Does India huge trade deficit with China matter?

Dr Bishwanjit Loitongbam *

India's trade deficit with China has become a cause of concern to the Government of India. The trade deficit between the two countries has increased to $52.03 billion with exports falling by around 29 per cent in 2015. India's exports to China stood at $9.58 billion whereas the imports have jumped to $61.60 billion in 2015.

It was the quick rise of a big trade deficit with China that fueled India's adoption of mandatory local manufacturing rules in 2010. An alarming rise in India's trade imbalance with China is a matter of high concern for India.

Let's seewhat is traded between the two countries.India's major exports to China were commodities such as cotton, gems, precious metals, coins, copper, cement, machinery and other electronic equipment, and plastics, amongst others. Cotton formed the highest export at nearly $3.2 billion. Chinese exports to India were mainly electronic equipment amounting to over $16 billion, organic chemicals and fertilizers, Exports to China are ore, slag or ash, iron and steel, tin, raw hides, leather, plastics and cotton.

Increasing trade deficit with China can be attributed to the relative demand for imports in India and China for each other's goods. India mostly exports raw materials to China and the latter ships back finished goods. The double decrease in import and export is due to the economic slowdown throughout the world.

The reason for low penetration into Chinese is due to high tariff and non-tariff barriers faced by India on these products and preferential treatment given to the competing countries. The reasons for surge in Chinese imports have been cited to be inverted duty structure, Information Technology Agreement (ITA-1) of WTO and a non-competitive Indian high tech capital goods industry.

China enjoyed vast technological superiority. They operated in a large and unified domestic market and were benefitted from offshoring. Indian manufacturing industries failed to adopt new technology quickly, and failed to improve product quality as rapidly as Chinese producers. There's a lack of trust between the two peoples.

The festering border dispute is one of the major reasons that strain relations between the two countries. Due partly to the lingering legacy of the 1962 Sino-Indian border war, Indians remain deeply suspicious of China. Unfortunately, this suspicion extends to the economic relationship.

Thus, India has blocked Chinese investments in sectors such as telecom, ports, and shipping due to security concerns, made it difficult for Chinese employees to obtain visas to work in India, and complained loudly and frequently about its trade deficit with China. China is hardly blame-free –it restricts Indian companies from entering many sectors, shows an institutionalized preference for its state-owned enterprises, and provides subsidies to its companies that some claim contravene international trade law. Even so, India's preoccupation with its trade deficit with China is misguided.

So, how much does all this have to do with China? Not much at all. Here are some reasons that Indians should not be fixated on Chinese trade. The structure of India's trade with China is not so exceptional. India buys more from the rest of the world than it sells; it runs trade deficits with 16 of its top 25 trade partners.

One reason for India's trade deficit is its weak manufacturing sector, which in turn stems from restrictive labor, land and tax laws, rickety infrastructure, and inadequate power supplies. India simply doesn't produce enough goods, or goods of high-enough quality, to meet the demand of its billion-plus consumers. India's trade with China is actually more balanced than some of its other trading relationships.

India's 2015 trade deficit with China represented roughly 73.1% of total China-India trade, while its trade deficits with Venezuela, Switzerland, Iraqand Qatar were 95.34%, 91.58%, 81.74% and 81.73% of total bilateral trade, respectively. In other words, India is sending a relatively large amount of goods back to China.

To an economist, bilateral trade figures are pretty much irrelevant. The presence of global supply chains and regional hubs of production means that always-balanced bilateral trade is neither possible nor desirable. This is especially true for China, as the last stop in the East Asian manufacturing supply chain.

China is the place where high-tech components made in Korea, Japan, Taiwan, and elsewhere are assembled and shipped out for sale. The countries that buy goods assembled in China such as iPhone run large bilateral trade deficits with China in part because China is just the last stop on the manufacturing train. Korea and Japan, meanwhile, run a trade surplus with China.

The only way for India to circumvent this process would be to integrate itself in the East Asian supply chain. Looking at trade data, it's clear that the main culprit for India's trade deficit is not China, but energy. Roughly 70% of India's trade deficit is due to net imports of oil and coal; gold imports further elevate the figure. This has nothing to do with China, but rather with ill-designed policies that prevent the efficient excavation and use of India's substantial coal and natural gas deposits.

To a certain extent, Chinese imports are beneficial both to Indian consumers and companies. Cheaper Chinese consumer goods allow Indian living standards to rise. Chinese imports also provide more competition for local products and encourage their innovation.

One of China's main exports to India are capital goods, which are used to accelerate the building of Indian infrastructure and thus positive for India's economic growth. Since Chinese capital goods are cheap and often come with low-cost financing, the Indian companies that buy these goods receive big savings they can invest elsewhere.

India should focus more onits own roads, ports and railways. In 2014 it cost $1,332 on average to export a container from India, compared with $823 to ship from China. The solution is the need to increase India's domestic competitiveness. India is competitive at the factory gate, not at the port.

To win the game, India needs to be competitive at ports. One way to help eliminate the trade deficit is to get China's manufacturers to start making goods in India. Recently Xiaomi and Alibaba started investing in India. So far, Chinese foreign direct investment into India has been miniscule: $1.36 billion over the past 16 years.

In order to boost exports and to maintain balance of trade with China, India has impressed upon China to recognize the need for reduction in trade imbalance for a long term, sustainable and harmonious development of economic cooperation between the two. India should also seek access for Indian IT and Pharmaceutical companies into Chinese market.