India’s Trade Dilemma with China

Context: China has emerged as the top source of India’s import despite various efforts on India’s part to reduce the deficit.

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For 2022-23 India’s trade deficit increased to $83 billion, which accounts for 31.6 per cent of India’s total trade deficit.

India’s Import basket

  • Among these, the top three product groups, make up for more than 60 per cent of India’s total imports from China. These product categories include products like electronic goods, mobile phones, semiconductors of different types, electrical appliances and machinery and organic chemicals including pharmaceuticals and organic chemicals used as intermediate goods.
  • And for the last 10 years these top three product categories have remained unchanged.
  • India’s top 10 imports from China are mostly value-added manufacturing products. These are electrical goods and machinery, electronics and semiconductors, organic chemicals and pharmaceuticals.
  • Among India’s top imports from China, a few are final goods, but the others are mostly intermediate goods which are used as inputs in Indian industries. For some products like Antibiotics, and Semiconductors more than 80 per cent of India’s total imports come from China.

India’s export basket

  • On the other hand, India’s exports to China have been more volatile. 
  • In 2022-23, India’s exports to China has declined in absolute terms. In 2022-23 India’s merchandise imports from China was more than six times of its merchandise exports to China (total exports were only $15.32 billion). 
  • Refined petroleum products have become India’s most important export item to China. Other than that, India’s exports to China have been mostly dominated by agricultural goods and metals. Iron ores, semi-finished products of iron, copper and copper products, cotton and cotton yarn, fish and marine products, vegetables, vegetable oils and rice are India’s major export items to China.

Outstanding Issues

  • India is also primarily exporting low value added products. 
  • India mostly imports value-added manufacturing goods and intermediate goods from China, its exports are mostly resource intensive primary or semi-processed products which are mostly at the lower end of the value chain.
  • Countries which operate at the lower end of the value chain tend to gain much less from trade as gains from exports depend to a large extent on domestic value addition and export sophistication.
  • Trade deficit with China could be attributed to two factors: narrow basket of commodities and market access impediments for most of our agricultural products and the sectors where we are competitive in, such as pharmaceuticals, IT/ITES, etc. 
  • Some Indian manufacturing sectors are competing with cheaper imports from China. Thereby they face price disadvantages in the domestic and international markets.

Signs of benefits

  • Some manufacturing sectors in India are gaining from the cheaper inputs from China. This has given competitiveness to India’s manufacturing. 

Way forward

  • Complete withdrawal from the trade is not possible at the moment. India need to move upward from low value products to high value products in the global value chain. 

Mains question

Q. India’s total trade deficit with China has reached its record high despite all the efforts. Analyse the reasons behind such a trend and state how can India reverse this trend. (150 words)

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