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Mainstream, VOL LIX No 11, New Delhi, February 27, 2021

India-China Economic and Political Relations in Changing Global Scenario | Suadat Hussain Wani

Saturday 27 February 2021

by Suadat Hussain Wani*

Political Relationship:

India was among the first few countries (first non-communist in Asia) to recognize China in 1950. In early times, there was much enthusiasm about bilateral cooperation and in 1954, panchsheel (five principles of peaceful coexistence) was signed. During this period of cooperation, Hindi-Chini Bhai-Bhai slogan was popular. However, inspite of enthusiasm to increase cooperation in many fields, border dispute emerged as main issue in early 1960s. The limited war in 1962 between two countries negatively impacted pace of cooperation in many fields. This limited war shadowed bilateral relationship for around two decades till 1978 when Indian Ministry of External Affairs Atal Bihari Vajpayee visited Beijing and official diplomatic relations were reestablished in 1979. The two countries agreed to discuss border dispute which was India’s priority to boarder base of cooperation. Even after six rounds of Joint Working Group talks, there was hardly any development on border issue, however, the then Prime Minister of India Narasimha Rao and Premier of China Li Peng signed agreement dealing with cross-border trade, cooperation on environmental issues, and ration and television broadcasting. In an attempt to improve relations and solve border dispute, China recognised sovereignty of India over Sikkim in 2003. During his visit to India in 2004, Chinese Premier Wen Jiabao stated 21st century to be “the Asian Century of the IT industry”. It was during the same year that bilateral trade surpassed USD 10 bn for first time. In 2005, two countries signed “strategic and cooperative partnership for peace and prosperity” with little success on this front. In 2006, Nathula pass was reopened for enhancement of trade after a gap of 44 years. However, during the same year, differences arised on the status of Arunachal Pradesh.

It should be noted that Xi Jinping was one of the top world leaders who visit India after Narendra Modi took over as prime minister of the country in 2014 which little helped to improve bilateral cooperation. In 2017, differences again arised in Doklam which raised tension between two countries for many months. It was in August 2017, that two countries agreed to disengage after many months of faceoff. In 2018, two countries agreed to cooperate in many areas including health, education, and food security in Afghanistan. However, in 2019 India reiterated that it would not join “Belt and Road Initiative” of China till concern expressed by the country are not addressed. Again in 2020, differences on border arised near Nathu La, Sikkim, leaving many soldiers injured. Following this incident, two countries came to standoff in Ladakh which resulted in death of 20 Indian soldiers and unknown number of Chinese soldiers. The differences on border was more intensified during 2020 which resulted in these clashes on multiple points. Following these clashes, there was growing demand to boycott Chinese goods which many predicted would hardly be feasible. However, government of India took some bold steps including banning of 59 Chinese mobile and desktop applications widely used in India. In addition, on August 19, Times of India reported that Ministry of External Affairs of India has been told that in line with measures taken with Pakistan, visas for Chinese academics, industry experts businessmen and advocacy groups will need prior security clearance. It is perhaps first time in history that after border dispute, economic relationship has been hit hard so intensively. In past border dispute has hardly taken the shape of curbs on economic cooperation.

Economic Cooperation:

Relationship between India and China also known as two economic giants of Asia, and the world, has been progressing at a tremendous pace. Both nations have witnessed ups and downs of their share over the years. The two countries today represent two largest and most dynamic economies of Asia which are emerging as new economic powers in international relations. The history of bilateral cooperation between India and China dates back to mid-1980s. The process of dialogue initiated by governments of the two countries at that point of time was quite helpful in identifying the common trade interests. Efforts were initiated to make the most of their economic strengths so as to further the bilateral economic relationship. In 1984, India and China entered into a Trade Agreement under which they accorded Most Favored Nation (MFN) status to each other.

Following global trend in 1990s, many regions including Asia witnessed an upward trend in Sub-regional and bilateral trade agreements. This trend was mainly due to risks associated with process of globalization and at the same time to benefit from trade opportunities. Moreover, given the slow progress in multilateral talks at global level, has been a driving force for these trade agreements. India and China share strong historical and cultural linkage and have many similarities. After many years of inward looking policies, both China (1978), and India (1990) adopted outward looking policy to benefit from the process of globalization. Given that India started process of opening its economy with outside world lately, it lagged behind China in almost all economic indicators. In 1992, two countries got involved in a full-fledged bilateral trade relationship. Further, 1994 marked the beginning of a new era in the India-China economic cooperation as double Taxation Agreement was signed. The two countries also took the necessary initiative to turn into dialogue partners in the Association of Southeast Asian Nations (ASEAN). In 2003, Bangkok Agreement was signed under which two countries offered some trade preferences to each other. India provided preferences on tariff for 217 products export from India. The two countries have also shown interest to take part in a multilateral trade system as per the WTO commitments.

In modern times, India and China are two populous and fast growing economies in the world and have biggest market. Given the present economic conditions around the world, bilateral cooperation between two countries has gained importance in recent times. On economic front, two countries have developed their own complementary skills which can be beneficial for both countries. By 2007, while India was skilled in cost effective designing and development, China excelled in cost-effective manufacturing. During the same year, Tarun Khanna wrote in Harvard Business Review that "The simplest, and most powerful, way of combining China and India is to focus on hardware in China and on software in India”. In 2009, in a book "Getting China and India Right", the authors suggest China plus India strategy so as to strategically benefit from both countries scale, complementary strengths, and reducing the risk of being unilaterally present. There are cases when Indian companies have gone to China and done well, such as Mahindra and Mahindra, while Chinese companies such as Huawei have done well in India. In 2008, China became India’s largest trading partner and the two countries have also extended their strategic and military relations.

It should be noted that from the beginning of present century, bilateral trade has progressed at a rapid pace and China has emerged as largest merchandise trade partner of the country. Since beginning of the current century, bilateral trade between two countries recorded exponential growth and increased from around 2 bn in 2000 to around 95 bn in 2018 (World Bank). In 2019, India was the 12th largest trade partner of China. The total bilateral trade registered a reduction of 2.93 percent year on year to reach USD 92.89 bn in 2019. India’s exports to China decreased by 4.55 percent year-on-year to USD 17.97 bn, and India’s imports from China also witnessed a drop by 2.54 percent to USD 74.92 bn. Due to the impact of COVID in 2020, the overall trade with China saw a reduction of 13.1 percent in Jan-Sept 2020 (USD 60.5 bn) as compared to the same period in 2019 (USD 69.7 bn).

Despite growing economic and strategic ties, there are lot of hurdles for India and China to overcome. First, India faces trade imbalance heavily in favour of China. While flourishing trade has brought with it all the advantages such as availability of low priced items, it has also led to the biggest single trade deficit, India faces with any country. It should be noted that trade deficit of India with China accounts for about 50 percent of the country’s total trade deficit. This trade deficit concerns are two pronged. One is the actual size of the deficit. Two is the fact that the imbalance has continuously been widening year after year to reach USD 58.04 bn in 2018. In 2019, India’s trade deficit with China stood at USD 56.95 bn, a minor year-on-year decline of 1.88 percent, with trade deficit declining for the first time since 2005. The decline in trade between two countries was largely attributed to economic slowdown of respective economies. In 2020, due to Covid-19 and the overall reduction in bilateral trade, trade deficit with China during the first nine months’ period saw a reduction of 30.5 percent from USD 42.9 bn (Jan-Sep 2019) to USD 29.8 bn as Indian exports to China increased by 14.9 percent year-on-year basis.

The growth of trade deficit with China can be attributed to two factors: narrow basket of exports, mostly primary commodities, that India export to China and market access impediments for most of the agricultural products and sectors where India is competitive, such as pharmaceuticals, IT, etc. The exports from India are predominated by commodities like cotton, copper and diamonds/ natural gems. While as exports from China to India are dominated by machinery, power-related equipment, telecom, organic chemicals, and fertilizers. Thus to overcome this problem, first India needs to diversify basket of commodities to be exported to China. Second India needs to engage with China continuously for addressing market access issues and hold them to assurances made on this account.

Bilateral Investment:

Growth in bilateral investment has not kept pace with the expansion in trading volumes between the two countries. While both countries have emerged as top investment destinations for rest of the world, mutual investment flows are yet to catch up. According to the Ministry of Commerce of China, investment from China to India between January-September 2019 were to the tune of USD 0.19 bn and Cumulative Chinese investment in India till the end of September 2019 amounted to USD 5.08 bn. Cumulative Indian investment in China until September 2019 is USD 0.92 bn. However, these figures do not capture investment routed through third countries like Singapore, Hong Kong, etc. especially in sectors such as start-ups etc. which has seen significant growth in Chinese investment.

Given the situation created by Covid-19 pandemic and shift by countries towards their domestic economies, global Foreign Direct Investment (FDI) is expected to decline continuously for many years. According to UNCTAD’s World Investment Report 2020, FDI flows are forecasted to decline by 40 percent, while decline to developing countries are expected to be 45 percent in 2020. Thus under these conditions, and present economic position, India needs to concentrate more on economic development. A look at trade data indicates that on year-on-year basis, Indian exports fell by 36.5 percent in May 2020, and imports by 51.1 percent according to media reports. Thus to overcome economic and trade problems, cooperation with other countries is of utmost importance.


As economic cooperation between India and China is considered to be one of the most significant bilateral relationship in the contemporary global economic scenario and this trend is expected to continue in the years to come, two countries have failed to solve problems associated with this cooperation. According to media reports, behind India’s decision to pull out of the Regional Comprehensive Economic Partnership (RCEP), the major issue for the country was the potential that opening up its market to China, another RCEP member, would lead to a flood of cheap Chinese goods crowding out Indian-produced products. New Delhi was concerned about what the second wave of opening up would do to the existing deficit—one that developed even without a free trade agreement with China. Moreover, two countries have failed to resolve their border dispute and Indian media outlets have repeatedly reported Chinese military incursions into Indian territory. Both countries have steadily established military infrastructure along border areas including amidst the 2020.

The solution to above mentioned problems is not confrontation which will not only impact economic and political developments negatively between two countries, but would also shelter dream of “Asian Century”. The two countries need to find ways of cooperation and not confrontation. The trade deficit problem can be solved by diversification of export basket by India, address non-tariff barriers by China and establishment of joint ventures where two countries face competition with respect to each other or in third market. As border dispute cannot be solved overnight, both sides need to take steps to avoid confrontation and minimize intensity of dispute. Given the changing economic situation in present world due to Covid-19, economic cooperation should be main preference of two emerging economic giants and border dispute and political differences should be less stressed for some time.

* (Author: Suadat Hussain Wani is a Research Scholar at the Centre of Central Asian Studies, University of Kashmir, Srinagar J&K (190006) | Email: suadat.scholar[a] )

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