India and China – Strategic Implications of the Trade Deficit
India and China established diplomatic relations on 1 April, 1950. By late 1950s, serious differences between the two states had begun to surface, particularly over the un-demarcated border. Ultimately, border clashes led to the Sino-Indian war in October 1962. Due to hostile political relations, the trade between the two countries was disrupted and it resumed in 1978. The trade in 2000 was $2.91 billion and it increased to $71.65 billion in 2015, making China India’s largest goods trading partner. This article explores the potential and problems of the Sino-Indian economic relationships.
India and China Bilateral Trade – 2000-2015
(Value in US$ Billions)
China’s Import from India
India’s Import from China
|Trade Balance||Total Trade|
Source: UN commodity trade statistics
The year 2006 was a watershed year in terms of bilateral trade because Chinese export started out numbering India’s export to China, India’s export to China was $10.27 billion compared to China’s $14.58 billion. Since 2006 the trade surplus has increased tenfold to reach $44.87 billion in 2015.
The number of products that India sells to China is much lower than the number of Chinese products coming into India. Overall, Chinese exports to India are still more diversified than the Indian exports to China. China’s exports to India comprise manufacturing goods, mostly power equipment, iron and steel, fertilizers whereas India’s exports to China comprise raw materials and intermediate goods.
Reasons for Trade Deficit
The problem behind this huge trade deficit is India’s export of raw materials as opposed to importing finished product with high technology from China. India’s trade basket consists of cotton, gems and precious metals, copper and iron ore. China on the other hand, exports manufactured capital goods. Since India does not produce enough high-technology manufactured goods for exports and domestic use, it has to rely on imports from the outside world specially China.
Market access is a huge problem for Indian companies. Strict government regulations in China hinder Indian companies from penetrating the Chinese market. For example, India is very strong in three key sectors – pharmaceuticals, agriculture and IT services – but Chinese regulations impose restrictions that stifle the provision of Indian goods and services. There is a serious knowledge and information deficit on China. “According to study conducted by CII Core Group on China, India does not have in-depth knowledge of the Chinese market. A concerted effort must be made to compile this knowledge and information for the benefit of Indian Industry and consequently for the government as well. Without such knowledge, no opportunities can be seized”.[i]
According to T.N.Ninan, “The Chinese system has fewer checks and balances, so the alignment of objectives is easier, with coordinated action to follow”.[ii] There are lesser checks and balances because one party controls all aspects of political economy. So the implementation of policies is quick. India on the other hand has a democratic system and implementation of policies takes more time compared to China. The complications occur when an over -zealous executive which is rule-bound interacts or counteracts with a private sector which is primarily result-oriented. Instances of judicial overreach may also threaten the economic logic of a particular policy in India.
The Way Forward
There is need for a comprehensive strategy to deal with China, for both the Indian private and public sectors. This is because in many ways China when dealing with other countries operates as a “system”- Government and Industry.[iii] Although Chinese companies are intensely competitive with each other the communist party keeps a check through continuous propping up of the public sector. The Indian government is mostly aloof or in regulatory mode and does not interfere with rules of competition through crony capitalism. India lags behind in government-industry cooperation, while compared to China, which shows better coordination between their government and industry as a whole.
In 2008-2009, iron ore was the single-largest item exported to China. India’s response to impose export restrictions on iron ore in the form of duties, and the ban on illegal mining led to decrease in this component of trade. However, other raw material and ore like copper and its items started to be included in India’s export basket to China but not as large compared to iron ore. Thus, unless India diversifies its export basket, it is unlikely that it will be able to bridge its trade deficit with China through raising exports.[iv] “If we look at the profile of India’s exports to China, it is dominated by raw materials. Iron ore and cotton together accounts for over 60 per cent of exports to China. If we have to balance our trade, we have to promote exports of value-added goods from India”, said Ajay Sahai, Director General, Federation of Indian Export Organisations (FIEO).[v]
China’s growing economy has witnessed an increase in labour cost in recent times. So, China seems to be opening up industries in countries like Vietnam, where there is availability of cheap labour. In India, the labour cost is relativity low than in China. The only problem in India is that although there is availability of cheap labour the manufacturing sector is not well-equipped to produce. The only aspect India should look upon is to strengthen the manufacturing sector.
Non-tariff barriers limit Indian exports and account for the trade imbalance to a large extent. According to the IIFT report, if India could capture ten per cent of the Chinese market, the spill-over effects in terms of specialization and economies of scale would result in the faster growth and development of Indian exports to China, especially in pharmaceuticals and medical instruments.[vi] To address this issue a closer dialogue is essential between officials and leaders of both countries.
There are numerous business opportunities for India and China, in sectors such as agriculture and food processing, asset management, construction and infrastructure, pharmaceuticals, electronics and information technology, and transport and logistics. India is a potential market for agricultural inputs like fertilizers and processed chemicals. In turn, Indian firms can focus on Chinese markets in processed and frozen foods and dairy products. The pharmaceutical sector has huge business potential for both countries. India is a large importer of pharmaceuticals ingredients and intermediates from China. Indian firms specialize in formula development and finished dosages. [vii]
India has its own set of structural issues that need to be addressed to solve the trade deficit. China, following its reforms in 1979, encouraged exports to boost its economy, which has often resulted in a large number of products being dumped in markets like India. This policy, however, has resulted in a further increase of the deficit. An inconvenient business environment and bottlenecks in infrastructure, labour laws and poor environmental standards have, furthermore, discouraged foreign investment and consequently affected the growth of the manufacturing sector in India. Various Indian governments have not been able to make the best use of India’s comparative advantages with China in order to tap into the under-exploited Chinese market. India needs to solve these internal structural issues if it is to attract greater investment from abroad.[viii]
Economic ties constitute one of the most crucial areas of the strategic and cooperative partnership between India and China. Both the Asian giants have grown in the post-reform years by increasing their external economic linkage. Currently, India-China trade stands at $71.65 billion, which offers tremendous opportunity for traders and investors of both countries in sectors such as agriculture, construction and infrastructure, information technology, and transport and logistics. India-China economic relations have implications not just for bilateral ties but have the potential to shape the economic landscape of the region and the world.
China has acquired the geo-economic dominance, but not yet the geopolitical clout. Unlike, the vast British Empire in the 19th century or the US dominance in the post World War 2 alliance system, China’s strategic allies today are limited to North Korea and Pakistan. China will not come to dominate the political landscape without increasing political thrust with its neighbours and increasing their incentives for mutual co-existence.
[i] India-China Ananta Centre: http://www.anantacentre.in/pdf/India_china_economic_ties_web.pdf
[ii] India can Make in India, but probably never catch up with China, T.N.Ninan: https://qz.com/616878/india-can-make-in-india-but-will-probably-never-catch-up-with-china/
[iii] India-China Ananta Centre: http://www.anantacentre.in/pdf/India_china_economic_ties_web.pdf
[iv] The way forward for Indo-Chinese trade relations and how can India benefit?: http://theindianeconomist.com/india-china-trade-relations/
[v] Ban on mining widens India’s trade deficit with China: http://www.business-standard.com/article/economy-policy/ban-on-mining-widens-india-s-trade-deficit-with-china-112120902021_1.html
[vi]Tackling India’s Trade Deficit with China: http://www.futuredirections.org.au/publication/tackling-india-s-trade-deficit-with-china/
[vii] The Case for Stronger India-China Economic Relation: http://thediplomat.com/2015/05/the-case-for-stronger-india-china-economic-relations/
[viii] Tackling India’s Trade Deficit with China: http://www.futuredirections.org.au/publication/tackling-india-s-trade-deficit-with-china/