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BENGALURU, NEW DELHI : Just over two years after issuing a clarion call for building a self-reliant nation, India’s trade deficit with China is on the rise. From electrical machinery and spectacles to cars, railway parts, headphones, memory cards, inorganic chemicals and petroleum products, imports from China have reported a sharp spike in the first two months of the current fiscal.

While imports from China grew by 12.75% in the first two months of the current fiscal, Indian exports to China fell 31% from a year earlier, putting pressure on the trade and current account deficits. The trade deficit with China widened to a record $72.9 billion in 2021-22. While China’s share in India’s imports basket eased marginally to 15.34% during FY22 after spiking to 16.53% in the previous fiscal, its share in India’s exports shrank to 5% from 7.26% in FY21.

“India’s imports from China rose significantly even at a time when anti-China sentiment had peaked. Now that the rhetoric is almost gone, we will need to see where the trade deficit will head," said Biswajit Dhar, a professor at Jawaharlal Nehru University.

“As the economy is recovering, we are realizing that we are more coupled with China than we were ever before."

Anil Bhardwaj, secretary-general, Federation of Indian Micro and Small and Medium Enterprises, said Indian MSMEs and the manufacturing industry’s dependency on China has risen of late. “That’s because we don’t get such materials at that price point from other countries. Besides, rising imports from China also help Indian exports, especially in the pharma sector."

Bhardwaj said demand for Indian exports of iron ore, cotton and meat had declined since the lockdown in China. A commerce department official said that the growth in Chinese imports has largely been driven by capital and intermediate goods. Imports of consumer goods and raw materials constitute a smaller fraction of imports from China, he said.

“Major items like chemicals used in industrial products imported from China are used in meeting the growing demand for industrial inputs as India has achieved 20.6% manufacturing growth in May 2022 over May 2021. Imports like active pharmaceutical ingredients and drug formulations provide Indian pharma industry raw material for producing finished goods which are then exported," he added. 

Data released by China’s General Administration of Customs (GAC) last week showed trade between China and India was on course to hit $100 billion for the second straight year, touching $57.5 billion in the January to June period. But this trade is heavily tilted in favour of China. A commerce department official said India’s total merchandise imports in the January-June period grew 39.6% to $361.1 billion, but those from China grew 25.4%. “India’s trade deficit with China had increased drastically from $1.5 billion in 2004-05 to $36 billion in 2013-14. However, growth in trade deficit has been brought under control from $48 billion in 2014-15 to $73 billion in 2021-22 (1.5 times)," the official said.

“Import dependency cannot go away overnight. It takes time. With schemes like PLI (production linked incentive), manufacturing is likely to increase in India. However, I will be more worried if our free trade agreements with export markets get delayed. Unless these materialize, manufacturing may not shift from China at the speed that we want," said Arpita Mukherjee, professor, ICRIER.

However, Dhar pointed out that it was too early to say if PLI schemes would actually help promote domestic manufacturing and cut dependence on imports. He added that it was difficult to match the scale and price of Chinese products.

“They have huge investments and are getting an advantage from economies of scale," Dhar said. “The government should have focused on fewer sectors and tried to make them as efficient as possible, rather than trying to spread out the resources available…there can’t be 15-20 champion sectors," Dhar said, citing Taiwan’s strategy to specialize only in computer hard disks and build industrial parks. It was also important to identify sectors that have strong backward linkages, “so based on the development of that sector, you also start developing other industries".

“Imports from China will grow because till today we have not been able to manufacture white goods. A lot of pharma companies import raw materials from China. A lot of products of mass consumption come from China and are merely packaged in India. India needs to boost production of these items," said Vijay Kalantri, president of the All India Association of Industries.

“India’s total merchandise exports increased $186 billion in Jan-June 2021 to $235.8 billion in Jan-June 2022, registering a growth of 26.8%. While exports to China have registered a decline of (-)30.9% in the first half of 2022, it is largely due to change in direction of India’s exports away from China," said a commerce ministry official.

“China was our 2nd largest export destination in the first half of 2021 with a share of 6.8%; however it has declined to 5th position in the first half of 2022 (share: 3.7%) as exports have been destined to the US, UAE, Netherlands and Bangladesh."

dilasha.seth@livemint.com

ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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