Stung by a rapidly widening trade deficit with China and Beijing’s continued rebuff of Indian attempts to reset the equation, the Congress-led government is fleshing out a draft action plan to seek combat its Asian rival.

India’s trade ministry has consistently raised “serious concern” that the India-China deficit may become unsustainable. India’s trade deficit with China is forecast to balloon to US$278.5 billion by 2014, a 20-fold increase from US$14.3 billion in 2004. At US$40.8 billion, Chinese exports to India were nearly double the US$ 20.8 billion in Indian exports to China, mainly driven by cotton and iron ore.

The action plan includes a multilateral strategy to get its neighbor to not just trade but also “invest and produce” here. According to Ministry of Commerce sources, India is also looking at raising duties on tier-two products (where it has minimal dependence) and creating non-tariff barriers where dependence is high.

A concerted effort is also expected be made to ensure that Chinese state-owned procurement agencies buy in bulk from Indian companies. Overall, the ministry will also seek to harness the strengths of the domestic market to gain access into Chinese markets in pharmaceuticals and information technology, its two strongest areas.

As an indication of the seriousness with which the Indian government regards t he problems, senior members from the Department of Commerce and other ministries including Power, Telecom, IT and Heavy Industries met recently with the deputy national security advisor to devise the contours of the action plan, which is to be firmed up over the next few weeks.

“A large widening of the trade deficit can potentially result in payments difficulties,” said the ministry in a strategy document. “Such a situation is simply unacceptable because it may jeopardize the entire growth process,” it said.

Broadly, New Delhi’s China plan is designed to bolster areas where India is not competitive, how duties could be realigned to bring about a level playing field, how Indian industries could whittle down their dependence on China’s semi-finished products and how India’s advantages could be harnessed to maximum gain.

Efforts will also be made to diversify the bilateral trade agenda with a renewed emphasis on manufactured goods. “All this will need to be done within the ambit of WTO since India cannot extend unfair treatment to Beijing given the fact that both India and China are WTO members,’ said the source.

New Delhi’s disquiet over Beijing’s commercial acumen is hardly new. But this is the first time the government and its ministries are working urgently to tackle the trade imbalance and its adverse domino effect on Indian industry.

While India's merchandise trade with China rose from US$12.70 billion in 2004-05, the figure reached US$42.37 billion in 2009-10. From US$1.48 billion in 2004-05, China’s trade surplus grew to US$19.21 billion in 2009-10. Imports from China have gone up by a staggering 365 per cent in 2010-11.

Prime Minister Manmohan Singh brought up the issue during Chinese Premier Hu Jintao’s India visit last year, telling Hu that the trade imbalance in favor of China was a “matter of concern” to India and he sought greater market access to bridge it. The issue resurfaced yet again when the two leaders met on the sidelines of Brazil-Russia-India-China-South Africa (BRICS) Summit this April.

India has repeatedly sought more access in Chinese markets across the board so that the gap could be reduced. Although China has assured India that it would give access through government contracts in sectors like pharmaceuticals and IT, penetration into the Chinese market has been far from easy.

Frustrated, India has also occasionally barred Chinese investments in certain sectors citing “national security concerns”. In December 2009, India banned import of all mobile phones from China which did not have IEMI numbers (specific numbers that a handset carries which enables tracking it).

The Indian government is also irritated with China for not fulfilling its promise to import more IT, IT-enabled services and pharmaceutical products. China's Health Minister Chen Zhu last year welcomed Indian pharmaceutical companies, known for their cost-competitiveness, to help address the growing demands of the Chinese market. But India’s creaky infrastructure, erratic policies and a shortage of skilled labor have hampered that ambition.

An undervalued yuan has further hurt India by tilting the trade balance decidedly in China’s favor. The rupee has retreated almost 6 percent to 6.87 per yuan from last year’s high of 6.48.

The trade imbalance, however, is not all China’s fault. Indian iron ore exports to China plummeted by more than half in the last year as the southern Indian state of Karnataka banned iron ore exports due to a political scandal while the western state of Goa ceased ore exports due to the monsoon. India is the world’s third largest iron ore supplier, with most of its exports going to China, which houses the world’s largest steel industry.

In the wake of the export ban, not only are domestic Indian iron ore manufacturers hit badly but international prices too, have risen almost 4 percent leading China to seek newer markets such as Australia and Brazil to source from.

Analysts predict that in the long term, the uneven bilateral trade could mean that India will look to impose trade barriers on Chinese commodities in order to rebalance trade and protect domestic manufacturers.

“If that happens,” says Pratap Bhasin of a Delhi-based chartered and auditing firm, “it will be difficult for the two countries to meet their US$60 billion bilateral trade target by this year-end and Indian infrastructure, IT, telecom and engineering industries that rely on cheaper Chinese equipment could get affected.”

India’s infrastructure development has not kept pace with the demands of its manufacturing. “Power is in short supply, highways are clogged with traffic and ports are too crowded,” a recent Reuters report said. “The Chinese government has spent a huge lot of money, creating cities where the vendors will be placed, creating infrastructure there. Those things are not in focus in India.”

However, Indian officials are hopeful that with China set to accelerate a US$2-billion reform in its healthcare sector in the coming months, Indian pharmaceutical companies could get to share the spoils.

“While the intention seems good, bureaucratic incompetence is India’s biggest bottleneck,” says Naveen Modi, a Delhi-based industrialist with business interests in Shanghai. “I won’t be surprised if things are soon in disarray with ministries quibbling over whose opinion is accepted in the final policy and action plan.”

Rather than obsessing over China, why doesn’t India focus on bolstering its manufacturing sector, job skills, governmental transparency and organizational efficiency? Modi asked.

(Neeta Lal is a New Delhi-based journalist; neetalal@hotmail.com)