Balancing trade with China: More Chinese investment, taking advantage of local production incentives, can help build self-reliance

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March 16, 2021 6:45 AM

India has displayed policy maturity and pragmatism in recent weeks by reassessing the possibility of reviving Chinese investments in the economy.

India has displayed policy maturity and pragmatism in recent weeks by reassessing the possibility of reviving Chinese investments in the economy.India has displayed policy maturity and pragmatism in recent weeks by reassessing the possibility of reviving Chinese investments in the economy.

China return as India’s largest trade partner during FY20-21 has surprised many. Since the outbreak of Covid-19, efforts to reduce reliance on Chinese products, many felt, would show up in bilateral trade figures through lower imports, and a smaller trade deficit. The expectations haven’t materialised. This isn’t surprising at all.

During April-December 2020, India ran trade deficits with 19 out of its’s top 25 trade partners. Some of these were due to large crude oil imports. China is not a source of crude oil imports for India. Nor is it a source of gold imports, which is another major import category for India. But China overwhelmingly dominates India’s non-oil, non-gold import basket. This has been so for several years.

The Covid 19 pandemic and associated developments, including geopolitical ones, haven’t changed China’s preeminence as India’s major source of non-oil, non-gold imports. Along with China, India sources these imports from East and Southeast Asia and Europe, too. This shows up in its trade deficits with Germany, Malaysia, Singapore, Korea, Japan, Thailand and Indonesia.

However, the sizes of these deficits are not comparable with that of China. On the whole, in India’s total trade of $462.7 billion during April-December 2020, its imports ($261.4 billion) exceeded its exports ($201.3 billion) by more than $60 billion. The deficit of $30 billion with China was around half of India’s total trade deficit. Clearly, no substantive change has taken place in the character of India’s trade with China!

Those unhappy over the Indian economy continuing to import more than it exports, especially from China, should note that high imports from China coincide with unmistakable recovery in the domestic economy. Turning northward from -24.4% in April-June 2020, quarterly GDP has moved out of the negative territory to be 0.4% in October-December 2020.

The third quarter growth looks more impressive at 5.3%, not corrected for inflation. The quarter has seen several sectors of the economy moving out of red. The most notable are manufacturing, electricity, gas and water supply, construction, and financial, real estate and professional services.

The industrial recovery—precipitated by gradual withdrawal of lockdown restrictions, pick-up in factory output and consumption demand arising from the festive season—has led to an expected rise in demand for imports by industry.

As a result, imports of telecom instruments, electronic components, chemicals (both organic and inorganic), fertilisers, bulk drugs, computer hardware, electrical and non-electrical machinery, and consumer electronic products, have picked up. The bulk of these imports continue to be sourced from China, as they used to be earlier. The received wisdom of the prospects of Indian manufacturing depending heavily on sourcing from China is vindicated again.

There were some expectations that Indian importers of items being sourced heavily from China would be able to switch to other sources. Obviously, that hasn’t happened. China was able to get its production back on track much faster than other major economies. As the only major economy to have avoided a contraction in GDP growth during 2020, China, for more than six months now, has responded well to the demands for industrial and consumer goods from the rest of the world, including India.

No other economy, from Asia or Europe, has been able to do so, leaving India and others with little choice but to import from China. The industrial recovery in China has also led to sustaining of its consumer demand. As a result, China has been the world’s major market for absorbing various exports from several other countries, particularly from Asia, abetting their economic recoveries.

From an Indian perspective, China’s persistence as the largest trade partner and source of imports underlines its high import dependence on China. Multiple efforts to incentivise and encourage higher production of import substitutes will take years to yield noticeable results. Till then the reliance of domestic manufacturing on China for intermediate imports would continue.

India has displayed policy maturity and pragmatism in recent weeks by reassessing the possibility of reviving Chinese investments in the economy. These investments, such as those by Xiaomi in making smartphones locally, can contribute significantly to the goal of producing more at home and reducing imports.

Similar investments in major employment-generating sectors like automobiles, can augment domestic capacities not just in vehicle assembling, but also upstream vehicle parts and component-making capacities. Indeed, at a time when India is working aggressively on privatising state-owned enterprises, Chinese investments, particularly in non-sensitive, non-strategic sectors, can contribute significantly to the overall objective.

India’s trade relations with China won’t transform overnight. But more Chinese investments, taking advantage of the new incentives for increasing local production, can be of significant help in the efforts to build self-reliance. Many of these investments would facilitate exports too, including to China. Using Chinese investments for increasing Indian exports to China would be the most effective way of reducing the bilateral trade deficit.

Senior research fellow and research lead at the Institute of South Asian Studies (ISAS), NUS isasap@nus.edu.sg
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