India-China Trade: Status and Concerns – Explained, pointwise

Introduction

The relationship between India and China has become strained due to the recent clashes between the Indian Army and PLA personnel in Tawang, Arunachal Pradesh. Popular sentiment has called for a more aggressive approach in dealing with China, amid calls for snapping of trade ties. Policy experts have pointed out India’s persistent trade deficit with China. Even more concerning is India’s dependence on China for some critical goods including pharmaceutical goods and electronics. In this context, a focused approach is required to correct the India-China Trade deficit and reduce dependence on China for critical items.

What is the status of India-China Trade?

China is India’s second biggest trading partner after the United States. In 2021-22, India-China bilateral trade stood at US$ 115.83 billion. This accounted for 11.2% of India’s total merchandise trade of US$ $1,035 billion (US$ 1.03 trillion). The US was the largest trade partner with US$ 119.48 billion trade (11.5%)

Trade Deficit: In 2021-22, India had a trade deficit of US$ 73.31 billion with China. India’s deficit with China was US$ 44 billion in 2020-21, thus worsening by 66% in a year. India’s trade deficit with China has increased from US$ 1 billion to $73 billion in the past 21 years. In no year India had a surplus with China.

Source: MoneyControl

Two decades ago, India’s imports accounted for about 60% of the total bilateral trade between two countries, but now it is over 80%.

India’ Imports: During 2021-22, 42% (US$ 94.57 billion) of India’s total imports (US$ 613.05 billion) came from China. Indian import basket was the personal computer (laptop, palmtop etc), which accounted for US$ 5.34 billion in 2021-22. It was followed by ‘monolithic integrated circuits-digital’ ($4 billion), lithium-ion ($1.1 billion), solar cells ($3 billion) and urea ($1.4 billion).

Source: MoneyControl

India’s Exports: In 2021-22, India’s exports to China stood at US$ 21.25 billion, which was 5% of India’s total shipments (US$ 422 billion). Among the top commodities China bought from India included: Ores, slag and ash ($2.5 billion); organic chemicals ($2.38 billion), mineral fuels, mineral oils and products of their distillation, bituminous substances, mineral waxes ($1.87 billion); iron and steel ($1.4 billion); aluminum and articles of thereof ($1.2 billion); and cotton ($1.25 billion). Among single items, light Naphtha ($1.37 billion) was India’s most valued export item to China during 2021-22.

Source: The Times of India

What are the reasons for high India-China Trade Deficit?

The trade deficit has risen from less than US$ 2 billion in 2001-02 to US$ 73.3 billion in 2021-22. Imports from China have risen at a much rapid pace compared to exports from India, resulting in large trade deficit.

Access: Access to Chinese markets presents a significant challenge for businesses in India. China has placed certain regulations, especially in pharma, agriculture and IT, which make it difficult for Indian goods to enter Chinese market. According to PHD Chambers of Commerce and Industry (PHDCCI), on 78 products China imposes greater tariffs on Indian goods than rest of the world. These are products on which India has competitive advantage e.g., Agricultural and raw material goods, coffee, tea, oil seeds, tobacco, man-made staple fibre, vegetable textile fibre, and wool, minerals and fuels, chemicals, fertilizers etc. among others.

Competitiveness: Chinese goods have cost competitiveness over India goods. Chinese political economy is the major factor. Policy decisions and implementation faces lesser opposition e.g., land acquisition is quick. Additionally manufacturing is provided with various incentives and subsidies. Conversely in India, there are high land acquisition costs, prolonged litigations and delays in getting permits etc.

Demand: Demand for Chinese goods is robust. China produces a very wide range of goods, from raw materials and intermediate good to final finished products. Imports from China stretch across the board — from capital goods to intermediates to raw material used in industries like electronics, organic and inorganic chemicals, medical and pharmaceutical products, fertilisers, and materials used by the leather industry.

What are the concerns associated with high India-China Trade Deficit?

Weaponisation of Trade and Security Concerns: India-China relationship is strained due to border dispute. India is dependent on China for many critical items e.g., India imports ~70-80% of Active Pharmaceutical Ingredients (APIs) from China. APIs are used in pharmaceutical industry for manufacturing medicines. Similarly, concerns have been raised about India’s rising dependence on China for lithium batteries used in Electric Vehicles (EVs). It will create future dependence on China as India undergoes mobility transition from fossil-fuel based vehicles (Internal Combustion Engines, ICEs) to EVs.

China can ‘weaponise’ the trade, like Russia’s decision to cut gas imports to the EU/West. China has resorted to such practices in the past, e.g., After Liu Xiaobo was awarded the Nobel Peace Prize in 2010, Chinese trade with Norway was severely reduced and did not recover until after the king of Norway visited China in October 2018. It used its monopoly of rare earths to stop their supply to Japan in 2010. Chinese curb on import of goods can severely dent Indian economy.

Economic Impacts: High trade deficit drains India’s foreign exchange. Import of cheap Chinese goods limit expansion of India’s domestic industry. Small manufacturers find it difficult to compete with Chinese goods and are forced to shut down.

What can be done to bridge the Trade Deficit?

Enhancing Domestic Production: (a) India should concentrate on production of commodities in which it has a comparative advantage e.g., India has a strong and competitive chemical industry, and steps should be taken to produce APIs domestically; (b) Focus should be on labor-intensive industries which will also create mass employment opportunities e.g., apparel and toys; (c) There are approximately 36 sub-sectors where India can reduce reliance on Chinese goods. These sectors together account for around US$ 35 billion in imports. India’s domestic market has production capabilities in these sectors. Hence, dependence on China can be readily reduced without substantial additional investments.

Export Enhancement: Targeted policy approach is required to support exports. New Foreign Trade Policy has been delayed considerably and should be formulated on priority. Government should focus on reducing tariff and non-tariff barriers to exports (like inverted duty structure). New FTAs should be negotiated keeping in mind India’s competitive advantage. All stakeholders including industry bodies like FICCI, CII, ASSOCHAM etc. should be kept informed and their feedback should be taken during the negotiation phase of the FTAs.

Government Support: The Government should focus on lowering the cost of doing business including compliance costs, logistics cost, land acquisition costs etc. There is need to diversify source of imports and build domestic capacities. India can adopt approach of the EU and the US e.g., The EU has unveiled a $221 billion plan to wean itself off Russian oil and gas. The US Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act 2022 includes a $52.7 billion subsidy for domestic semiconductor production. India has pledged to spend more than US$ 26 billion on the production-linked incentive (PLI) scheme to encourage companies to ‘Make in India’. Focus should be on implementation and achieving outcomes. The Government should implement the recommendations of the SCALE Committee.

Public-Private Sector Cooperation: Both the private and public sectors in India require a comprehensive strategy to deal with China. Economic experts contend that China operates as a “system” in many respects when dealing with other countries, consisting of both the government and industry. Indian businesses and the government would benefit greatly from concerted efforts to collect data and insights about the Chinese markets. This will help develop appropriate strategies for penetrative Chinese markets.

Conclusion

The persistent trade gap with China is matter of urgent concern. The Government has articulated the vision of Aatmanirbhar Bharat about making India self-reliant. Based on this vision, Government should take all possible steps to make India’s manufacturing sector and domestic goods more competitive. The Government should also enhance engagement with like-minded friendly countries like Japan, Taiwan etc. to address the India-China trade gap. This will help safeguard Indian economy from possible Chinese aggression in the future.

Syllabus: GS III, Indian Economy

Source: Indian Express, Mint, Economic Times, PHD Chamber of Commerce and Industry