Mumbai: India’s trade deficit with China increased more than two-fold (219%) from $16 billion in 2007-08 to $51 billion in 2016-17, according to commerce ministry data. India’s imports ($61 billion) from China were six times its exports ($10 billion) in 2016-17, making rising trade imbalance a major concern.

“Increasing trade deficit with China can be attributed primarily to the fact that Chinese exports to India rely strongly on manufactured items to meet the demand of fast expanding sectors like telecom and power, while India’s exports to China are characterized by primary and intermediate products,” C.R Chaudhary, minister of state in the commerce ministry, said in a reply to the Lok Sabha (parliament’s lower house) on December 18, 2017.

The recent trade war between the United States of America and China has sparked a ray of hope for Indian exports such as cotton, soya bean and maize to Asian markets, especially to China. As China imposes tariff barriers to US products, Indian exports are expected to increase.

For instance, cotton has been one of India’s leading exports to China, but volumes have shrunk considerably in the past few years. Now, China has imposed a 25% tax on US imports of cotton, and shipments from India are expected to see a boost this year.

Largest trading partner

China is India’s largest trading partner with bilateral trade reaching almost $72 billion in 2016-17, an increase of 88% from $38 billion in 2007-08.

Bilateral trade between April 2017 and January 2018 was reported to be more than $73 billion, the most over the last decade.

India’s imports from China have more than doubled (125%) over the last decade, from $27 billion in 2007-08 to $61 billion in 2016-17. Imports crossed $63 billion in January 2018, the most in the last 10 years.

India’s exports to China have declined by 6% from $10.9 billion in 2007-08 to 10.2% in 2016-17. India reported exports worth $18 billion in 2011-12, the most in the last 10 years, which fell 43% to 2016-17.

India’s major exports to China include ores, slag and ash, cotton, organic chemicals, mineral fuels/oils, copper and its articles. Imports include telecom instruments, electronic components and instruments, computer hardware, organic chemicals, plastics and plastic items.

“Imports exceed exports because of shortages/non-availability of items domestically or because of the cost competitiveness of the foreign manufacturers,” Chaudhary said in another reply, this time to the Rajya Sabha (parliament’s upper house), on March 7, 2018.

What is causing India’s trade deficit

Ores, which are minerals used to extract metals or manufacture chemical compounds of metals, were India’s top export to China in 2016-17, totalling $1.7 billion. This figure was 73% lower than the $6.2 billion worth of exports in 2007-08.

Cotton is the second most exported commodity to China in terms of value. Cotton worth $1.3 billion was exported to China in 2016-17, which comprised an 18% increase in trade value compared to 2007-08, when $1.1 billion worth of cotton was exported. However, exports have declined by 67% over the last six years, from a peak of $4 billion in 2011-12.

China is the largest market for India’s cotton yarn, yet exports halved from $2.2 billion in 2013 to $1.1 billion in 2016. The decline is attributed to China’s increasing import of cotton yarn from Vietnam, which registered an 88% increase over the same period.

“China has shifted from India to Vietnam/Indonesia as they have duty free access while Indian yarn carries 3.5% import duty,” Sanjay Kumar Jain, chairman of the Confederation of Indian Textile Industry, told The Times of India in this December 15, 2017, report.

Another important factor is competitive prices of Chinese products in the Indian market. For instance, Chinese solar cells cost 35% less and solar panels 10-15% less compared with locally made ones.

Over the last five years, India’s import of solar panels from China has increased more than six-fold (623%) from $389 million in 2012-13 to $2.8 billion in 2016-17. India imported 88% of all its solar panels from China in 2016-17.

India “does not have a manufacturing base for polysilicon, ingots/wafers, the upstream stages of solar PV manufacturing chain, which is a very energy intensive and capital intensive process… some of the reasons for poor manufacturing capacity are high cost of land/ electricity, low capacity utilization, high cost of financing”, the reply to the Rajya Sabha said.

Domestic manufactures have, in fact, complained that Chinese solar panels and chemicals are dumped into Indian markets. (Dumping implies selling in a foreign country at a price lower than the cost of manufacture in the home country.)

A hundred Chinese products bear an anti-dumping duty, according to the government’s reply to the Lok Sabha on December 18, 2017. Of these, chemicals and petroleum constitute the most (47 products), while steel and other metals (10) and fibers and yarn (9) are among the top products.

How to boost Indian manufacturing

India ranked 30 among 100 countries on the structure of production scale, a global manufacturing assessment index created by the World Economic Forum for its Readiness for the Future of Production Report 2018. Japan topped the list, followed by South Korea, Germany, Switzerland and China. India scored 5.99 on the index (on a scale of 0-10, where zero is the worst and 10 the best score), as compared with China’s 8.25 and Japan’s 8.99.

The assessment was based on two key components: ’Structure of Production’, a country’s current baseline of production, and ‘Drivers of Production’, the key enablers that position a country to transform production systems at the advent of the ‘fourth industrial revolution’.

On the Drivers of Production index, the US topped the list, followed by Singapore and Switzerland. India ranked 44, below China (25).

It cited human capital and sustainable resources as the two key challenges for India.

Manufacturing Competitiveness: India, China and the US
Countries Structure of Production - Rank (Score) Drivers of Production - Rank (Score) Manufacturing Value Added 2010 $ Billion Manufacturing Value Added Growth Annual % Manufacturing Employment % Of Working Population
China 5 (8.25) 25 (6.14) 3000 6.5 NA
US 7 (7.78) 1 (8.16) 1969 0.8 10.2
India 30 (5.99) 44 (5.24) 424 8.4 11.4

Source: Readiness for the Future of Production Report 2018

“Efforts are made to promote manufacturing through initiatives like ‘Make in India’, ‘Digital India’, ‘Skill India’ etc. which provide support for promoting domestic manufacturing capacity in the country,” Chaudhary’s Lok Sabha reply stated.

Investment is one of the key challenges for India, Uttara Sahasrabuddhe, professor of international relations at the University of Mumbai told IndiaSpend. “There have been significant efforts to push investments through initiatives like Make in India, but still we are far off to match with China. Poor governance, labour laws that are becoming fast outdated and connectivity are some of the other issues that we face,” she said, “[The] Chinese have an upper hand when it comes to infrastructure which is the foundation of any good manufacturing sector. We don't have that type of port connectivity or transport linkages within the country, or even uninterrupted electricity supply. India will have to overcome these challenges to compete with China, transforming itself into a manufacturing hub, key to boost exports.”

Towards trade balance

In a move to promote Indian exports and reduce the trade deficit with China, the two countries developed a Five-Year Development Programme for Economic and Trade Cooperation in September 2014.

The programme aims to strengthen cooperation and achieve trade balance over the next five years by focusing on services, especially in information technology and related services.

With the success of Bollywood movies at the Chinese box office, India is planning to appoint Aamir Khan as its brand ambassador to China.

The 53-year-old actor has gained popularity and a fan following in China with hits such as 3 Idiots, PK, Dangal and Secret Superstar.

To what extent this will help boost exports and reduce the trade deficit remains to be seen.

(Mallapur is an analyst with IndiaSpend.)

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Chaitanya Mallapur

    Chaitanya has a masters degree in politics from the University of Mumbai and a bachelor's degree in computer science. His areas of interest are foreign policy and security studies. He has also worked with ET NOW, a business news channel, as an assistant producer in the digital team.