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China India Trade: Batting for Imbalance

, September 25, 2014, 0 Comments

india china trade-marketexpress-inThe Chinese President’s visit to India was noticeable for not having been accompanied by the declaration of a bilateral trade target. While the ex-premier Wen Jiabao’s visit in December 2010 was followed by the announcement of a bilateral trade target of US$100 billion by 2015, no such numbers were put out this time.

Avoiding a target might have been due to the fact that bilateral trade (merchandise) has not increased from its peak of US$73.4 billion in 2011-12. The last two years have had trade hovering around US$66 billion. As a result, achieving the target of US$100 billion by 2015 appears almost impossible. This would be the first time since Zhu Rongji’s visit in 2002 that the declared trade target would remain unfulfilled.

Despite the sluggish growth, China remains India’s topmost trade partner. Most analysts, given India’s obsession with trade deficit, usually accept this grudgingly. It is impossible to come across discussions on China-India relations that do not refer to the bilateral trade deficit.

The paranoia over deficit trade with China could have been justified if India was a net exporter of goods to the rest of the world and its trade with China was an exception. The structure of India’s trade with China is not exceptional in any way. India buys much more from the rest of the world than it sells and is a net importer of goods. And it runs trade deficits with sixteen of its top twenty-five trade partners.

The imbalance in India’s trade with some of its major partners is far more than that with China. During 2013-14, India’s trade deficit with China was US$36.2 billion. As a proportion of the total bilateral trade of US$65.9 billion, the deficit was roughly 55%. India’s trade deficits with Iraq, Switzerland and Australia in the same year were 90%, 83% and 62% respectively of its total bilateral trades. Deficits with Saudi Arabia and Korea were also almost half of the bilateral trades.

Trade deficits with China and other countries cannot be wished away till India does not produce enough of what it needs. Pushing for greater market access in some products in China can partly increase Indian exports. But that would not stop Chinese imports into India. These have hardly subdued despite the Indian industry successfully lobbying for imposition of anti-dumping duties across more than two hundred tariff lines. Indeed, the futility of these actions is evident from the fact that China continues to remain the largest source of organic chemical imports for India despite these imports inviting maximum anti-dumping action.

India needs to approach its economic relationship with China with the understanding that correcting the deficit is purely wishful thinking. From a consumer’s perspective, India does not produce enough for taking care of its large market. It is not for nothing that Chinese mobile phones, the latest being the Xiaomi budget phones, occupy significant market space in India.

The talk of greater investment from China covering the trade deficit is difficult to understand. From a balance of payments perspective, current account deficits in India are covered up by capital inflows leading to accumulation of foreign exchange reserves. But the bulk of these flows are short-term. If this is the logic being peddled for convincing deficit skeptics, then the peddlers are on wrong ground. The logic will hardly work at the level of bilateral trade.

Even if India works on the assumption that it can turn the table on China by drawing from it long-term investment equivalent to the trade deficit, statistics are hopelessly against it. The best FDI inflow year for India during the last decade was 2008-09 when it received US$41.7 billion from all sources. The average FDI inflow during the last decade has been at around US$30 billion. This is, as it is, less than the trade deficit of US$36 billion with China. Assuming China to regularly pump in around US$30 billion of long-term investment funds into India, when that is roughly what India manages to mobilise from all its investors from across the world, is more than fertile imagination.

Indeed, the fertility of imagination is amazing given that China’s total long-term investment in India, since 2000, has been around US$411 million. Though India’s FDI statistics tend to under-reflect Chinese investments given that some of these get clubbed as ‘project goods’ imports in trade statistics, China has clearly not been the largest source of investments. It ranks 28th on India’s source country list for FDI inflows. This is all the more why the talk of China pumping in US$100 billion in India is preposterous.

President Xi’s visit reaffirms that the Chinese focus on the Indian economy is increasing. India is an important destination of final demand for Chinese products and will continue to be so. Along with imports, Chinese businesses will invest in India for producing more for the domestic market. This is good news for Indian consumers, including industrial consumers. It is high time India accepts that an unbalanced economic relationship is not necessarily a bad relationship.

This article appeared in the Indian Express