Chinese Toys, American Apples...

Focus during the impending China visit of PM Modi will be on sorting out the border disputes. But economics will not be far behind. Commerce Ministry sources have already asked China to open up her markets for Indian products especially in pharmaceuticals, agricultural produce and software. Prime Minister Modi also wants China to make more investments in India. India's trade deficit with China continues to increase, India exported goods worth mere 17 billion dollars last year to China against imports of more than three times that figure at 54 billion dollars. Modi wants to adopt a two-pronged approach of increasing exports and inward foreign investment to bridge this imbalance.

The foreign trade policy of any country consists of inward flow of dollars from exports and foreign investments; and outward flows of dollars for imports and accumulating foreign exchange reserves. India's policy is to obtain more dollars from foreign investments and use them for imports of goods for consumption like Chinese toys, American apples and Australian coal and Saudi oil. China's policy is entirely different. China has kept its currency renminbi low so that exports are buoyant and imports are less. A low renminbi means that Chinese importers get fewer dollars for their renminbis. Consequently US imports such as those of Washington apples into China are more expensive. The huge earnings of dollars from buoyant exports are being used to buy US Treasury Bills. China purchased 107 billion dollars worth of US T-Bills in the first five months of 2014. This is equal to about one third of India's total foreign exchange reserves of 300 billion dollars. China's policy is to throttle domestic consumption for increasing its strategic power over the United States. Huge holdings of US T-Bills mean that the US economy is at the mercy of the Bank of China. The Bank of China can start selling the T-Bills in the global market. The US Federal Reserve Board will have to print dollars to pay for these T-Bills. That will increase the supply of dollars in the world economy and lead to reduction of its price. That will bring the US economy crashing down just as an entrepreneur's world comes crashing down when the bank sells the house mortgaged as collateral security.

The Chinese approach of buying US T-Bills throws light on the character of India's policy. India is increasingly mired into debt since it is receiving huge amounts of dollars as foreign investment. Foreign investment is a debt. Indian Government guarantees that foreign investors can take out their monies from India whenever they wish. Last year there was a mayhem in Indian share markets when the US Federal Reserve Board increased the interest rates and that led to foreign investors selling their holdings and the Sensex crashing. The remittances made by foreign investors had simultaneously led to the rupee slipping to Rs 70 to a dollar. That event clearly shows that foreign investment is a kind of debt that can be recalled at the whims of the lender. The foreign investment taken in by India is fundamentally different from that taken in by China. Beijing takes in less dollars from foreign investment than it sends out for the purchase of T-Bills. Hence China can easily sell its huge holdings of UST-Bills to obtain dollars if foreign investors decide to exit. China is like a prudent moneylender who takes fewer loans than he gives out. China is safe.

The different approaches to foreign trade taken by India and China are of momentous significance. India is taking in increasing amounts of foreign investment so that it can pay for imports. India's policy is like that of head of the family mortgaging one's house to buy expensive consumption goods like cars, TVs and Chinese toys. China's policy is exactly the opposite. China is cutting domestic consumption to lend money to the US and establish its control over that country.

Modi may have ambitions to make India a superpower. Unfortunately, however, the policies espoused by him will make India a super debtor.

In truth, China is destroying her rivers, air and soil to produce cheap goods for exports. In this situation India has a choice either to destroy her environment and make cheap products as done by China; or it has to impose an "environment import tax" on Chinese goods.


Vol. 47, No. 41, Apr 19 - 25, 2015