Business

India Intelligence
A monthly report on business, e-business and IT developments in India January 2002
Vol IX, No. 1

China, India and the WTO WTO

The impact on India of
Officially, policy makers in India have welcomed China’s accession to the WTO. They should be worried China’s accession to the WTO
is unlikely to be positive.
Pages 1-2
What does China’s accession to the World Trade US$40bn in foreign direct investment (FDI) every
Organisation (WTO) mean for India? The benefit, year. The same rhetoric in India, a country that Outlook for foreign
Indian policymakers hope, will be in the enforce- attracts less investment in a year than China receives investment
ment of commercial accountability on Chinese each month, would be heresy. What will 2002 hold for FDI
industry. A longstanding Indian beef is that Indian Conventional wisdom has it that China, as a policy?
products cannot compete with China’s because of WTO member, will attract even greater FDI, to the Pages 3-4
the latter’s low and subsidised input costs – indus- detriment of other developing countries in Asia, Foreign investment
trial land, credit, and so on. In any case, they argue, including India. This seems very likely. China’s atti- Many investors have pulled
since China already has a bilateral MFN agreement tude to FDI aside, the focus of FDI generally follows out of India. Why?
with India, its joining the WTO will not put any the concentration of economic activity—richer, more Pages 4-5
immediate additional pressure on India. What is competitive economies tend to receive (and send)
more, China achieved its economic miracle without more FDI. India’s woeful track record on FDI is with- Unocal
Unocal plans to build a gas
being a member of the WTO (a bit of logic used by out doubt due in large part to its poorer economic
pipeline from Bangladesh to
Indian nationalists when arguing that India could circumstances. The World Investment Report’s India.
replicate the Chinese model in terms of internation- Inward FDI Index assesses the ability of countries to Pages 6-7
al trade if it remained outside the WTO). attract FDI after taking into account their size and
India hopes to find an ally in competitiveness. (The average of Case study
China, one that will improve the a country’s share in world FDI Since Subex Systems
bargaining position of develop- Widening the gap? relative to it shares in GDP, switched to software it has
FDI in China vs India, 1990-2000 been growing at 100%
ing nations within the WTO, employment and exports: a annually.
especially on issues such as agri- China
US$ bn value of less than one indicates Pages 8-9
50
culture and anti-dumping. This India an under performer.) Even
40 Case study
may happen. But, more impor- accounting for China’s larger
tantly, it is indicative of India’s 30 market, always a magnet for MRO-TEK is a pioneer in
defensive mindset. India would 20 multinationals, India’s Inward India’s networking market.
Page 9-10
do better to emulate China or to 10 FDI Index score of less than one
brace itself for China’s regional 0
compares horribly with China’s Sourcing from India
economic hegemony. Indeed, 1990 91 92 93 94 95 96 97 98 99 2000 score of nearly 11. The marked A look at what foreign
China’s accession to the WTO Source: International Financial Statistics, IMF difference between China and companies source from
will pose several new challenges India in attracting foreign invest- India.
for the Indian economy, as follows: ment is usually blamed on a combination of factors: Page 10-11
● Attracting FDI. A subtle but important difference the quality of infrastructure, the cost/availability of
between China and India is the way in which each skilled labour, industrial cluster/linkages (a critical Sections
views the WTO. India views it in the context of inter- mass of relevant and supporting inputs/services), pol- Regulatory monitor.........12
national trade; the Chinese view it complementari- icy incentives, India’s relatively late entry into the Politics & economy monitor
ly with investment because they have come to race for FDI, India’s democratic system, etc. But one
..................................13
understand the close relationship between the two. overlooked intangible is the expectation of growth.
Industry monitor .......14-15
The Chinese government invariably positions its In this respect, China definitely has the upper hand.
Indicators.....................16
accession in terms of creating an environment con- Its miraculous economic transformation and strong
ducive to investment—even though it already attracts government provide investors with every confidence

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© The Economist Intelligence Unit Limited 2002 Business India Intelligence January 2002 1
Trade
in continued expansion. tion within the Asia-Pacific region, which could be has-
In the end, the statistics speak for themselves: in tened by intra-regional trade agreements (the South Asian
2000, according to World Investment Report numbers, Association for Regional Cooperation, to which India
India received US$2.3bn in FDI, China US$41bn (Hong belongs, does not hold much promise). To the extent that
Kong received an additional US$64bn, much of it funds this occurs, India may be dropped from the supply chain.
China sees the connection parked in Hong Kong in anticipation of mainland The one area in which India has stolen a march
between the WTO and opportunities). That India has little to lose in terms of on China is in computer software development and
investment FDI because it hardly receives any is cold comfort. The IT-enabled services. But envious of India’s leadership
Indian government needs some successes in this regard in IT—by the estimate of the Karnataka State Planning
in order to push through its reform agenda. Board, India’s software exports in 2000 were worth
● Competing in third markets. By and large, China US$6.2bn, China’s only US$600m—China is report-
and India target the same export markets, albeit on edly building 100 new technology institutes over the
a different scale. Although India has a narrower next five to ten years.
range of goods that it exports in large quantities, in ● Defending the home market. Since India lifted
the manufacturing sector there is significant overlap quantitative restrictions on imports in April 2001, as
in key sectors, suggesting more intense competition required in a WTO-dominated world, Chinese goods
between the two, post-WTO. have been pouring into the Indian market. ). In
One industry that could be in trouble is textiles and 2000/01, India’s imports from each of the US, Europe
garments. It accounts for 25% of the total value of and Asia declined substantially. In the same year,
India’s exports but has been badly affected of late by imports from China jumped 14.1%. China is now the
the downturn in the global economy. The phasing out largest source of imports of non-petroleum products
of the Multi-Fibre Agreement (MFA) by 2005, which from Asia (the sixth largest globally. However,
would end the system of reserved quotas for exports China’s share of the Indian import market is still rel-
of garments and textiles from developing countries to atively small at around 3% (2000/01) vs. 6% for
developed countries, might well help China capture a Switzerland, for example.
larger market share. China’s entry into the WTO ● Cracking the China market. Of course, as China’s
would certainly sharpen competition – China has tariffs come down, and assuming non-tariff barriers
lower interest rates, minimal labour problems and is follow suit, India has the potential to increase exports
going all out for low unit cost predicated on large vol- of agricultural products, marine products, mineral ores,
umes. It has scrapped mil- building materials, chemicals, pharmaceuticals, com-
Set to change lions of obsolete spindles puter software and biotechnology to China. Unfortu-
India’s leading exports to China and is modernizing its nately, Indian businesses have been slower, when
2000/01 Annual average industry with government compared to the rest of the world, in exploiting the
US$ m growth* assistance. India, on the opportunities presented by the opening up of the Chi-
Iron ore 130.2 13.4 contrary, only recently nese market. In India’s bilateral agreement on China’s
Marine products 116.0 53.2 removed restrictions on accession to the WTO, New Delhi insisted on equal
Plastic & linoleum products 102.0 50.9 investments in large tex- treatment for its banks and insurers. But the reality is
Cotton yarn etc 71.2 27.5 tile/garment factories. that India will be at the tail end of the queue because
Agrochemicals 60.6 32.5 Similarly, China’s bankers and insurers from other countries have had a
Pharmaceuticals and fine chemicals 57.1 39.4
exports of footwear, toys, head start, having entered the market several years ago.
Iron & steel 24.1 10.6
Electronic goods 20.5 60.9 leather products, artificial ● Policy catch-up. Although India has been pursuing
Machinery & instruments 20.1 47.0 flowers and other labour- a process of liberalization since 1991, and is already a
Non-ferrous metals 18.0 n.a. intensive, low-cost items member of the WTO, China’s terms of accession will
All products 830.6 20.0 are expected to increase cause it to leapfrog ahead of its South Asian rival in
India’s leading imports from China significantly following its many aspects of market opening and liberalisation.
2000/01 Annual average accession to the WTO, and The conditions China has accepted are, in some cases,
US$ m growth* India’s already relatively tougher than those India had to accept. For instance,
Coal, coke & briquettes 258.2 15.9 small export markets in India’s average rate of import duty on other WTO
Electronic goods 243.6 36.8 these commodities will be members has been reduced from an average of 71%
Organic chemicals 178.5 5.1 directly threatened. India’s in 1993 to a current average of 35% but this is still 2-3
Raw silk 94.6 8.7
fledgling electrical and times higher than the comparable Chinese rate would
Textile yarn etc. 72.7 16.3
Pharmaceutical products 70.0 -1.3 electronic product export be after accession, under the terms laid out in the US
Crude fertilizer 60.9 109.4 industry also lacks com- and EU agreements. Also, China has accepted a lower
Non-electrical machinery 60.3 11.3 petitiveness. ceiling on agricultural subsidies than India. If China
Inorganic chemicals 48.0 11.3 More strategically, has been willing to pay this high price to join the
Electrical machinery 45.9 40.0 China’s entry to the WTO WTO, it clearly sees benefits most Indian commenta-
All products 1,470.4 12.6 is likely to catalyse the tors, in government and outside, do not. Indian think-
* 1996/97-2000/01
Source: Foreign Trade & Balance of Payments, Centre for Monitoring
development of intra- ing, on the whole, remains largely inward-looking.
industry trade specialisa- ■

2 Business India Intelligence January 2002 © The Economist Intelligence Unit Limited 2002