India and China have agreed to grant permission to each other’s banks to open branches and representative offices. China hopes that at least one of its banks will be allowed to operate in India. In return it has agreed to take measures to promote greater Indian exports (especially of pharmaceuticals and IT) to China, apart from ensuring speedier completion of phyto-sanitary negotiations in agro products.

These measures are long overdue to redress the growing and unsustainable trade imbalance that has emerged between the two countries. For now, India has taken the view that Chinese imports help Indian industry remain competitive and so are desirable. But if the two countries have to start talking about a Free Trade Agreement, some of India’s trade concerns will also have to be addressed.

Reducing India’s trade deficit of $20 billion in a bilateral trade of $60 billion would not be easy since China’s share in India’s top 5 exports is miniscule. China hardly imports India’s top two export products - gems and jewellery and petroleum products, and its share in India’s electrical and non-electrical machinery exports is hovering in the low range of 3-4 per cent. The record is worse when it comes to other important export products like apparel, pharmaceutical and transport vehicles, the other three booming Indian export products. Although India exports items such as pharmaceuticals to developed European and American markets, the Chinese market remains largely closed.

Apart from being one-sided, India-China trade follows the colonial pattern: China imports raw materials from India and exports finished products. The deals signed with Wen include large ones in the power sector, and a large proportion of India’s new 3G telecom networks are to be run on Chinese equipment. But China seems to be in no hurry to reciprocate. Though China accounts for 6.5 per cent of India’s exports, the flows are heavily skewed with just two products - minerals and cotton - accounting for 60 per cent of the flows. If one excludes these two primary products, China share in India’s exports is a mere 3 per cent.

Interestingly, the two countries attract more than $100 billion of foreign investment each year, but have less than a billion of investments taking place between them. Although the Chinese premier has called for easier procedures to move capital and people across the two countries, this is not likely to happen anytime soon.

This is because investment and capital flows would require a much higher degree of trust and understanding of each other’s core interests. It is not possible to segregate political and economic relations beyond a point. And political relations between the two great neighbours remain “very fragile”, easily damaged and “difficult to repair”, as China’s ambassador to India Zhang Yan put it.

India is rightly worried that China is becoming ever more assertive along their 4,000km-long shared border. China is already occupying large tracts of Indian territory. Chinese incursions into Arunachal Pradesh and Ladakh have progressively become deeper and more audacious. China has cheekily started calling Arunachal Pradesh ‘Southern Tibet’ and objected to construction of a dam there by India. China has dropped its official policy of neutrality over Kashmir - by deploying soldiers and construction workers to Pakistan-run parts of the territory, and by refusing to issue visas (or only ones stapled into passports) to Indian Kashmiris visiting China. It is planning to build large dams on rivers that flow from Tibet into India, notably Brahmaputra, which will give China a strategic advantage over India.