“When Hui Liangyu, China’s vice-premier, visited New Delhi last week he was presented with a miniature silver chariot pulled by two horses. The horses, his hosts quipped, represented China and India pulling the global economy into recovery.”

When Beijing and New Delhi pull together

By James Lamont

Published: March 31 2010 23:09 | Last updated: March 31 2010 23:09

When Hui Liangyu, China’s vice-premier, visited New Delhi last week he was presented with a miniature silver chariot pulled by two horses. The horses, his hosts quipped, represented China and India pulling the global economy into recovery.

More often than not these horses pull in different directions. India bridles at its growing dependence on Chinese telecommunications and power equipment, vital for modernising its decrepit infrastructure. It has imposed curbs on Chinese companies bringing workers across the Himalayas to build pipelines and power plants. Fearful of a flood of cheap imports supported by an artificially weak renminbi, India has also put restrictions on non-branded Chinese mobile handsets, toys and chocolate.

The tensions stretch to territory, too. India worries about Chinese claims to Arunachal Pradesh, an Indian state bordering Bhutan and Tibet; Beijing’s interference in disputed Kashmir; and its navy’s presence in the Indian Ocean and the Arabian Sea. China’s alliance with Pakistan, and its supply of military hardware, also rankles.

In turn, Chinese officials grumble that their efforts to open Confucius institutes in a handful of Indian universities, to promote Chinese language and culture, have been rejected. Huawei, the fast-growing Chinese telecoms company, complains that foreign technology providers are finding it increasingly difficult to do business in India.

To bring China and India closer, an awkward trading alignment first needs to be fixed. Over the past 10 years, China has very quickly become, by different calculations, either India’s top trading partner or second only to the US. Bilateral trade between the world’s two fastest-growing large economies rose to $52bn in 2008 from $260m in 1990.

By Chinese estimates, trade between the two is expected to reach as much as $60bn (€45bn, £40bn) this year as the economies shrug off the effects of the global financial crisis.

But trade flows are terribly lopsided. Far from celebrating burgeoning trade, India harbours deep resentment over a yawning deficit overwhelmingly in China’s favour. About 70 per cent of India’s exports to China are raw materials that then come back as higher value finished goods that undercut India’s small and medium-sized businesses.

India’s deficit last year was $16bn on bilateral trade of $43.4bn.

This skewed trade has risen to the top of New Delhi’s agenda with Beijing. Ministers have appealed for corrective steps and have taken their complaints to Wen Jiabao, China’s premier. These appeals are likely to be delivered again by S. M. Krishna, India’s foreign minister, on a visit to Beijing next week, and by Pratibha Patil, India’s president, on her official visit later this year.

Among other measures, New Delhi wants Beijing to end restrictions on Indian exports of information technology, Bollywood films and fresh food. It wants greater investment opportunities for Indian companies in sectors such as pharmaceuticals and IT.

The signs are that Beijing is listening. India’s concerns about its purposeful neighbour have often been met with indifference in Beijing. But China’s Communist party leaders, mindful that the two countries represent almost half of humanity, now appear receptive to a partnership.

Mr Hui acknowledges the need to balance trade. China does not need to run a trade surplus with India, he says. He even offers a four-point plan, based on stimulating demand among Chinese consumers, encouraging Indian investments in China and technological partnership in agriculture, manufacturing and environmental protection.

India has advised China how it could build more confidence in India by not immediately seeking participation in its more sensitive sectors such as telecoms, ports and other critical infrastructure. Nor, it says, should Beijing seek to export its low-skilled labour. Some policy advisers hold up South Korea, which has made strong inroads into the Indian economy with Samsung and Hyundai, as an example to follow.

Beijing and New Delhi need to get down to specifics, and the removal of non-tariff barriers, before the widening deficit erodes trust further.

But where is the silver chariot headed? India and China are hoping to grow at 8-10 per cent over the next 25 years. Still flushed by what they consider a triumphant confrontation with the US at the United Nations talks on climate change in Copenhagen, they are also hoping to align their interests more closely in multilateral discussions over climate, trade and the world’s financial architecture.

The Indian establishment is split. While some predict enmity with China, others – such as Jairam Ramesh, India’s feisty environment minister and a close ally of Congress party head Sonia Gandhi – foresee partnership. Mr Ramesh proposes that whatever India does in the world it should do with China. The trade dispute, in his opinion, will ease as India’s companies become more efficient, and as China opens.

But Mr Ramesh is not alone in identifying a deeper alliance as creating greater friction elsewhere, particularly in the US. “If the Americans are finding China a headache, they will find dealing with India and China a nightmare,” he warns. The chariot ride may become more balanced, but no less bumpy.

http://www.ft.com/cms/s/0/dd22c9a2-3cfd-11df-bbcf-00144feabdc0.html