Of late, New Delhi has responded to border skirmishes with China, which eventually took a deadly turn, with policy action that aims to make its economy more insular with respect to external shocks. In light of these events, here’s delineating a know-how of India’s trade relations with its neighbour.
China is Asia’s largest economy and the world’s second-largest, with a Gross Domestic Product of about $13.6 trillion in 2016. India is currently at number three in Asia at $2.7 trillion. From supplying industrial components and raw materials for India’s industries to interconnectivity investments in India’s startups and technology firms, China is India’s biggest trading partner after the United States. The rapid expansion of India-China bilateral trade since the beginning of this century have propelled China into emerging as India’s largest goods trading partner, a position which China has been holding since 2008 till today.
In the recent past, India and China have been engaging in conversations over a few commercial and economic issues; a Bilateral Investment Treaty has also been in the pipeline, but considering the current scenario of building tensions between the countries, its prospects seem to be getting bleak. India and China have also been working on the areas of cooperation in the oil and gas sector to leverage the sheer size of the market of two countries. The two nations have also entered into a social security agreement last year, keeping in mind the steady increase in the number of professionals being employed from both countries in the other.
China accounted for over 5% of India’s total exports in the financial year 2019-20 and more than 14% of imports - enumerating India’s huge running trade deficit with China. Data compiled by BloombergQuint from China Global Investment Tracker showed Chinese FDI into India at $4.14 billion in 2019, however, China’s commerce ministry pegs the figure at $8 billion for the fiscal year 2018-19. According to Invest India, there are around 800 Chinese companies in the domestic market.
While flourishing trade with China has brought with it all the advantages such as the availability of low-priced items in India, it has also led to the biggest single trade deficit that India is running with any country it trades with. The trade deficit concerns with respect to China are a double-edged sword. On the one hand, is the fact that the size of the deficit is very large. And, on the other hand, is the fact that the imbalance in the balance of trade has continuously been increasing year after year. The deficit has reached USD 58.04 billion in 2018.
India’s trade deficit with China was roughly $57 billion last year, a giant figure when bilateral trade totals just $92.5 billion. About half of India’s electronics imports come from China, as do two-thirds of the materials it needs to make drugs for its lucrative generic pharmaceuticals sector.
Growth in bilateral investment between India and China, however, has not kept pace with the expansion in trading volumes between the two countries - while both countries have emerged as top investment destinations for the rest of the world, mutual investment flows are yet to catch up.
According to India’s systems, the growth of trade deficit with China can be attributed to two factors: a narrow basket of commodities, mostly primary, that we export to China; and market access impediments for most of our agricultural products and the sectors where we are competitive in, such as pharmaceuticals, IT/ITeS, etc. Our predominant exports have consisted of cotton, copper and natural gems. Over time, these raw material-based commodities have been overshadowed by Chinese exports of machinery, power-related equipment, telecommunication equipment, organic chemicals, and fertilizers.
Trade imbalances are driven by market forces and lead to global economic growth. The harm or benefit of trade deficit depends on the reason it exists. If it is the cause of inflationary pressure or is used to meet current consumption, it is detrimental to the current consumption, it is detrimental to the economy. However, if the deficit is used to finance long-term investment and boost future economic growth, it is beneficial.
Trade deficits can cause problems in countries with weak economic systems as free capital flows might destroy domestic production. But in other economies, trade deficits may not pose a challenge and even (arguably) boost economic growth. In the U.S., for example, there have been certain periods of strong economic growth which come at times of a widened trade deficit, as consumers and businesses buy more products and services from abroad, and foreign investors seek to put their money to work in the U.S. India, similarly, has the opportunity to leverage its position in this context, to create a strong ecosystem within its economy which at some point in the future, may work to its benefit.
Further, India also has limited trade connectivity with the rest of South Asia, despite numerous Free Trade Agreements (FTAs) in place. India should consider enhancing the interconnectivity in the region using intra-regional trade. The ensuing economic growth can help reduce India’s overall trade deficit, divert some of the dependency on China and also raise the opportunity cost of conflict for all the stakeholders involved.
India’s trade with its immediate neighbourhood has ranged between 1.7% and 3.8% of its global trade, which remains dismally low despite the immense potential in the South Asian region. While there are agreements such as the SAARC preferential trading agreement and the Indo-Sri Lanka Free Trade Agreement, the presence of high trade barriers such as tariffs, the persistence of informal trade, and non-trade barriers have hindered the complete engagement of the scope of the region in terms of trade.
India’s international trade policy can be better strengthened by involving countries such as Sri Lanka, Myanmar, Bangladesh, and Sri Lanka by factoring in the concept of comparative advantage as specialisation and building value chains can boost the intra-regional trade to mutual benefit.
Considering the current tensions between India and China, it becomes imperative to study the sort of leverage India has on the trade front when it comes to China as a way to counterbalance the military situation, and for it to tread with caution. This is a precarious notion also because the massive trade deficit in China's favour indicates a significant reliance of Indian supply chains on Chinese imports - which could stifle manufacturing in India if a rash policy decision were to be made.
Views expressed are solely those of the author.
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About the Author
Bhavya Pandey is a student of Economics at Daulat Ram College, University of Delhi. A voracious reader and declamatory writer, she has grown up exploring and opining on a plethora of subjects ranging from environment to economics. She is a trained Indian classical dancer in Kuchipudi, under the tutelage of Padmabhushan Gurus Raja Radha Reddy and has been performing for more than a decade. Bhavya enjoys penning down poetry besides affixing a monocle and combing library bookshelves in search of classics in her free time. She is also currently serving as the Joint Secretary for the Women’s Development Centre of Daulat Ram College and editing for three collegiate level magazines. Bhavya can have endless conversations about the internet and food.