Economic Highlights

New Delhi, 10 April 2010

US, China Policies

INDIA MUST GUARD AGAINST ONSLAUGHT

By Shivaji Sarkar

India needs to be cautious in its dealingswith the US on the one sideand Chinaon the other. More so when it is time for the country to provide a global model.However, it has little to cheer from the visits of US Treasury SecretaryTimothy Geithner or External Affairs Minister SM Krishna’s visit to China.

Washington is eyeing for a $ 600 billion investment in India’sinfrastructure, as the returns are very high. Closer ties with China saddles India with a massive trade deficitof $ 15.8 billion. It is no better for the US,which has a trade deficit of $ 227 billion as it imports $ 296 billion worth ofitems from Chinaand exports only $ 69 billion products. This happens as Beijing keeps its currency, the Yuanartificially low.

AsNew Delhi accepts large investments from the US ininfrastructure, it suffers on two counts – cost of infrastructure developmentgoes up and the country’s manufacturing sector continues to remain weak. However,Beijing has cleverly taken this advantage fromthe US.The major merchandise export to the USfrom Chinais from the manufacturing sector that produces at extremely, often artificial,low costs. It is hitting the USeconomy hard and if Indiadoes not learn the lessons from the US, then it would hit its economy harder.

TheUShas primarily suffered because it ignored the growth of the Chinesemanufacturing sector, which was being fuelled by US imports. China simultaneously took the economic andfinancial initiative to create a safety net for itself so that the US could notsuddenly withdraw from its market. It invested heavily to create a dollarreserve. In November 2009, China owned$789 billion in the US Treasuries, 33 per cent of the total $2.4 trillionoutstanding. This makes it the largest owner. Many are concerned that it gives China politicalleverage over US’ fiscal policy.

Thehigh trade volume China haswith the US also provides itthe base for low-priced manufactured product exports to India, which has not learnt from the woes of theUS.America’s trade deficit with Chinameans that the UScompanies that can't compete with cheap Chinese goods must either lower theircosts or go out of business.

It has already happened to many sectors in India, includingelectrical, electronics and toys. Many Indian companies either have gone out ofbusiness or have become houses that trade in Chinese goods. Either way it leadsto losing of jobs and the edge that manufacturing sector gives to a country.

TheUShas learnt it the hard way. Indiais not in that kind of a tight spot but still it has not taken any step toavoid getting into the Chinese quagmire. It is indeed surprising that New Delhi should woo China for closer trade ties. Nobody knows why India supplies iron ore to China atridiculous export duty of one per cent. It is virtually subsidizing the Chinesemanufacturing sector, which is wrecking havoc with the Indian economy. India has no obligation to supply iron ore to China, which it uses also for building arms andother strategic weapons, which are deployed on India’s borders and facilitatesmovement to the Tibetan plateau.

India has permission for exporting onlythree of the agreed list of 17 fruits and vegetables. Such exports hardly addany value but Commerce Minister Anand Sharma has apparently cowed down and almostbegged Chinato increase that basket recently. However, Beijing has refused entry to aviation andentertainment sectors as well from where returns could be high.

Alow cost Yuan is detrimental to the Indian economy. Worse, India has notsought any revision of the value of the Yuan against the Rupee. It has neithertaken any trade or diplomatic initiative to contain China. And, larger trade with China mayfurther stymie growth of the Indian manufacturing sector.

Additionally,the way it is gleeful over the US’moves to invest in Indiais yet another danger. The policy makers in New Delhioverlook the recent announcements of US President Barack Obama of encouragingthree emerging economies – India,China and Brazil – to buy more goods from the US to doubleexports in five years. US Commerce Under-Secretary for International Trade,Francisco Sanchez said this week: “That's where the money is and that's wherewe need to focus”, noting that 95 per cent of the world's consumers liveoutside the US.

TheUS with high unemployment rate of 10 per cent needs that strategy. There hasbeen minor increase in jobs in the private sector as the US has decided to pushits $1.4 trillion budget deficit. It is also pushing its economy with virtualzero interest rates. High deficits not only in the US but also by all majorEuropean countries threaten an uneven global competition. It would force Indiato hedge against artificial values of most global currencies and price itsgoods uneconomically.

Indiahas not protested at the high budget deficit trends of these countries. It haspushed up crude prices to $ 85 a barrel from $ 65 to 69 a week ago as such deficitscreate false hope of a US recovery, which is just not happening. It certainlyhelps the oil companies, most of which are based in the US, rake in hugeprofits. In other words, India and other countries would be subsidizing USbudget deficits.

TheUS has recently stated that it is borrowing less form the rest of the world. Infact, it has honed up its strategy in such a way that it does not need toborrow and the rest of the world would subsidise its economy as it adoptsdevious techniques. Importantly, India needs to be aware of this and mustsharpen its policies to guard against such subtle onslaughts. More so when despitea thaw in the downtrend, job prospects in India have not brightened up. That isthe key to a recovery.

IfIndia falls prey to the policies of the US and China, the prospect of its ownrecovery and consequent growth might get muted. The policy makers need to standup firmly and chalk out an aggressive strategy to shield the country againstsuch evil maneuvers. The country does not need to succumb to the temptation ofincreasing low-cost exports just to shore up statistical presentations. – INFA

(Copyright, India News and Feature Alliance)