The trade target story: How UPA government helped China grow at India’s expense

“In my third term, I promise that India will become the world’s third largest economy,” the Prime Minister stated in a recent address to the Lok Sabha. This is “Modi ki guarantee,” he explained. In the recent decade, India has risen six positions, from 11th in 2014 to sixth in 2024. The Prime Minister has now set an aim for 2029 to become India the world’s third largest economy. According to the IMF’s most recent predictions, it might happen much earlier, by 2027. This would put the Indian economy behind only China and the United States. Compare this to the 2043 aim set by the previous UPA administration when it presented its final budget in 2014.

However, senior Congress leader P Chidambaram, who delivered the budget in 2014, was not satisfied. “China’s GDP is five and a half times higher than ours,” he reminded us. Now, Chidambaram’s figures are slightly off. China’s GDP is just under five times ours, not five and a half times. But that’s not the point. There is a significant disparity between India and China. We must face this difficult fact.

But how did things get this way? To begin, consider the following two unexpected facts. In 2004, India’s GDP was roughly 37% of China’s size. By 2014, it was only 19%. In other words, during the UPA years, India’s economic size in relation to China was reduced by half. Second, do you ever notice that so much of our merchandise appears to be manufactured in China when you go shopping, whether online or in person? But it wasn’t always this way. Would you believe that in 2004, India actually had a trade surplus with China? There was a $1.75 billion surplus in 2004. By 2014, it has developed into a $38 billion deficit! So, how did we get so dependent on China? Here is the story.

 

Following the 2004 elections, the Congress party unexpectedly rose to power. At the time, the world was entering an era of rapid growth. For decades, India has been an economic underperformer. But now, everyone was talking about the BRICs (Brazil, Russia, India, and China). These four growing powers were expected to lead the globe. Everything was trending upward: markets, company confidence, and economic growth rates. Is India on track to become an economic superpower? The UPA government couldn’t believe their luck.

However, the Chinese were only too happy to capitalize on the UPA’s excitement. In April 2005, Chinese Premier Wen Jiabao paid a visit to India. By the 2004-05 fiscal year, India was already running a small trade deficit with China of approximately $1.48 billion. The Chinese leader must have felt especially welcome in India, given that the UPA relied on the backing of the Communist parties to maintain power. That’s when the UPA settled on its first “trade target” with Beijing. At the time, India’s trade with China amounted to about a billion dollars per month, or over $12 billion annually. The two countries agreed to increase this by at least $20 billion over the next three years.

But this “target” was met shortly. Too fast, in fact. Chinese President Hu Jintao visited New Delhi in November 2006. India quickly agreed to boost the “trade target” to $40 billion annually. This commerce was not very ‘bilateral’ in nature. Indian markets were inundated with Chinese goods. The trade gap expanded dramatically. In fact, India’s “target” had evolved into a pledge to deliver the Chinese more money!

Surprisingly, the UPA government did not appear to notice at all. Prime Minister Dr. Manmohan Singh even brags about it during his visit to China. “Our trade target of $20 billion by 2008 was met two years ahead of plan. The increased objective of $40 billion by 2010 is likewise expected to be met two years ahead of schedule,” Dr. Singh told a business leaders’ gathering in Beijing in January 2008. Best of all for the Chinese, Dr. Singh stated in his address, “We therefore propose to set more ambitious targets.”

And he did. During his three-day visit to Beijing, Dr. Singh increased the trade aim to $60 billion. By this period, India’s trade deficit with China had reached $9 billion. There were whispers of alarm about this. But the UPA government insisted that there was nothing to be concerned about. Apparently, the Chinese agreed to deploy regular “buying missions” to India. That would close the deficit. Now we’re wondering if any of these “buying missions” ever occurred, and what the outcomes were. It does not appear like anyone was paying close attention to anything.

The Indian media and civic society likewise failed to raise a warning. In January 2008, MK Venu wrote in the Economic Times that China was on track to supplant the United States as India’s top “trade ally”. Even the wording is surprising. The common term is “trade partner”. It was meant to be about business. Regarding cold hard cash. Using the word “ally” in this context implies an unexpected level of emotional attachment or wishful thinking. MK Venu was also an editor at The Hindu and the founding editor of The Wire. So this is a true reflection of establishment mentality at the time.

However, the UPA government persisted with its gravity-defying mindset. Many initiatives were thrown off track by the 2008 global financial crisis. But not the UPA government’s intention to continue expanding trade targets with China. In December 2010, Chinese Prime Minister Wen Jiabao paid another visit to India. This time, India decided to increase its trade objective to $100 billion by 2015! For as long as the UPA ruled, the Chinese never returned empty-handed.

By this point, the gap between India and China had widened dramatically. China had successfully established itself as the world’s second largest economy. India, which was ranked 12th in 2004, had barely risen to tenth place. China’s days of “peaceful rise” were plainly past. They were preparing to utilize heavy power. And they use their economic might to get their way around the world. In this circumstance, India’s increasing “targets” for what was effectively one-way commerce made little sense.

However, if Dr. Manmohan Singh wasn’t diligent enough, some sectors of the UPA government went entirely crazy. In May 2010, then-minister Jairam Ramesh paid a visit to China. He also criticized the Indian government for being “alarmist and paranoid” about Chinese investments. “We are imagining demons where there are none,” Jairam Ramesh warned Indian security officials from Chinese soil. These statements prompted protests, particularly in Arunachal Pradesh. Many people were concerned that India will allow the Chinese to invest in massive power and water projects in the key border state claimed by China. Finally, the Prime Minister reprimanded Jairam Ramesh for his comments. However, when top ministers publicly claim that the threat from China is fictitious, it reveals a lot about the UPA leadership.

By 2011, Chinese intrusions across the border had become routine. Meanwhile, India made tremendous headway towards its $100 billion trade target with China, hitting $74 billion that year. “Our government does not share the view that China plans to attack India,” Dr. Singh told the Lok Sabha in December 2011.

In case you’re wondering, the 2015 deadline for the $100 billion trade aim between India and China was missed. Perhaps due to a change of leadership in 2014.

In retrospect, Dr. Manmohan Singh may have made the same mistake as Jawaharlal Nehru many decades ago. In the early 2000s, he was swept away by a romantic vision of a new world in which developing countries will overthrow Western control. In this scenario, India and China were allies, not competitors. Much as Nehru would have felt when European empires collapsed following World War II. In a postcolonial society, India and China were expected to be friendly. But this is not how human nature works. Every country protects its interests selfishly.

“Even though we regard ourselves as friends of China, the Chinese do not regard us as their friends,” Patel told Nehru in a letter written in 1950, only a month before his death. Nehru most likely failed to internalise these words. Much like Dr. Manmohan Singh, many decades later.

 

So, for a decade, India continued to establish “trade targets,” resulting in ever-increasing deficits with China. Goods from China swamped Indian markets. A trade surplus of $1.75 billion with China in 2004 was reduced to a loss of approximately $1.5 billion in 2005. By 2014, the deficit with China had increased to $38 billion, or up to 25 times. Repairing the damage created by this habit will take many years. From 37 percent in 2004, India’s economic size relative to China fell drastically to 19 percent by 2014. Since then, it has risen to approximately 21%. However, the gap is perilous and will take several years to close.

In February 2014, then-Finance Minister P Chidambaram stood up to deliver his budget speech in the Lok Sabha. “I wonder how many people are aware that India’s economy is the world’s 11th largest in terms of GDP. “There are great things in store,” he said, seeming pretty satisfied with himself. We wonder if he noticed that India had only moved up one spot from 12th place in 2004. Meanwhile, all three other BRIC countries, including China, had left us behind. In 2004, both Brazil and Russia trailed India in terms of GDP. Now, both had moved on.

In his 2014 budget speech, Chidambaram predicted that India would become the world’s third largest economy within three decades. On February 17, 2014, the Ministry of Finance issued a press release describing the UPA government’s path for achieving this target by 2043. With all due respect, we believe that India cannot afford to wait so long. Let us hope that India will be the third largest economy by 2029. This would be 14 years ahead of plan. At least Chidambaram was correct about one point in his 2014 address. That year, India was in for some exciting times.

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