Implications of India’s Trade Deficit and Political Linkage
Concerning linkages between economic and politics—for example, whether the border dispute was getting in the way of improving economic relations; or whether the development of economic relations was hampering a border solution,some specific questioning can be found in parliament. The issue was whether any inherent contradiction existed between India’s goals of promoting its economic relations with China and resolving the border dispute. In a 2004 discussion, Foreign Minister Natwar Singh answered such queries thus:
No, there is no contradiction. There is an instrumentality on both the sides for dealing with the border. Special representatives are discussing the border question. With regard to trade, I am glad to inform you, that our trade with China by the end of this year should touch $10 billion. So, the discussions on the border issue are not coming in the way of improving our economic relations which are doing extremely well.
But political-economic linkages took on more significance as the growing economic ties also led to a significant trade deficit for India by 2008. Until then, India’s deficit, while growing, was generally viewed as manageable. Nationalist, and to a lesser degree, realist opinion in India envision the widening trade gap in China’s favor as giving the Chinese yet another pressure point over India. In their view, China’s economic advantage is providing additional leverage over India in the political sphere—an arena where there are still serious unresolved issues. So far, however, the center of gravity seems to be on the globalist market oriented side of Indian opinion, especially given the continuing support of the government.
In 2009, under questioning from parliamentarians on relations with China, as the deficit swelled and received high media attention, Prime Minister Singh tried to quell rising fears of China by putting it in a broader context:
I should say that China is our strategic partner. We have a multi-faceted relationship with China. There is enough space—I have said so often— for both China and India to develop and contribute to global peace, stability and prosperity. We do not see our relations with China in antagonistic terms. We have a large trading relationship, we consult each other on global issues, whether in the G-20 process on climate change or terrorism, and we share a common commitment to maintain peace and tranquility on our border.
Although the deficit became a controversial issue from 2008 onwards, it is safe to say that under Congress rule and even under the earlier BJP, the approach to this was largely shared and governed by the idea that it is better to engage than confront China. A senior Indian official pointed out that although the BJP is “talking big” on China as the opposition party, when it was in power, it was a different story with Prime Minister Vajpayee instrumental in improving relations with China.
The nationalists would like to see India achieve more balance in trade by getting the Indian government to do more to help Indian businesses. They point to Chinese governmental support for business that gives them an unfair advantage. Indian national manufacturers and traditional businesses, along with sections of the strategic community, argue that the Indian government needs to push for a “level playing field.” They note that while Indian power equipment producers are operating under “unfair” conditions vis a vis Chinese companies, the Indian government is giving duty free access to the Indian market to Chinese power equipment producers. (The Indian government would respond that it is struggling to meet India’s energy needs in the most economical fashion—thus, disappointing Indian equipment producers but making Indian power generating companies happy.)
The hard nationalists among the strategic elite (and realists) see a severe lack of leverage by India over China to get redress on the economic or political side. What they recommend is that India pursues a strategy of military modernization to close the capability gap, in particular, by expanding its naval power. Some argue that India will get relief on the trade imbalance only if the Indian government is able to gain more leverage via political hardball. As one national security commentator I interviewed put it: “If we give in on Tibet and South China Sea, we’ll have no
leverage. India is keeping that leverage and should continue to do so.” Realists, in particular, see India’s economic prowess in terms of how it can be useful as “economic statecraft,” to achieve more global influence and great power status. For them, India’s economic growth is important for its strategic agenda, as opposed to the globalists and domestically-oriented nationalists. Moreover, according to some realists, one positive side effect of competing with China is that it makes India
“think big.” Ultimately though, realists would not depend on economics as a strategic asset—they value military power and “alliances” with other major powers. They would argue, for instance, that China ultimately came around to taking India seriously as a “peer” only after the historic U.S.-India 123 nuclear agreement and unprecedented India exception in civil nuclear trade. The first official reference to possible civil nuclear cooperation with India by China appeared in a joint declaration released after talks between Prime Minister Manmohan Singh and President Hu Jintao in 2006, on the heels of the 2005 U.S-India nuclear accord. For realists, it was the huge turnaround in U.S.-India relations since 2002 that has led China to turn to India more seriously—thus, in their view, economic relations can only go so far and political concerns are primary.
The globalist counter-argument is that a major reason for India’s trade imbalance is internal to India: it is India’s lack of a strong manufacturing base. India’s manufacturing exports comprise only 18 percent versus 55 percent of Chinese GDP. They urge a faster-track development of manufacturing and note that as China moves up the value chain, Indian businesses can enter these vacated spaces. So it is up to India to correct the course, not China or any other country. They also point out that India, too, is gaining generally from trade. For example, the critical telecommunication products are cheap due to Chinese cost efficiencies; likewise with Chinese power plants. As one industry expert said to me, “China is subsidizing the Indian consumer.” Other commentators argue that while the pattern of trade may be skewed, Chinese imports, like machinery, chemicals, steel and electronic goods, play an important role in India’s own industrialization process. In other words, “Simply put, a part of India’s industrialization and infrastructure development becomes viable only if it can piggyback on the price competitiveness
of Chinese industry.” Others have said that the trade deficit with China could work the other way around, too: China becomes export dependent, so India gains some leverage.
Globalists see the political atmosphere and continuing mistrust as the biggest hurdles in the economic relations. In a globalized free market system, trade deficits should not matter and political tensions are blamed for the protectionist sentiments from nationalists and realists. Many top industrial leaders seem to believe that if the suspicions between the two countries are alleviated at the political level, thorny economic issues could be dealt with. They are confident that there are many “win-win” opportunities for India and China to exploit, which are likely to be missed as a result of unfavorable politics. On the question of ties between China and Pakistan, which is identified as a major source of mistrust (along with the unresolved border), the dominant view tends to be that Pakistan is no longer a major preoccupation for China. There was little apprehension that China would seriously risk relations with India over Pakistan.
A consensus common to all the schools of thought is that India should deepen ties with countries in China’s immediate neighborhood—for both economic and strategic reasons. Little disagreement exists about the need to continue India’s Look East policies, though globalists emphasize the economic benefits and the realists underscore the soft balancing that Indian could gain against China. Realists point out that this can be accomplished with little effort on India’s side, given the threat from China that many neighboring countries currently perceive.
This article has tried to show that neither the conventional realist view nor the pure interdependence argument fully explains the impact of growing economic ties. I suggest that apart from simply the level of economic activity or strategic interaction that India has with China, the key lies in how elites in India perceive, interpret and give meaning to these factors. While a globalist worldview has emerged and strengthened in India since the 1990s, placing its hopes on economic
integration regionally and globally, the realist and nationalist worldviews continue to make the notion of economic interdependence with China vulnerable to challenges. Thus, while the interdependence adherents are too optimistic, the realists are also unduly pessimistic.
The characterization of China as both a threat and opportunity appears to have led India to adopt a much more nuanced perspective. Led by globalists in the government and industry, the challenge from realists and nationalists on the growing imbalance in economic relations in China’s favor, seems to have been managed successfully so far. However, the inescapable fact is that at both the economic and strategic levels, there is an asymmetry of capabilities between India and China. Thus,
one further question is whether the deepening economic relationship itself is changing China’s incentives toward greater cooperation with India. This analysis remains to be undertaken.
 Lok Sabha Debates, Government of India, Aug. 18, 2004.
 Lok Sabha Debates, April 20, 2010 and Dec. 21, 2011.
 Lok Sabha Debates, June 9, 2009.
 The Hindu, Nov. 22, 2006.
 World Trade Organization, Trade profiles for China and India,
 Editorial, Times of India, Oct. 17, 2013.