China and India: A love-hate relationship

Indian Prime Minister Narendra Modi (L) and Chinese President Xi Jinping (R).
Mikhail Svetlov | Getty Images
Indian Prime Minister Narendra Modi (L) and Chinese President Xi Jinping (R).

China and India, the two most populous countries in the world and Asia's economic giants, have had a chequered history.

They share a border, have fought a bitter war and continue to compete for geopolitical supremacy in the region. Political ambitions and distrust on either side have sometimes been at the cost of better economic sense.

But in recent years there have been attempts to mend and strengthen the relationship through bilateral visits from both heads of state. And while Indian manufacturers, like their counterparts elsewhere, complain about inexpensive Chinese products flooding the market, Indian consumers are lapping up everything from cheap Chinese phones and toys to clothes made in China.

Imbalance in trade

China is India's largest trading partner and like with many other countries, this relationship too is imbalanced. Trade between the two countries has been expanding annually at 15 percent since 2007, according to the Confederation of Indian Industry (CII), a trade body. Unfortunately for India, so has its trade deficit with China.

In the financial year that ended March 31, India exported a little over $9 billion worth of goods to China, while it imported goods worth $61.7 billion, taking the trade deficit to a whopping $52.7 billion, according to trade body FICCI's East Asian Division.

Therefore trade experts said India's dependence on China for export oriented growth is limited.

"With the slowing Chinese economy, the trade imbalance will further widen," according to Garima Arora, executive officer, international division, CII.

India mainly exports raw materials to China such as cotton and copper and as the Chinese economy rebalances to become more consumer led, there will be a further fall in exports.

This is evident from the 2015-2016 figures that show Indian exports to China fell by over 24 percent, according to Reuters.

While the scenario for traditional Indian exports to China may look bleak, some analysts say that the rebalancing of China provides an opportunity for India. It should look to aggressively export more products that don't cater to the manufacturing or industrial sectors alone like Ayurvedic and agro products and IT services.

Alka Acharya, director of the Institute of Chinese Studies in Delhi, told CNBC, "China is a huge market we should expand there in a big way. We need to study their market and explore possibilities. "

Make in India now?

Besides looking to sell end products to Chinese consumers, another way of making this relationship more equal, according to analysts is to market India as an investment destination.

"We need to urge Chinese companies to set up their manufacturing facilities in India," suggested Arora of CII. Recently, Shanghai Fosun Pharmaceutical Group agreed to pay $1.3 billion for a controlling stake in India's drugmaker Gland Pharma, which is the largest acquisition of an Indian company by an overseas company this year, Reuters reported.

Over the past 13 years, 142 Chinese companies have invested a total of $27 billion in India in sectors such as automotive parts and consumer electronics, according to CII. Top Chinese companies investing in India include Huawei Telecommunications, ZTE, Alibaba and Xiaomi. During the same period, 139 Indian companies have invested $12 billion in China, largely in the software and Information technology (IT) services sector.

During Indian Prime Minister Narendra Modi's visit to China in May last year, 24 agreements worth $22 billion were signed between Indian and Chinese companies to finance and invest in projects across sectors, according to the CII.

However, large Indian firms have traditionally been more interested in looking for mergers and acquisition in the West rather than investing in China.

Analysts said that the growth in economic ties with China will come through small entrepreneurs. Many small manufacturers are sourcing products as diverse as firecrackers and religious idols from China. Said one such Indian small scale manufacturer, "It is still cheaper to buy from China, than make in India, and even the quality is better."

Borrowing from its own people

The Indian economy has one buffer against global market uncertainties: Its government has borrowed very little from external sources. That also means that dependence on China to fund the budget deficit is far more limited compared to some global peers.

India's total external borrowing as of the end of 2015 stood at $480 billion and the share of sovereign debt was just 19 percent with the rest made up of commercial borrowings and nonresident Indian deposits, according to government data.

Most of India's sovereign debt is owned by multilateral agencies such as the World Bank, IMF and the Asian Development Bank and a small portion is owned by countries like Japan and the U.S. China does not own any Indian debt.

"Hindi/Chini bhai bhai"

The slogan, which means "Indians and Chinese are brothers" in Hindi, was once popular.

While the bonhomie has ebbed somewhat with the passage of time, Chinese food remains highly in demand in India, even though it has been "Indianized" beyond recognition.

The rush to learn Mandarin which started a couple of years ago has continued with a mushrooming of "learn Chinese classes" across Indian cities. Seeing the popularity of the language, the government has instructed schools to offer Mandarin as an "optional" language.

This appreciation has been reciprocated across the border, with Bollywood movies finding a ready audience in China. Even though China restricts the number of foreign films that can be released in the country every year to 34, some of India's A-list stars such as Aamir Khan and Shah Rukh Khan have seen their films gross millions of dollars in recent years.

Tourism is another area of cooperation and many Buddhists from China come to India while visiting the birthplace in neighboring Nepal of Shakyamuni Buddha, the founder of the religion.

Correction: This story was revised to correct that Shakyamuni Buddha's birthplace is in present-day Nepal.

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