A $671 million trade deficit in FY01 swelled to $63 billion in FY18
India has benefitted immensely from the import of cheap intermediate and capital goods
Almost two decades ago, when India was self-sufficient in producing penicillin, primarily by state-owned firms, China started dumping the essential antibiotic drug at dirt-cheap prices. Consequently, domestic production of the medicine could not be sustained.
With state backing, non-transparent export subsidies, robust infrastructure facilities and cheaper credit, the dominance of Chinese exports through its state-owned enterprises has been unprecedented.
Today, though India has become a leading generic drug producer in the world, two-thirds of the raw material, or active pharmaceutical ingredients (API), are still sourced from China.
Widening trade gap
India’s trade deficit with China rose from $671 million in FY01 to $63 billion in FY18. Trade deficit in FY19 declined for the first time to $53 billion with exports to China rising by 25%, but China made up for the shortfall by pushing more exports to India through Hong Kong.
Electronic items dominate India’s imports from China, but cheaper intermediary and capital goods such as steel, machine parts, and chemicals, including APIs, help India’s small and medium enterprises thrive.
This complexity of trade relations has baffled policymakers and made it difficult for them to devise a coherent strategy to counter China’s aggressive trade push. New Delhi has imposed anti-dumping duties against cheap Chinese items to protect the domestic industry, but Beijing has been reluctant in giving market access to Indian products. The product profile of India’s exports have more or less remained unchanged over the last decade and have been dominated by raw materials such as cotton, iron ore, copper, coal, and chemicals.
India has benefitted immensely from the import of cheap intermediate and capital goods. However, the burgeoning trade deficit, which India has often termed “unsustainable", could not be dealt with.
Now, the two countries have set up yet another committee—the High-level Economic and Trade Dialogue mechanism—following the just-concluded informal leadership summit between Prime Minister Narendra Modi and Chinese President Xi Jinping.
The lack of mandatory technical standards on a number of items also provides an easy passage to low-quality Chinese products such as toys and firecrackers to flood Indian markets.
“The impact of Chinese imports has been such that India is threatened to become a country of importers and traders with domestic factories either cutting down on production or shutting down completely. The committee is very clear that it does not want such a state of affairs to prevail in the country. The country can ill-afford its industry, including MSMEs, getting annihilated," the parliamentary standing committee on commerce had said in July 2018.
The ongoing negotiations for a free trade agreement among the 16-member Regional Comprehensive Economic Partnership (RCEP) has been stuck mostly because of India’s reluctance to further open up its market to China. Indian industry representatives have been opposing the RCEP, apprehending that it would lead to a surge in imports that will harm the domestic industry further. Analysts have said that India was unlikely to gain major market access to China even if Beijing substantially reduces its tariff levels, as New Delhi has not negotiated non-tariff barriers with RCEP members, especially China.
India has been giving conflicting signals on joining the deal in the final leg of discussions, which analysts said could be part of pressure tactics to convince other members on its demands on market access, investment, e-commerce and services.
A section of analysts, including economist Arvind Subramanian, said the other reason why India needs to be more cautious in having a trade deal with China in the form of RCEP was the “geostrategic dimension". India has openly opposed Beijing’s aggressive push for the China-Pakistan Economic Corridor, which it considers a security threat. China’s support to Pakistan in most international fora and opposition to India’s entry into the Nuclear Suppliers Group also makes it difficult for India to sell a trade deal with its northern neighbour to its domestic audience.