China believes that an FTA would help allay Indian concerns about its rather sizeable trade deficit with the PRC. That is, it could lower tariffs on exports where India is strong such as information technology, entertainment (Bollywood), and other software 'n' services type trade. From the Financial Times:
China has offered to accelerate free trade agreement talks with India in a bid to balance a burgeoning trade relationship between two of Asia’s largest economies that is heavily skewed in Beijing’s favour.
Chinese officials expect trade between the two to rise to $60bn (€44.5bn, £39.5bn) this year, as the world’s two fast-growing large economies recover from the global financial crisis. Yet Indian officials describe a trade deficit that last year was about $16bn in Beijing’s favour as “politically unsustainable”, and identify it as a point of friction in a relationship key to Asia’s peace and stability.
Zhang Yan, Beijing’s ambassador to New Delhi, told the Financial Times China was preparing the ground for a bilateral trade deal with India “similar to a free trade agreement...The two countries should endeavour to reach a regional trade arrangement and take effective measures to remove trade and investment barriers,” said Mr Zhang. He said steps were needed to “improve the trade configuration” and remedy the trade imbalance across the Himalayas.
Trade between the two countries has been growing at more than 30 per cent in recent years. However, about 70 per cent of India’s exports to China are raw materials that then come back as higher value finished goods that undercut India’s small and medium-sized businesses.
India has appealed for China to open up its market to Indian goods and companies, complaining that they face considerable non-tariff barriers and seldom win state contracts. Among other measures, New Delhi wants Beijing to end restrictions on Indian exports of information technology, Bollywood films and fresh food. It also wants greater opportunities in sectors such as pharmaceuticals and energy.
Vishnu Prakash, a senior government spokesman on foreign affairs, confirmed talks over a bilateral agreement were under way. “We have been discussing a Regional Trading Agreement on the lines of an FTA with China,” he said.
India has FTAs with South Korea and the Association of South East Asian Nations, and is currently locked in negotiations with the European Union. China, meanwhile, has signed bilateral agreements with Asean, Pakistan, Chile, New Zealand, Singapore and Peru.