India - China: India’s Options to Reduce Trade Imbalance
STORIES, ANALYSES, EXPERT VIEWS
Among other issues, India, China relations are hostage to the trade imbalance in favour of the latter. In the contemporary world economy, Anup Sinha (former Professor of Economics, IIM Calcutta) writes “it is well nigh impossible to remain completely cut off from the Chinese economy. Thus, India too, despite the ongoing diplomatic and border tensions, has become dependent on the Chinese economy. China is now India’s largest trading partner.”
The total volume of trade in 2022-23 was around $117 billion, with India’s exports amounting to $15 billion and the import bill being $102 billion. The trade gap was very large at $87 billion in 2022-23. Out of India’s total imports, 40% comes from China. This, states Sinha “is indicative of a very high trade dependency on China from India’s point of view. On its part, China has been gradually reducing its demand for Indian exports. The deficit with China ($87 billion) is about 40% of India’s overall trade gap of $226 billion.”
India’s policy choices and options
Given this state of affairs, India faces a number of challenges and needs to make some critical policy choices.
Push India’s exports: One option to tackle the trade deficit “is to try and push India’s exports. Currently, India’s export basket to China consists mainly of mineral fuels, chemicals, fish products and cereals. Expanding trade in these items is difficult since China is already reducing its demand. Expanding in relatively new product categories like iron ore or cotton, in which India is estimated to have some comparative advantage, is going to be equally difficult because that would mean competing in China’s market……”
Shift India’s imports into ASEAN countries: A second strategic possibility would be to “shift India’s imports away from China and into ASEAN countries like Singapore, Malaysia, Thailand and South Korea. These nations do give China a run for its money in their ability to produce sophisticated manufactured goods at competitive prices. In fact, China sources a lot of imports from these nations. India’s import basket from China consists primarily of electrical machinery and equipment, organic chemicals, nuclear reactors, plastic items and fertilisers. There appears to be a large potential to switch imports. It is relatively easy to change import-sourcing than to push new exports into a tricky market.”
Global supply chain controlled by China: Finally, the third possibility would be to “promote the production of the goods currently imported….” For this to happen, India needs investments and therefore it “must be able to attract a lot more of foreign direct investments. However, there is a problem here. India, unlike most countries of the world, is not yet fully plugged into the global supply chain controlled by China. Unless that happens, much of the potential foreign investment may turn shy in coming because of the restrictive ability of the investments to capture full value. This possibility requires the opening up of India’s domestic market to Chinese foreign direct investments in a big way. This is anathema to the security establishment in India…..”
Chinese investments, states Sinha “are a necessary condition for complementary investments from other foreign sources and, thus, the fostering of rapid growth of modern industries in the domestic economy….”
There have been voices in the Indian government that have been calling for a return to business as usual with China. The latest Economic Survey suggested that India should allow Chinese imports and investments to boost Indian manufacturing and link India to the Chinese supply chain, which is the biggest supply chain in the world. Indian companies are constrained by the business restrictions with China. India, most believe, is on the cusp of a rapid growth phase. China, however, is experiencing a major slowdown and Chinese companies are keen to boost their exports. The moment is ripe for both economies to benefit by doing more business.
