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Wednesday, December 06, 2006

Remove iron ore and Indian exports to China will be halved

When Chinese president Hu visited India, both countries agreed to set the US$40 billion trade target for 2010. This report reveals some difficulties on the India side: India's weak industry sector cannot provide something competetive for China even China's market is so open today.

As the euphoria over Chinese President Hu Jintao's visit to India subsides, industry on both sides is waking up to the huge amount of work to be done for bilateral trade between the two nations to touch $40 billion by 2010.

Even as the two sides are studying the possibility of a regional or free trade agreement, an inter ministerial group set up by the Prime Minister's Office to formulate a policy on iron ore exports will decide the flow of bilateral trade at least in the shorter term. As on 2005, India exported 90 million tones of iron ore and as much as 83 per cent of it went to China alone.

In fact a deeper analysis shows iron ore alone has led the charge in Indian exports to China, as its share went up from 20 per cent to almost 50 per cent of total exports between 2001 and 2005. Overall bilateral trade itself achieved some much needed critical mass after 2001 as the two countries realised each others potential. In 1990 trade flows between the two countries stood at $260 million and rose to $2.988 billion in 2001 and to $17.62 billion in 2005 with a cumulative aggregrate growth of 42.6 per cent.

In such a scenario a ban or a cap on ore exports may have some dramatic but short-term impact on trade and may need redrawing some targets. “The surge in exports has only been due to ore and if it is capped or banned the buoyancy will be lost and the target of $40 billion for 2010 will not be achieved,” said Federation of Indian Mineral Industries secretary general R.K. Sharma.

But what concerns industry and the commerce ministry is that the trade deficit is growing overwhelmingly in China’s favour (see table). While ore exports have checked the deficit to some extent, it is an exhaustible resource being used by China to manufacture steel that’s export back to India. No wonder commerce minister Kamal Nath and minister of state for commerce Jairam Ramesh have been stressing the need to expand India's trade basket.

In the long run, industry is upbeat about trade prospects. “In the times to come textiles, pharma, food products, steel and chemicals will be the products that will see a jump in exports to China. Share of iron ore exports are at a peak right now and has to come down and stabilise at 10-15 per cent in the longer run,” said CII head, trade policy international agreements T.S. Vishwanath.

Ficci feels trade is already at a higher level but for the problem of logistics which needs third country involvement. “We’ve recommended setting up a core group to tackle the problem. Even if 30 per cent of indirect trade is converted into direct between the two nations, the resulting trade inflow will more than offset any uncertainity arising out of ore exports,” said Ficci Secretary General Dr Amit Mitra. The chamber has also recommended core groups on harmonisation of data, IPR rules for pharmaceuticals and chemicals and Sanitary and Phyto-Sanitary(SPS) standards for food processing.

“There’s a will to work jointly on IPR issues, which China is working on currently. We’ll have to enlarge our trade even if iron ore exports aren’t capped or banned. We can’t have a sustainable model based on that as the steel upcycle will not last forever in China,” Mitra added.

Hu Jintao's visit may not herald a revolution in trade between the two countries but it has brought a note of caution for Indian industry that trade cannot increase solely on the basis of iron ore. While the $40 billion trade target is not unachievable, it can’t be taken for granted.

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