The ever-increasing India-China trade deficit and what it means for India

In October 2017 alone, India’s exports to China have increased by 53 percent, year on year, to USD 1.24 billion. Imports from China increased by 6.87 percent, to USD 5.09 billion. Our exports to China have been increasing steadily over the last few months. However, so has our trade deficit, reaching a whopping USD 51.1 billion (out of total trade worth USD 70 billion) in the financial year 2016-17.

What is the background?

The trade deficit has seen a constant increase from USD 29.3 billion in 2010-11 to USD 51.1 billion in 2016-17. India initiated anti-dumping measures against China in 2010. As of 2017, it has 93 investigations pending against the country. The bilateral ties have turned frosty, what with the Doklam standoff. Other points of contention are India’s recognition of Tibet, the asylum of the Dalai Lama, and opposition to the One Belt-One Road policy. China’s support to Pakistan has also always rubbed India the wrong way.

How did the trade deficit arise?

India exports mainly raw material such as ores, slag, ash, cotton, organic chemicals, and mineral fuels to China. These natural resources were the reason that India’s exports increased. However, India imports value-added products from China such as electrical parts, machinery, organic chemicals, plastics. This creates a price delta in China’s favour. Chinese goods are cheap because of the subsidies and the cheap finance provided. Cheap goods mean happy customers. As a result, China now holds 51 percent of the Indian mobile phone market. The Rupe -Yuan valuation, demonetisation, and GST were other contributors to the trade deficit, according to Upasna Bhardwaj, Senior Economist at Kotak Mahindra Bank Ltd,

Why does it matter?

The obvious impact of the deficit is the threat it poses to India’s industries. As China floods the markets with its toys and firecrackers and idols and cell phones, Indian businesses are finding it hard to keep up. However, the problem isn’t as simple as that of a strong competitor. Indian firms are also dependent on the neighbouring country for their own capital goods. Our startups have begun to seek China for funds. This is clear, with Alibaba’s major stake in Paytm and Tencent’s funds in Flipkart. China is India’s biggest trade partner, while India receives less than three percent of Chinese exports. The imbalance creates a sticky vulnerability for India.

What is the future outlook?

There have been several calls for the boycott of Chinese goods but experts call it unfeasible. If India were to start importing from other countries instead, the prices of goods would only be higher. Attempts to increase anti-dumping measures could also upset the WTO. To manage exports, the Indian government plans to encourage and push for the export of medicines and agricultural goods. They want to retain the best iron ore for the home industries. There are also plans of checking imports with sector-specific strategies. Bridging the trade deficit will be no easy task. It must be done strategically, curtailing China’s dominance and boosting India’s economy.