Now, India has a deficit when trading with China. Last
year, bilateral trade was about 66.5 billion dollars, and China exported to
India about 47.7 billion dollars. Thus, the Indian deficit was approximately 20
billion dollars. Also, it is a main concern in India when discussing RegionalTrading Arrangement (RTA) between these two countries. In order to overcome
this problem, the Prime Minister, Manmohan Singh, has welcomed Foreign Direct
Investment (FDI) from China and building up a Chinese Industrial Park in India.
India faces a deficit, which means that its imports
are larger than exports. In order to pay to exporters from China, consumers in
India have to sell local currency and buy Chinese currency. During this
process, the national income flows to China, which causes weakening of the
national economy. One way to solve the problem is that India can devalue local
currency, which will decrease imports and also lower the prices of exports to improve
competitiveness of exports. However, currency devaluation can lead to some
serious problems, such as inflation and rising domestic prices.
Therefore, India chooses to attract FDI from China and
establish a Chinese Industrial Park in India so that they can improve exports
and reduce its deficit. In the classes, we have learned about FDI that if
prices do not change, the receiving country will lower the rental/return on
capital and land as well as raise wage in the short run. In other words, the
owners of capital and land become worse off and workers gain. But in the long
term, wage and capital will not change, because land, capital and labor are
mobile, and industries have enough time to absorb the new workers by adjusting
output. For India, although it may worsen the rentals at the beginning, it will
have no impacts on them in the future. Therefore, it is a good way to solve
the deficit by attracting FDI. Additionally, India can learn experience or lessons
from other countries, like Malaysia, which has a chronic deficit and also
attract FDI.
Source:
I agree with you that attracting FDI form China is a good way to reduce India's deficit toward China. But what's the impact to India's overall trade? In the long run, it may not affect India's overall trade because wage and rental don't change. However, in the short run, India may loss advantage of relatively low wage against other Asia countries because wage is increased. India can be seen as a labor intensive country as China. Rising the wage means rising the cost of the exported industries, which is bad for India to attract FDI from other countries. And it may hurt India's exported industries because rising cost will lead to higher relative price of exported products which might decrease the amount of India's exportation and lead to deficit to overall trade of India.
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