- India’s nonchalance in the face of its large and growing bilateral trade deficit with China is an example of rational commercial relations with a counterparty to a border conflict
India-China trade crossed $100 billion for the first time, reaching $125 billion in 2021. And latest data just out shows the trend won’t change in 2022. China’s trade data for the first quarter of 2022 shows a sharp increase in India’s imports of Chinese goods in January-March 2022 on the back of which bilateral trade grew 15% to a record $31.96 billion. India’s imports surged 28% over the January- March quarter of 2021 to $27.69 billion. Exports were down 26% to $4.87 billion.
The bilateral deficit of $77 billion India has with China is the largest India has with any country. India’s bilateral trade with China is large and skewed heavily in China’s favour. India imported $103.47 worth of electrical and electronic goods, machinery, fertilizer and other goods from China, while exporting $26.46 billion of merchandise to China, according to trade statistics published by the Chinese, which are in line with the statistics published by India for the first 11 eleven months of the last financial year.
India’s nonchalance in the face of its large and growing bilateral trade deficit with China is an example of rational commercial relations with a counterparty to a border conflict, which not just reins in conflict but also builds grounds for its resolution, on account of demonstrable interdependence between the parties.
There are many people who worry about dependence on China and wonder why production-linked incentive schemes and other AtmaNirbhar (self-reliant) initiatives do not cut India’s imports from China. The greater India’s efforts to step up manufacturing in India, with PLI and other schemes, the greater our imports of components and other intermediates from China. This works to the advantage of both countries, instead of being a source of weakness.
India has the reputation of being the world’s preferred maker of generic drugs. This, obviously, is good for India’s pharma industry. But in the process, Indian drug makers import a whole lot of active pharmaceutical ingredients (APIs) from China. The greater the local production of final, assembled smartphones, the greater the import of smartphone parts, assemblies and sub-assemblies from China. AtmaNirbhar manufacture drives up the local demand for imported inputs for such manufacture. A lot of that comes from China.
China itself runs up trade deficits with a variety of Asian economies, but more than makes up for it with a huge trade surplus with the US. President Trump’s punitive tariffs on Chinese goods made American imports from China greater than before, while not visibly making America great again.
It is not a bilateral trade deficit that should worry a nation, from the point of view of macroeconomics. It is the global trade and current account deficits that matter. With the help of imports from China, India produces a lot of things to export to Africa, where the domestic purchasing power has been buoyed by exports to China of assorted raw materials. India’s overall current account deficit is well within the 3% of GDP mark that many would consider a prudent cap, given the need to retain the confidence of external financiers of the current account deficit.
Even if we have our macroeconomic base covered, what is the strategic implication of such dependence on imports from a neighbour with unfriendly designs on our territory and a barely concealed desire to tie India down to South Asia by arming and assisting Pakistan and building strategic facilities in other South Asian nations?
New Delhi has not hesitated to match strength for strength in the border standoff in the Galwan valley in June 2020. Further, in the wake of those border clashes, to signal to Beijing India’s readiness to play economic hardball, New Delhi banned assorted Chinese apps from being downloaded in India, including TikTok. India has not accorded China the market economy status China seeks under World Trade Organization rules. India can activate punitive obstacles to trade with China, in case of overtly hostile moves by China.
That said, the gains from trade are mutual. There is no reason for India to follow a strategy of cutting off one’s nose to spite one’s face, with regard to trade with China. India’s pragmatic readiness to carry on trade with China should serve as an example to the rest of the world. Commerce and the mutual gains from it for the trading partners should not easily be forsaken to pursue ‘continuation of politics by other means’, unless such a course of action becomes unavoidable.
Right now, the imperative is for India to grow its economy, for which export growth is a vital means. Exports entail imported inputs, the cheaper, the better. The way to address India’s trade imbalance with China is by strengthening the competitiveness of Indian industry, not by trade-restrictive measures.
Improving access of the micro, small and medium enterprises to trade credit at reasonable rates would do more to curb the trade deficit with China than meddling with tariffs and tariff lines in the China trade would. If a culture of paying for the power consumed could get political backing, Indian industry would not have to use expensive captive power, instead of drawing power from the grid. That would boost the competitiveness of the Indian industry.
A coherent policy on urbanization would release land for building factories and houses for workers, and thus make Indian producers more competitive than they are now, when they have to worry about agitations by farmers, whose land is being taken over for building industrial estates, instead of focusing on getting their plants up and running. A steady supply of healthy, educated and skill-upgradable workers would boost Indian producers’ competitiveness and slash the import bill vis-à-vis China.
Much needs to be done, and can be done, to reduce the trade deficit with China, but the site of the action is domestic production, not trade.
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