the world's least developed regions. This region has potential for development by exploiting its mineral resources, forests, fertile lands and favourable weather. Until the formation of new republics of India, Burma, China and Bangladesh, this region also had an excellent transport and communication network during the late British period.30 The political differences amongst these countries have not only made it difficult to take any joint initiatives for common development of this region, but actually resulted in encouragement of various insurgencies and other anti-state activities. Some positive initiatives have, no doubt, been made during more recent years yet the progress in projects like Asian Highway or Trans-Asian Railway still leaves much to be desired.31 Various other proposals for river navigation and gas pipelines have also been floated though continued political differences, or low national priorities attached to these areas have not allowed much progress on the ground. This lack of development has only further complicated matters by enhancing problems like spread of small arms, drug-trafficking, refugee migrations, AIDS, and insurgencies across each others borders.

Similarly, India and China have also supported each other at various international forums. India, for example, has been supporting the case for China's inclusion into the Word Trade Organisation. New Delhi has been galvanising support amongst developing countries to get China elected to the Executive Committee as representative of the developing countries. This is because all the developing countries put together account for only a quarter of world trade and they rank still lower in terms of investments. Most of the developing countries are heavily dependent on foreign aid from developed countries and highly unlikely to go against the policies of their donor countries. Amongst some of the stronger economies (based on exports) amongst these developing countries, a global comparison for their exports during 1997 shows China ($183 billion) at the top, followed by South Korea ($136 billion), Mexico ($109 billion), Malaysia ($78 billion), and Thailand (57 billion).32 India came far below with $34 billion for 1997. Similarly, in Foreign Direct Investment (FDI) again, it is China that dominates the scene with countries like Brazil ($19.6 billion), Argentina (6.6 billion), and Thailand (5.1 billion) following far behind. China is not only the largest exporter amongst the developing countries, but generally enjoys huge trade surpluses with countries like the United States and Japan the two largest exporters. All these figures clearly show how WTO remains incomplete without China and why India has been pushing for China's inclusion at the very earliest.


To conclude, therefore, while India-China politico-strategic equations will continue to have their impact on the potential of their economic integration, their interactions in trade and commerce have evolved their own strong fundamentals that remain poised to withstand such occasional political polemics. However, more than their Chinese counterparts, Indian businessmen, remain skeptical about China which can be seen by comparing trends in their investments with other countries. Thus, there is no denying the fact that broadly guided by their politico-strategic equations some skepticism continues to affect Sino-Indian economic interactions. To give one example, it is often argued that given the fact that Chinese goods are cheaper, there should be nothing wrong with India buying them directly and that India should not overreact and let Chinese goods flood the Indian market. But this definitely does not represent the opinion amongst India's business chambers and other manufacturing sectors that have been up in arms against this trend of cheap Chinese goods virtually invading the Indian markets.33 Their continued protestations have in fact resulted in Government of India initiating an increasing number of anti-dumping investigations against smuggled or under-voiced Chinese imports and, on November 11, 2000, India's Customs Department had carried out a major crackdown on such Chinese products across major Indian cities.34 Besides, such trade practices hardly hold out any promise to provide for a mutually convenient and sustainable economic proposition. A lasting economic integration has to be based not only on both sides appreciating each other strengths, but also each other's limitations. There is definitely need, therefore, to continuously take stock of the nature and composition of their bilateral trade and commerce and to explore fresh investment opportunities. And, while both sides open new vistas of economic cooperation, neither should underestimate the value of rectifying imbalances that may otherwise add to factors that disrupt their economic integration. Both have to work together to promote each other's contribution towards their bilateral and multilateral initiatives.



1. T.C.A Ramanujam, "India and China a Study in Contrast", The Hindu Business Line (Chennai, India), October 12, 1999, p.14.

2. Sam Dzever and Jacques Jaussaud (ed.), China and India Economic Performance and Business Strategies of Firms in the Mid-1990s, (New York: St. Martin's Press, 1999), p. xi.

3. Gerald Segal and Richard H. Yang (ed.), Chinese Economic Reforms: The Impact on Security, (London: The Routledge, 1996), pp. 6-7.

4. Susumu Yabuki and Stephen M. Harner, China's New Political Economy, (Boulder, Colorado: Westview Press, 1999), pp. 245-253.

5. Calculations based on figures drawn from China Statistical Yearbook 1997, State Statistical Bureau, People's Republic of China, p.594 and Statistical Yearbook China 1987, State Statistical Bureau, People's Republic of China, p.522.

6. Zhong Yan, "China's Economic Operation: Review and Prospects", Beijing Review (Beijing), vol.43 no.4, January 24, 2000, p.11; "Economy to Grow 7.5% in 2000", Beijing Review (Beijing), vol.43 no.3, January 17, 2000, p.5; also Economic Survey 1999-2000, Government of India, Ministry of Finance, New Delhi, p.1 and S-1.

7. "Foreign Funding to Reach US$40 Billion", Beijing Review (Beijing), vol.43, no.6-7, February 7, 2000, p.23.

8. Economic Survey 1999-2000, Government of India, Ministry of Finance, New Delhi, p. 87.

9. "Unctad sees New Foreign Investment Boom in China", The Hindu Business Line (Chennai, India), October 5, 2000, p.8.

10. Wu Feng, "Jan-June Foreign Trade Hits $158 Billion", China Daily (Hong Kong), July 14, 1999, p. 1.

11. Yu Yi, "RMB to Remain Stable", Beijing Review (Beijing), vol.42, no.11 (March 15-21, 1999), p. 16.

12. "HK Expects 0.5% Economic Growth", Beijing Review (Beijing), vol.42, no.12 (March 22-28, 1999), p. 5.

13. Chi Hong, "Balance of International Payments Favourable", China Daily (Business Weekly) (Hong Kong), July 18-24, 1999, p.1.

14. Zhong Yan, "Tapping China's Reserve Strengths In the Western Region", Beijing Review (Beijing), vol.43 no.2, January 17, 2000, p.15.

15. "Beijing Establishes Joint Venture in India", Xinhua (in English), cited in Foreign Broadcast Information Service-China-93-013, January 22, 1993, p.15.

16. "Qian, Finance Minister Sign Agreement", Xinhua (in English), cited from Foreign Broadcast Information Service-China-94-137, July 18, 1994, p.9.

17. "China, India to Settle Border Issue", Beijing Review (Beijing), vol.43 no.24, June 12, 2000, p.5.

18. Rajesh Kadian, Tibet, India and China: Critical Choices, Uncertain Future, (New Delhi: Vision Books, 1999), p. 176. This author has put the figure at $337,349 for 1992 and $554,000 for 1994. The formal border trade had opened since July 1992.

19. These include wool, goat skin, yak tail, yak hair, goats, sheep, horses, salt, borax, China clay, butter, silk and Szaibel yite.

20. Kadian, n. 18.

21. Some of the well known Indian companies include Tata Exports (Shanghai), NITT (Shanghai), Bry Air (Shanghai), Essel Packaging (Guangzhou), Ranbaxy (Guangzhou and Shanghai), Ofind Refractories (Liaoning), Wockhardt (Beijing), Lupin Laboratories (Guangzhou), August International (Beijing), Archean Granites (Beijing), Ispat Karmet (Urumqi), State Bank of India (Shanghai).

22. "Private Sector Grows Fastest of All", Beijing Review (Beijing), vol.42, nos. 9-10, March 1014, 1999, p. 4.

23. "Foreign Investment Continues to Go Up", Beijing Review (Beijing), vol.43, no.24, June 12, 2000, p.9.

24. Indian Joint Ventures and Wholly Owned Subsidiaries Abroad Approved During 1999, Indian Investment Center, New Delhi, p. 8 and 32; and Indian Joint Ventures and Wholly Owned Subsidiaries Abroad Approved During 1998, Indian Investment Center, New Delhi, p. 6 and 28.

25. "Statistical Communique of the People's Republic of China on the 1998 National Economic and Social Development", (Decumbent), Beijing Review (Beijing), vol.42, no.13 (March 29-April 4, 1999), pp. 35-50.

26. For details see "China's Economy and India-China Trade", Journal of The SICCI (Southern India Chambers of Commerce and Industry, Chennai, India), July 1999, pp.12-14; also see FIEO News, August 1, 1999 p. 21, also at <>

27. Ross Garnaut, "India and China: Reforming Giants", Asia-Pacific Magazine (Canberra, Australia), No.2, May 1996, pp. 11-16 at < Proj/APM/TXT/garnaut-r-02-96.htm>

28. Jasjit Singh, "Future of Sino-Indian Relations", Strategic Analysis, vol.xvi, no.11 (February 1994), p.1512.

29. Vivek Raghuvanshi, "China Asks to Develop LCA Fighter with India", Defense News (USA), August 15-21, 1994; also "India, China and South Korea will Form Consortium: Plan to Build Passenger Planes", The Times of India (New Delhi), August 28, 1995.

30. But even the British never used these facilities to promote the social welfare of local people of this region. Instead, they used it to expand their British Indian empire.

31. For details seen Swaran Singh, "Myanmar: The 'Strategic Hub' of the 21st Century Asia", USI Journal (New Delhi), vol. CXXVIII, No. 532 (April-June 1998).

32. News Bulletin, China-India Chamber of Commerce & Industry, Mumbai, June 1999, p. 2.

33. T.K. Bhaumik, "Facing the Chinese Competition", Economic Times (New Delhi), November 1, 2000, p.10.

34. Prasenjit Bhattacharya and Sahir Anand, "Nationwide Raids on Chinese Goods", Economic Times (New Delhi), November 12, 2000, p.1.