What Can China and India Learn from Each Other?

India and China are the 'twin engines of growth' of Asia. Indeed, each of them has a population of more than one billion. Together they constitute 40% of humanity. Both are developing countries, giant economies and amongst the fastest growing in the world. The large land mass, the vast natural endowments, the enormous size of the market, and the huge potential for growth, initial dependence on import substitution policies and now a highly capital intensive production structure: is what is common to both.

What can China and India learn from each other?

Bilateral Trade and Investment

India-China bilateral trade has grown rapidly in the last decade from US$ 339 million in 1992 to US$ 8 billion in 2003. The average annual growth of trade during the 1995-2003 was 26.4 per cent. In 2004, India became the 11th largest trade partner of China and the largest in South Asia. Bilateral trade between India and China reached a total of US$ 13.6 billion, representing an increase of 79.1% per cent over the corresponding period last year. Despite the rapid growth, the share of India in China's imports is just 1.0 per cent (in 2003) and of China in India's imports is fewer than 5 per cent. In 2003, the total trade in services between the two countries amounted to US$ 75 million representing a growth rate of 125.5 per cent. This suggests an enormous potential for trade expansion.

According to the Government of India statistics, during the period January

1991 to August 2003, India has approved FDI of US$ 231 million from

China. According to the Chinese Ministry of Commerce, the total Indian investment projects in China reached 101 by the end of 2003, with the total contracted investments amounting to US$ 235 million and actual investment amounting to US$ 79 million.

This brief overview of India-China trade and investment linkages shows that the magnitude of trade has expanded rapidly over the past few years. This indicates the presence of complementarities and suggests the potential of an even faster growth. However, the India-China trade is still concentrated in a few products especially the low value added raw materials and minerals dominating India's exports. The challenge is to make trade more broad based and diversified in favor of manufactured goods rather than raw materials while sustaining a healthy expansion of trade. For this, a great deal of attention needs to be paid to trade facilitation besides addressing the issues of relevant tariff and non-tariff barriers. It is believed that trade facilitation itself could lead to further strengthening of the India-China economic linkages by bringing down the present level of high transaction costs. The steps that could be considered include streamlining customs procedures and moving towards a more comprehensive electronic data interface in customs administration and information exchange, having a bilateral pre-shipment inspection agreement, mutual recognition agreements on standards, and harmonization of conformity assessment procedures among others. Trade facilitation could also cover cooperation to facilitate trade financing and cooperation between export-import banks of the two countries.

Barriers to trade in services need to be addressed systematically to exploit the potential of trade in services for mutual benefit. Such potential appears to exist in areas such as IT and IT enabled services, biotechnology, education, financial sector, education, health care, tourism, among other sectors. Bilateral investment flows could be facilitated by bilateral investment protection and promotion agreement, among other policies. In addition, an organized institutional promotion by business chambers and governmental agencies may be fruitful. Economic relations could be further strengthened with improved transport linkages and connectivity.

Economic cooperation between India and China also has to look beyond just promoting trade and investment. It could cover much broader areas including: to strengthen cooperation and information exchange between Government agencies and related institutions; exchange development experiences and promote technology and industrial cooperation in the fields, such as agriculture and rural development, electrical and electronics sector, project contracting. Given the fact that both China and India are highly dependent on imports of petroleum and gas, mutual cooperation in energy security is also of strategic importance; exchange experiences in the management of economy, such as city management, poverty relief and social security, development of SMEs, disaster management, water resource management.

Economic Lessons

If India wants to be as successful as China in attracting foreign and domestic investments in manufacturing then India must emulate the effective way in which China has built up its extensive communications and transportation infrastructure, power plants and water resources and implements policies that lead to huge FDIs in manufacturing, high job creation and high growth. China's manufacturing is nearly 50% of GDP, at about $ 650 billion per year, nearly 6 times the size of India's Manufacturing Sector, which stands at about $100 to $110 billion per year

India needs to create a liberal and flexible economic environment along the lines of SEZs in China would stimulate greater foreign investment and as in China, local governments may be given full authority to approve foreign investment up to a certain limit. Most important, rules of entry and exit in the zones can be made more flexible. Because these zones will be introduced in limited areas with a high growth potential, political consensus may be easier, even if this requires new legislation. Eventual success in the open zones may open the way for political consensus on a wider scale. Currently, India does have export processing zones. But the geographical area over which such zones operate is far too limited to allow for the full play of liberal policies and make them focal points of investment activity.

Similarly, China needs to have a robust capital market like India; this is likely to have a strong influence on the future shape and development of Chinese capitalism. Cheap manufacturing might be China's current competitive advantage but, in the long run, Beijing planners want the country to move more into lucrative high-technology sectors that provide better-paying jobs. China will need a dynamic private sector, run by entrepreneurs who have the drive to build innovative companies. The lack of equity funding route is likely to curtail China's ability to develop a strong private sector.