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Sino-Indian Relations and the Elephant in the Room

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Text of Sino-Indian Relations and the Elephant in the Room

  • MOHAN GURUSWAMYVISITING PROFESSOR, ADMINISTRATIVE STAFF

    COLLEGE OF INDIA.

    DISTINGUISHED FELLOW, UNITED SERVICES INSTITUTION OF INDIA

    Sino-Indian Relations and the Elephant in the Room.

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    Mohan Guruswamy

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    The Big Economic Transition Happening. (GDP PPP)

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    Top GDPs by PPP

  • IMF Projections for China & India PPP GDPs.

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    Year China India

    2020 $29 trillion $13 trillion

    2030 $46 trillion $22 trillion

    2040 $71 trillion $35 trillion

    2050 $103 trillion $55 trillion

    2060 $145 trillion $82 trillion

  • Great revival of the Chinese nation.

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    On November 15, 2012, the day he became general secretary of the Chinese Communist Party, Xi Jinping stood onstage at the Great Hall of the People, in Beijing, to reflect back on his countrys 5,000 years of history. After citing Chinas indelible contribution to world civilization, Xi called for the great revival of the Chinese nation. And he acknowledged that others had failed one time after another to realize that goal. Implicit in Xis remarks was a promise: unlike his predecessors, he would not fall short.

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    China will still be thrice as rich as India .

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    Two different orbits.

    India and China exist in different orbits of the world economy. A slowed down China now growing at 7% still adds $490 billion to global growth, while a speeded up India, now growing at 7%, adds a mere $160 billion.

    Even when the rate of Indian growth exceeds Chinas by a big margin, it will be a long time before it adds more to global growth than China.

    Although the Chinese economy does not compete directly

    with Indias, the effect the former imposes on the global economy will influence the Indian economy.

    Hence, whether a slowing Chinese economy will really create more opportunities for the Indian economy needs rethinking.

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    "The faster growth rates of China and India imply that their combined GDP (gross domestic product) will exceed that of the major seven (G7) OECD economies by around 2025.

    China, currently the world's second biggest economy, is forecast to grow at an average pace of 6.6% from now till 2030, and 2.3% from 2030 to 2060. The projections for India, the 10th largest, are 6.7% and 4%, respectively, the OECD said.

    In comparison, the 34 OECD nations are projected to grow an average of 2.3% per year from now till 2030 and 1.7% from 2030 to 2060.

  • Why China needs India.

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    Now to the Elephant in the room.

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    US Balance of Trade averaged -$13749 million from 1950-2017. It was $762 billion in 2006. In 2016 it was $502 billion (Imports $2.172 trillion; Exports $2.209 trillion). It was $47 billion in April 2017.

  • USA Exports to China.

    China was the United States' 3rd largest goods export market in 2016. U.S. goods exports to China in 2016 were $115.8 billion, down 0.3% ($297 million) from 2015. U.S. exports to China account for 8.0% of overall U.S. exports in 2016. The top export categories in 2016 were: miscellaneous grain, seeds, fruit (soybeans) ($15 billion), aircraft ($15 billion), electrical machinery ($12 billion), machinery ($11 billion), and vehicles ($11 billion). U.S. exports of agricultural products to China totaled $21 billion in 2016, its 2nd largest agricultural export market. Leading export categories include: soybeans ($14 billion), coarse grains ($1.0 billion), hides & skins ($949 million), pork & pork products ($715 million), and cotton ($553 million). U.S. exports of services to China were an estimated $53.5 billion in 2016, 10.5% ($5.1 billion) more than 2015, and 406% greater than 2006 levels. It was up roughly 896% from 2001 (pre-WTO accession). Leading services exports from the U.S. to China, in 2015, were in the travel, intellectual property (trademark, computer software), and transport sectors.

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  • Chinas Exports to the USA.

    China was the United States' largest supplier of goods imports in 2016.U.S. goods imports from China totaled $462.8 billion in 2016, down 4.2% ($20.4 billion) from 2015. The top import categories in 2016 were: electrical machinery ($129 billion), machinery ($97 billion), furniture and bedding ($29 billion), toys and sports equipment ($24 billion), and footwear ($15 billion). U.S. imports of agricultural products from China totaled $4.3 billion in 2016, its 3rd largest supplier of agricultural imports.

    U.S. imports of services from China were an estimated $16.1 billion in 2016, 6.6% ($993 million) more than 2015, and 58.8% greater than 2006 levels. Leading services imports from China to the U.S., in 2015, were in the transport, travel, and research and development sectors.

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  • Trade Balance.

    The U.S. goods trade deficit with China was $347.0 billion in 2016, a 5.5% decrease ($20.1 billion) over 2015. The United States has a services trade surplus of an estimated $37 billion with China in 2016, up 12.3% from 2015.

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  • Bi-lateral Investment.

    U.S. foreign direct investment (FDI) in China (stock) was $74.6 billion in 2015, a 10.5% increase from 2014. U.S. direct investment in China is led by manufacturing, wholesale trade, and depository institutions. China's FDI in the United States (stock) was $14.8 billion in 2015, up 50.6% from 2014. China's direct investment in the U.S. is led by manufacturing, depository institutions, and real estate. Sales of services in China by majority U.S.-owned affiliates were $54.9 billion in 2014 (latest data available), while sales of services in the United States by majority China-owned firms were $4.8 billion.

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  • USAs Exports to the India.

    India was the United States' 18th largest goods export market in 2016. U.S. goods exports to India in 2016 were $21.7 billion, up 1.1% ($237 million) from 2015 and up 124.2% from 2006. U.S. exports to India account for 1.5% of overall U.S. exports in 2015. The top export categories in 2016 were: precious metal and diamonds ($7.0 billion), machinery ($2.0 billion), optical and medical instruments ($1.3 billion), mineral fuels ($1.2 billion), and electrical machinery ($1.2 billion).

    U.S. total exports of agricultural products to India totaled $1.3 billion in 2016.

    U.S. exports of services to India were an estimated $20.3 billion in 2016, 12.3% ($2.2 billion) more than 2015, and 211% greater than 2006 levels. Leading services exports from the U.S. to India, in 2015, were in the travel, transport, and intellectual property (computer software, audio and visual related products) sectors.

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  • Indias Exports to USA.

    India was the United States' 9th largest supplier of goods imports in 2016. U.S. goods imports from India totaled $46.0 billion in 2016, up 2.7% ($1.2 billion) from 2015, and up 110.7% from 2006. U.S. imports from India account for 2.1% of overall U.S. imports in 2015. The top import categories in 2016 were: precious metal and diamonds ($11 billion), pharmaceuticals ($7.4 billion), mineral fuels ($2.4 billion), miscellaneous textile articles ($2.3 billion), and machinery ($2.1 billion).

    U.S. total imports of agricultural products from India totaled $2.1 billion in 2016.

    U.S. imports of services from India were an estimated $26.8 billion in 2016, 8.6% ($2.1 billion) more than 2015, and 280% greater than 2006 levels. Leading services imports from India to the U.S., in 2015, were in the telecommunications, computer, and information services, travel, and research and development sectors.

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  • Trade Balance

    The U.S. goods trade deficit with India was $24.3 billion in 2016, a 4.2% increase ($970 million) over 2015. The United States has a services trade deficit of an estimated $6.5 billion with India in 2016, up 1.5% from 2015.

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  • Bi-lateral Investment.

    U.S. foreign direct investment (FDI) in India (stock) was $28.3 billion in 2015 (latest data available), a 4.4% increase from 2014. U.S. direct investment in India is led by prof., scientific, and tech. services, manufacturing, and wholesale trade. India's FDI in the United States (stock) was $9.3 billion in 2015 (latest data available), up 3.7% from 2014. India's direct investment in the U.S. is led by prof., scientific, and tech. services, depository institutions, and manufacturing. Sales of services in India by majority U.S.-owned affiliates were $22.7 billion in 2014 (latest data available), while sales of services in the United States by majority India-owned firms were $13.4 billion.

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  • There is no bilateral trade relationship of greater economic and political significance for the U.S. than with China. And it is the size of the trade deficit that feeds all manner of concerns in the U.S. about declining competitiveness, job losses, and unfair trade practices by Chinese companies.

    China is also the worlds largest exporter and a global center for the manufacturing and assembling of goods for export.

    In addition, manufactured exports tend to have higher levels of foreign value-added due to the role of imported intermediate goods and services in their production. Factoring in Value Addition reduces the US-Chin trade deficit by 25%.

    Shutting the doors on China by the USA.

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  • One of the important trade policy insights from the value-added data is that barriers to Chinese imports will often harm U.S. consumers through higher prices for final goods.

    In addition, U.S. manufacturers would end up paying more for intermediate goods, which would reduce the competitiveness of their final goods in the U.S. and in export markets overseas.

    Furthermore, to the extent that U.S. trade barriers reduce demand for Chinese imports, they also reduce demand for the U.S. goods and services incorporated into Chinas exports.

    The realities of the inter-dependent world.

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  • How much is the US trade deficit with China?

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    The United States has a robust trade and investment relationship with ASEAN. These countries collectively are the United States fourth-largest trading partner and together represent a market with a GDP of more than $2.4 trillion and a population of 632 million people.

    In 2016, two-way goods trade was $234 billion. Since 2010, U.S. goods exports to ASEAN countries has expanded by 58 percent, with top U.S. goods export categories including electrical machinery, machinery, aircraft, optic and medical instruments, and miscellaneous grain, seed, and fruit.

    U.S. domestic exports of agricultural products to ASEAN countries totaled $11.2 billion in 2016, with leading categories including soybeans, cotton, soybean meal, wheat, and dairy products. Meanwhile, U.S. services exports to ASEAN totaled $27.1 billion in 2015 (latest data available), up 11.7 percent from 2014. U.S. trade in goods and services with ASEAN now supports more than 500,000 American jobs.

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  • Indias IT sector and the US dependency.

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  • The IT industry continues to be the largest private sector employer in India, adding 230,000 employees in 2014-15, taking the total number of jobs in the industry to 3.5 million, while accounting for 9.5% of the gross domestic product. The IT industry also holds the largest share of total services exports at 38%.

    The software lobby body on Tuesday forecast that software exports for 2015-16 would grow between 12-14% to about $110-112 billion, compared with the 13-15% growth estimate for the current fiscal year. The IT sector is expected to grow at 13% to $146 billion in the year.

    On the domestic front, IT will grow at 15-17% growth to reach $55-57 billion in the next fiscal year. Domestic growth is expected to be led by e-commerce, government initiatives and technology adoption by industries.

    The importance of IT to India.

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  • ARE WE READY?

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    Chinas US trade surplus in 2016 was $350 billion. After adjusting 30% value addition from third

    country imports, it is still about $280-300 billion.Indias US trade surplus was $25 billion in 2016.Indias IT exports to the US was $110 billion in 2016.Indias surplus after adjusting for value addition

    from third country imports is around $130 billion.Both, India and China cannot afford to do without

    USA now. But need to examine ways of reducing dependency on it.

  • The realities of India-USA-China triangular relationship.

    1. The USAs engagement in Afghanistan will increase. Its dependency on Pakistan will consequently increase.

    2. The USAs primary interest is to sell more arms to India and diminish the Indo-Russian arms partnership. It seeks to hurt the Russian arms industry, particularly military aviation, so that Western companies can enjoy unchallenged dominance. Higher prices being assured in the absence of credible competition.

    3. The USA is much too engaged economically with China to risk a break with it. It is not interested in another Cold War.

    4. Tensions with China sustain its military-industrial complex.5. India is not interested in any alliance directed against China in

    which it will become the frontline state.6. India remains very concerned with the Sino-Pak military alliance,

    particularly in the nuclear weapons technology transfers. 7. India sees no economic gains for it from OBOR.8. Western thinktanks and opinion makers shape the perceptions

    about China in India. And presumably in China about India.

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  • The Challenge for Sino-Indian Leadership.

    Given the dynamics of the worlds top three economies, it is important we move carefully and with a full understanding of all the issues involved.

    Both India and China need the USA for growth. To reduce that dependency India and China should integrate their economies into a Great Asian Powerhouse.

    India and China are logical partners in creating an economic counterweight to the West and restore the world order as it was in the 1700s.

    Any India-China conflict will throw the world economy into a turmoil which neither country can afford. Our window of opportunity to restore the historical order is only here for the next few decades.

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    Survey on India in the Indo-Pacific:

    Along with six other partner think tanks, Brookings India participated in a six-country public opinion survey (covering Australia, China, India, Indonesia, Japan, and South Korea)* that covered attitudes to the United States, China, regional security, trade, investment, immigration, and democracy.

    Overall, the survey showed extraordinarily high Indian public opinion of the U.S., wariness about China, strong support for free trade agreements and FDI, consistent views on democracy, and concern about regional competition.

    *(Simon Jackman, Gordon Flake et al., The Asian Research Network: Survey on Americas Role in the Indo-Pacific, United States Study Centre at the University of Sydney and Perth U.S.-Asia Centre, May 2017)

  • THANK YOU

    Think about it.

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    1. UnemploymentDespite rapid economic growth, unemployment is still an issue in both rural and urban areas. The fast rate of economic growth has left unskilled workers behind, and they have struggled to find work in growing industries. In 2017, the official unemployment rate was just below 5%. However, a report by the OECD found over 30% of people aged 15-29 in India are not in employment, education or training (NEETs).

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    Poor educational standards

    Although India has benefited from a high % of English speakers, (important for call centre industry) there is still high levels of illiteracy amongst the population. It is worse in rural areas and amongst women. Over 50% of Indian women are illiterate. This limits economic development and a more skilled workforce.

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    Poor InfrastructureMany Indians lack basic amenities lack access to running water. Indian public services are creaking under the strain of bureaucracy and inefficiency. Over 40% of Indian fruit rots before it reaches the market; this is one example of the supply constraints and inefficiencys facing the Indian economy.

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    Balance of Payments deterioration.Although India has built up large amounts of foreign currency reserves, the high rates of economic growth have been at the cost of a persistent current account deficit. In late 2012, the current account reached a peak of 6% of GDP. Since then there has been an improvement in the current account. But, the Indian economy has seen imports growth faster than exports. This means India needs to attract capital flows to finance the deficit. Also, the large deficit caused the depreciation in the Rupee between 2012 and 2014. Whilst the deficit remains, there is always the fear of a further devaluation in the Rupee. There is a need to rebalance the economy and improve the competitiveness of exports.

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    High levels of private debtBuoyed by a property boom the amount of lending in India has grown by 30% in the past year. However, there are concerns about the risk of such loans. If they are dependent on rising property prices it could be problematic. Furthermore, if inflation increases further it may force the RBI to increase interest rates. If interest rates rise substantially it will leave those indebted facing rising interest payments and potentially reducing consumer spending in the future

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    Inequality has risen rather than decreased.It is hoped that economic growth would help drag the Indian poor above the poverty line. However, so far economic growth has been highly uneven benefiting the skilled and wealthy disproportionately. Many of Indias rural poor are yet to receive any tangible benefit from the Indias economic growth. More than 78 million homes do not have electricity. 33% (268million) of the population live on less than $1 per day. Furthermore with the spread of television in Indian villages the poor are increasingly aware of the disparity between rich and poor.

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    Large Budget DeficitIndia has one of the largest budget deficits in the developing world. Excluding subsidies, it amounts to nearly 8% of GDP. Although it is fallen a little in the past year. It still allows little scope for increasing investment in public services like health and education.

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    Rigid labour LawsAs an example Firms employing more than 100 people cannot fire workers without government permission. The effect of this is to discourage firms from expanding to over 100 people. It also discourages foreign investment. Trades Unions have an important political power base and governments often shy away from tackling potentially politically sensitive labour laws.

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    Inefficient agricultureAgriculture produces 17.4% of economic output but, over 51% of the work force are employed in agriculture. This is the most inefficient sector of the economy and reform has proved slow.

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    Poor tax collection rates.According to the Economist, India has one of the poorest tax to GDP rates in the whole world. Indias tax revenue as a % of GDP is just 12%. Compared to an EU average of 45%. This poor tax collection rate reflects widespread corruption, tax avoidance and complicated tax rates. In 2017, Narendra Modi has sought to improve tax collection rates and reduce complications through the introduction of a general sales tax (GST) which involves a single tax rate rather than tax rates applied multiple times at different stages of production.