India and China: Trade and Foreign Investment

The author discusses briefly the growth experience of India and China and describes the evolution of trade flows at the aggregate level. He considers the composition of each country’s exports and imports of goods, and documents the success of India’s software industry. He compares the foreign direct and portfolio investment flows into the two countries, and explores the connection of trade and foreign investment flows to policy changes during the last quarter century. He discusses why India continues to lag behind China and gives examples of two specific external trade issues of relevance to India and China: the Doha Round and an India-China free trade area (FTA). The paper’s chief conclusion is that China and India would derive substantial benefits from greater economic interaction.