The trade deficit between India and China has emerged as a major concern on the global stage, highlighting an increasingly unbalanced bilateral trade relationship and its implications. As India’s golden era of development, referred to as “Amrit Kaal”, it is crucial to consider multiple factors to achieve its ambitious goals. Among these, trade dynamics hold a central role, with China being India’s largest trading partner and its reliance on Chinese imports rising significantly—from $102 billion in 2022 to $121.97 billion in 2023. On the other hand, India’s exports to China saw only a modest increase from $15 billion to $16.24 billion over the same period. Based on our analysis of multiple trade databases, we deep-dived into the facts of what this growing deficit means for India’s economic future. Can India continue to depend so heavily on Chinese imports without compromising its own strategic goals?
India’s key imports from China mainly include electronic gadgets, machinery, nuclear reactors, and chemicals, which are essential for Indian industries. As per a report by the Global Trade Research Initiative (GTRI), India’s dependence on these imports has risen from 21% to 30% over the past 15 years. These imports make up more than 70% of India’s total imports from China.
To address this growing trade imbalance, several strategies can be adopted. These include diversifying India’s sources of imports, strengthening domestic markets, increasing India’s market interventions in key economies, and exploring new opportunities in emerging markets. A deep understanding of commodity-specific trade patterns is crucial for these strategies. Notably, China’s significant import dependencies include sectors such as oil, electronic equipment, minerals, machinery, gems and jewellery, chemicals, and oilseeds at the six-digit HS code level, which comprises 63.59% of its total imports in 2023, up from 59.60% in 2019.
In this context, a critical question arises: Where does India stand in China’s import dependency? For instance, China’s top imported product at the HS six-digit level is crude petroleum oil (HS code 270900), which constitutes 13.21% of China’s total imports in the recent fiscal year. India, however, does not export this product. Similarly, for China’s second-largest import product, electronic integrated circuits (HS code 854231), which accounts for 6.89% of the world’s imports, India’s exports to China hold a mere 0.04% share of China’s total imports, highlighting the significant trade imbalance.
India’s top exports to China include iron ore and concentrates, which, at the HS six-digit level, make up 13.03% of India’s total exports to China. While this product is among the top fifty products imported by China, India’s share in China’s total import of iron ore is only 4.25%. In contrast, Australia dominates with a 57.52% share, followed by Brazil with 19%. The disparity between Brazil’s and India’s share is notable, underscoring the need for strategic interventions to close these gaps. How can India enhance its competitive edge in such critical sectors to match or surpass other global players?
One significant approach that India can adopt to mitigate its trade deficit with China is to diversify its import sources, a strategy known as “Trade Diversification.” Instead of heavily relying on Chinese imports, India can explore alternative suppliers from ASEAN countries such as South Korea, Singapore, Malaysia, Thailand, and Vietnam. These nations play a significant role in facilitating China’s capital-intensive, high-value-added exports. For instance, nearly 20% of China’s exports of electrical machinery and electronics equipment are directed to the ASEAN-5, accounting for over 4% of global exports in this sector. Additionally, China imports a substantial volume of such products from these countries. By directly sourcing these products from ASEAN countries, India can effectively reduce its over-reliance on Chinese imports, fostering greater trade resilience and diversifying its supply chains.
At the same time, India should focus on strengthening its domestic producers through targeted market interventions and incentive schemes like the Production-Linked Incentive (PLI) scheme. This scheme boosts domestic production in 14 key sectors, reduces import dependence, and enhances India’s role in global supply chains. But will these measures be enough to create a significant shift in India’s trade patterns? Strategic implementation of this scheme not only promotes local manufacturing, creating jobs, attracting investment, and fostering innovation while also reducing import reliance and boosting India’s competitiveness in global markets. India’s recent economic partnerships with developed economies open doors for establishing a stronger presence in these markets. By leveraging its competitive advantages in sectors such as textiles and agriculture, India could enhance its global footprint.
In conclusion, strategic interventions and policy measures are urgently required to address the rising concerns around the India-China trade deficit. It is essential to tackle these issues at their roots rather than addressing surface symptoms. Without proactive measures, the trade imbalance could persist, allowing other global competitors to overshadow India in the near future. The question remains: Is India ready to take the bold steps necessary to secure its economic future?
The authors are with NCAER, New Delhi. Views are personal.