Anil K. Gupta, University of Maryland and China-India Institute

Can Xi Jinping and Narendra Modi establish an economic partnership?

Anil K. Gupta is Professor of Strategy, Globalization & Entrepreneurship at The University of Maryland’s Smith School of Business, and Co-founder of the China-India Institute.

Anil K. Gupta

The India-China economic relationship woke up from deep freeze around 2000. It has warmed at a phenomenal pace since then. China-India trade grew at an average annual rate of over 29% — much faster than the 19% annual growth rate in either China’s or India’s trade with the world at large or the 10% annual growth rate in world trade. At the same time, however, the trade relationship has been very unbalanced with China enjoying a large and growing trade surplus vis-à-vis India.

The economic relationship between the two countries is at the cusp of transformation — from one defined primarily by trade to one defined heavily by investments. Leaders on both sides accept that unbalanced trade can be neither sustained nor scaled up. Thus, there needs to be a shift in the focus of the economic relationship — from trade to investment.

The timing is almost perfect. The Chinese have worked with Modi earlier and believe that, as in Gujarat, he’ll focus heavily on infrastructure investments throughout India. They also believe that he can walk the talk. Over the next five years, India should attract about US$250 billion in foreign direct investment (FDI). Of this, US$35 billion may come from Japan — as Abe proposed during Modi’s recent visit to Japan. However, that still leaves vast opportunities for Chinese companies. On the Chinese side, the leadership is extremely keen to see Chinese companies go global. India provides vast opportunities right across the Himalayas.

Until the border disagreements get resolved, the Chinese are unlikely to be invited to invest in in the more “sensitive” sectors of the Indian economy such as nuclear energy, operation of rail networks, and so forth. This would still leave vast opportunities for Chinese investments — especially in the power sector and manufacture of high speed locomotives and rolling stock.

I expect that the starting moves will be agreements between the two sides regarding the development of industrial clusters designed specifically for Chinese companies. These industrial clusters would include single window clearance facilities, needed infrastructure and conveniences of daily life such as Chinese schools and restaurants. Such industrial zones would eliminate many of the tangible and intangible constraints that get in the way of Chinese investments. I fully anticipate concrete agreements regarding at least two industrial clusters, one of which would be in Gujarat. The industrial clusters would then serve as platforms for manufacturing investments by companies such as Shanghai Electric and China CNR.

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