Presently, India has a USD $48 billion trade deficit with China. Foreign Trade Policy 2015-2020 projects that if the current situation persists, then India will have an unsustainable trade deficit of US$ 60 billion with China by 2016-17.
The FTP has laid down an approach to bridge this deficit. This will require focus on increasing market access through removal of non-tariff barriers on particularly agro commodities including bovine meat , oil meals and cake, tobacco, rice fruits and vegetables etc. and seek tariff concessions in specific products of interest to India; seeking market access for Indian IT services and encourage other service sectors like tourism, films and entertainment; attracting Chinese investment to boost India’s manufacturing capacity and finally, operationalizing the five year development programme for economic and trade cooperation that lays down the roadmap for deepening and balancing bilateral economic engagement.
Of these, increased investment is likely to be a game changer in reducing India’s trade deficit with China. It is evident that Chinese companies are changing their roles from global manufacturers to global investors. For the first time in 2014, China became a net exporter of capital, with outward investment exceeding the inward investment. According to a 2015 report by Ernst and Young, outbound investment flows from China have exceeded US$ 100 billion in 2014, making China the world’s third largest overseas investor.
However, so far Chinese investments in India have been very low. Even though investment flows during 2000-01 and 2010-11 were almost negligible, for the first time, during 2011-12 and 2012-13, FDI inflows worth US$ 224 million from China were reported. Although this is way below the potential levels of investment flows from China, it is an indication of the synergies that can be realized between the two countries.
Perhaps the most effective way for China to participate in India’s infrastructure development would be through the development of industrial corridors. Since India has a large hinterland, it is important to develop industrial corridors which connect ports to manufacturing hubs. These corridors are envisaged as industrial townships with efficient road and rail connectivity for freight movement to and from ports and logistics hubs, and reliable power which would provide an environment that is conducive for setting up globally competitive businesses.
The government of India has conceptualized some of the industrial corridors which include the Delhi-Mumbai Industrial Corridor (DMIC), the Chennai- Bangalore Industrial Corridor (CBIC) and the Bangalore-Mumbai Economic Corridor (BMEC) among others. Japan has been the most active participant in this economic activity. For example, in DMIC, Japan is currently a main project stakeholder with a 26 percent share and has shown interest in collaborating for CBIC as well. The potential to develop these corridors remains largely untapped and China could be an active participant.