India is more concerned than ever about its yawning trade gap with China, as The Wall Street Journal detailed in a front-page story today.
But it isn’t just the volume of trade that’s at issue.It’s the mix.
While India exports mostly raw materials to its neighbor, China is selling more sophisticated manufactured goods – translating into better profit margins and higher paying jobs for workers. That disparity underscores India’s lack of manufacturing capabilities – and, for some national security hawks, it’s raising questions about whether India is too reliant on its rival for vital technologies.
One clear example of the trend is electronics. Overall electronics-related exports from China to India jumped from $2.8 billion to nearly $12 billion in the five years ending March 31, 2011.
Computer hardware from laptops to accessories like USB dongles accounted for $1.5 billion in China’s exports.
Chinese-made cellphones and mobile network gear, in particular, have flooded into India. In the two years to March 2011, India’s imports of mobile devices jumped 45% to over $4 billion. That’s partly because of a wave of new Indian firms that are marketing cellphones they’ve sourced from China and rebranded as their own. Chinese brands like Huawei Technologies have had their own stunning success in India.
The government’s attempts to erect barriers have proven futile in the telecom sector. In 2010, India began more closely screening imports of cellular network equipment, partly because of security concerns about Chinese goods.
The government required equipment vendors to make their software code and facilities available for inspection and to pay penalties that could reach into the tens of millions of dollars for any security breaches.
Despite those moves, imports from China continued to soar. Huawei agreed to the Indian new security restrictions and powered ahead. The company is now providing the equipment for 25% of the third-generation wireless broadband networks telecom operators are building in India. Huawei has introduced smartphones, tablets and 3G laptop dongles in India and had $1.6 billion in revenue from the country last year. A Huawei official who declined to be named said the company is thriving in India despite an environment where Indian telecom operators are encouraged, subtly, to buy gear from non-Chinese vendors.
India is also looking at ways to jumpstart its own high-tech manufacturing. The government is considering a move as part of a new manufacturing policy that would require telecommunications companies to buy a majority of network equipment from local firms. Foreign companies including those from China would theoretically be encouraged to invest in Indian joint ventures to comply.
For now, India’s manufacturing success is limited to lower-tech areas like auto parts and baby garments, experts say.
Developing a truly competitive manufacturing sector will require a vastly different approach from a government that has saddled factory owners with onerous labor laws, taxes and regulations that make it hard to acquire land.
“The real solutions will lie in India taking steps to improve its competitiveness,” said Anwarul Hoda, a former World Trade Organization official who is now a professor at the Indian Council for Research on International Economic Relations, a think tank. “You have to deal with the problems faced by small and medium-scale industries.”