Sino-Indian Relations and the Elephant in the Room

MOHAN GURUSWAMY
VISITING PROFESSOR, ADMINISTRATIVE STAFF
COLLEGE OF INDIA.
DISTINGUISHED FELLOW, UNITED SERVICES
INSTITUTION OF INDIA
Sino-Indian Relations and the
Elephant in the Room.
1
Mohan Guruswamy

6/20/17Mohan Guruswamy 2
The Big Economic Transition Happening.
(GDP PPP)

Top GDPs by PPP

IMF Projections for China & India PPP GDP’s.
6/20/17Mohan Guruswamy
4
Year China India
2020 $29 trillion $13 trillion

“Great revival of the Chinese nation.”
5
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 country’s
5,000 years of history. After citing China’s “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 Xi’s remarks
was a promise: unlike his predecessors, he would not
fall short.

China will still be thrice as rich as India .

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 China’s 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 India’s, 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.

"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.
13

Now to the Elephant in the room.

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.

China’s 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.

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.

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.

USA’s 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.

India’s 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.

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.

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.

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 world’s 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.
6/20/17
24
Mohan Guruswamy

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 China’s
exports.
The realities of the inter-dependent world.
6/20/17
26
Mohan Guruswamy

How much is the US trade deficit with China?
27

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.

India’s IT sector and the US dependency.
6/20/17
31
Mohan Guruswamy

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.
6/20/17
36
Mohan Guruswamy

ARE WE READY?
37
China’s US trade surplus in 2016 was $350 billion.
 After adjusting 30% value addition from third
country imports, it is still about $280-300 billion.
India’s US trade surplus was $25 billion in 2016.
India’s IT exports to the US was $110 billion in 2016.
India’s 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 USA’s engagement in Afghanistan will increase. Its dependency
on Pakistan will consequently increase.
2. The USA’s 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.

The Challenge for Sino-Indian Leadership.
Given the dynamics of the world’s 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 1700’s.
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.
6/20/17
39
Mohan Guruswamy

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 America’s 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.
6/20/17
41
Mohan Guruswamy

1. Unemployment
Despite 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).

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.

Poor Infrastructure
Many 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
inefficiency’s facing the Indian
economy.

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.

High levels of private debt
Buoyed 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

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 India’s rural poor are
yet to receive any tangible benefit from the
India’s 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.

Large Budget Deficit
India 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.

Rigid labour Laws
As 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.

Inefficient agriculture
Agriculture 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.

Poor tax collection rates.
According to the Economist, India has one of the
poorest tax to GDP rates in the whole world.
India’s 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.

Sino-Indian Relations and the Elephant in the Room

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