The Jigsaw puzzle : India’s trade ties with China

Over the years, China has emerged as the epicentre of the global supply chain. Notwithstanding the on-going trade war between China and the US, the pandemic, and the clamour for “China-plus-one” strategy, the key role of China in global merchandise trade seems unaffected. While many countries were not at ease with over-dependence on China for their imports, China continues to be a key trading partner for diverse countries all over the world. India is no exception.

Why China is Important for India

India’s trade with China is important because, for the last 15 years, China has been India’s top source of imports. In 2007-08, China’s share in India’s imports was around 10.8 per cent. It gradually went up and reached 16.4 per cent in 2017-18. It languished around 13.7 per cent for 2018-19 and 2019-20, but in the two post-Covid years (viz., 2020-21 and 2021-22), China’s share in India’s imports reached 16.53 per cent (record high) and 15.43 per cent, respectively.

To put these numbers in perspective, in these two years, the second biggest source of imports for India was the UAE, with an import share of 6.7 per cent in 2020-21 and 7.31 per cent in 2021-22. These numbers indicate that China is not only India’s biggest source of imports, but its share in total Indian imports is also more than double that of the UAE.

Secondly, in total non-oil merchandise imports, China’s dominance is even more pronounced. As oil imports account for 25-30 per cent of India’s total imports, India’s dependence on China for non-oil imports can be as high as 25 per cent or more.

India’s imports from China

Interestingly, the slowdown in China and the massive supply disruptions have not reduced China’s share in India’s total imports. In fact, the import shares seem to have gone back close to the pre-Covid peaks (see chart) . Moreover, in absolute terms, India’s imports from China during the pre-Covid years were $76 billion in 2017-18 and $70 billion in 2018-19. These numbers for 2020-21 and 2021-22 are $65 billion and $94.5 billion, respectively.

This shows that in absolute terms, India’s imports from China in 2021-22 is significantly higher than its pre-Covid level of imports. Data for the period April 2022 to February 2023 show that India’s total imports from China have already crossed $90 billion. In terms of commodity basket, India primarily imports the following items from China — electrical and electronic goods, organic chemicals including pharmaceuticals, and plastic items.

Together, these four categories make up more than 70 per cent of India’s imports from China. Also, imports of these items by India from China have gone up in the post-Covid period. Interestingly, China is a big market for Indian exports, as well. China has been among the top four export markets for India in the last few years. After Covid, India’s exports to China have gone up.

However, as imports from China are much bigger, India’s bilateral trade deficit with China is large and growing. In 2021-22, India’s trade deficit with China was around $73.3 billion (see table). It is expected to cross $100 billion in FY23, going by China’s customs data for 2022. India’s trade deficit with China accounts for 38-40 per cent of India’s total merchandise trade deficit in the post-Covid era (see table).

Do the large trade deficit numbers raise any cause for concern? 

Per se, running a trade deficit with another country is not necessarily undesirable. Imports can be useful as they can bridge the gap between domestic demand and supply of some goods. Imports of cheap raw materials and intermediate goods can help domestic competitiveness. The principle of comparative advantage precisely says this. Also, imports may give access to better technology and apart from the usual gains from trade, cheaper imports can also keep domestic inflation low. However, imports can be destabilising for a country’s domestic economy as they can displace domestic industries and can lead to premature deindustrialisation and unemployment.

Slower GDP growth

But apart from these reasons, the growing trade volume and increasing trade imbalance between India are intriguing for some special policy reasons. Since the Covid crisis, China is experiencing a slower GDP growth rate and has shifted its policies more towards domestic consumption. But these policy shifts do not seem to have dented Chinese exports to India.

Secondly, India has signed a number of free trade agreements (FTAs) with several East and Southeast Asian nations. International trade theory suggests that the signing of such trade agreements should have taken some market share away from China, which has not happened.

It is also notable that India withdrew from the Regional Comprehensive Economic Partnership (RCEP) before signing a deal and consequently, there is no FTA between India and China right now. This puts China at a disadvantage over other FTA partners of India. Finally, over the last few years, the government of India has taken several policy measures to improve import substitution.

But, despite all these developments and various conscious efforts by the government, India’s dependence on China does not seem to have waned. Admittedly, the effects of government policies may kick in with some lag. But, geopolitical and strategic differences between India and China may raise some concerns about the extent of India’s dependence on China in important and strategic industries. This warrants a deeper look at what India and China trade with each other.