Slow and uneven growth, declining commodity prices, and structural issues have led to a decline in global trade. Naturally, exports from many emerging markets are plunging and India is no exception. Our merchandise exports, which are almost two-thirds of total exports, have fallen 17.6% in dollar terms in the first seven months of this fiscal, after seeing a 1.5% decline in fiscal 2015. This is not just because of lower prices, there has been a decline in real terms, too. According to the Central Statistical Organisation, exports after adjusting for inflation declined by 0.8% in fiscal 2015 and further by 6.5% on-year in the first quarter of fiscal 2016. That compares with a positive real growth of 7.3% in fiscal 2014.
But the fall in exports was accompanied by lower imports because of the meltdown in the commodity complex—particularly oil—and subdued domestic demand, which has helped rein in the trade deficit. India’s goods and services trade deficit as a proportion of GDP has declined from 6.4% in fiscal 2013 to 1.8% in fiscal 2014, and further to 1.4% in the first quarter of this fiscal. Having said that, it is important to bear in mind that the reduction in trade deficit is largely due to transitory factors, and the spectre of rising trade and current account deficit could haunt us when commodity prices and domestic demand revive.
Over the years, India has geographically diversified its export basket. Today, half of its exports are to Asia, compared with 37% in fiscal 2001. Exports to the West, on the other hand, have been on a decline. The share of Europe and the US in India’s exports stood at 18.1% and 13.7%, respectively, in fiscal 2015. The flip side to this diversification has been rising trade deficit with Asia and to some extent with Latin America (see chart). India’s trade deficit with Asia has actually rocketed and is the most among all geographies.
China is India’s biggest trading partner in Asia and has been the prime driver of this trend, contributing about 40% of the total trade deficit that India ran with Asia in fiscal 2015. For many years now, India’s highest trade deficit has been with China. True, bilateral trade between the two countries flourished in the last decade, rising to $72.3 billion in fiscal 2015 from $12.7 billion a decade ago. But, worryingly, India’s trade deficit with its neighbour has also widened over this period—from 5%, China’s share in India’s total trade deficit has risen to 35%. While exports to China rose from $5.6 billion in fiscal 2005 to $11.6 billion in fiscal 2010—a period when the Chinese economy was growing in double digits—they remained lacklustre thereafter, and measured $11.9 billion in fiscal 2015. Imports from China, on the other hand, have continued to grow rapidly, journeying from $7.1 billion in fiscal 2005 to $60.4 billion in fiscal 2015.
There are many reasons attributed to this trend. Chiefly, India has not been able to increase its exports to China due to which the latter’s share in India’s total exports has declined to 3.9% in fiscal 2015 from 6.7% in fiscal 2005. At the same time, India only accounted for 0.8% of China’s total imports in fiscal 2015, down from 1.5% in fiscal 2005. Not only this, India’s rank in terms of countries exporting to China has worsened from 16 to 28 during this period, suggesting that India has been losing its market share to other competing nations. On the contrary, ranks of many other emerging peers within Asia (Malaysia, Indonesia and Thailand) and elsewhere (Brazil, Russia and South Africa) have either improved or remained at similar levels during this period. What this means is that India’s significance as a source of import for China not only remains low, but is also declining.
Another key reason for India’s burgeoning trade deficit with China is that the bulk of India’s exports to China are low value-added goods such as cotton, copper alloys and iron-ore, the demand for which has been declining with the slowdown in the Chinese economy. On the other hand, India’s imports from China mostly include products with high level of value-addition, chiefly machinery and mechanical appliances, electrical equipment, electronics and parts, chemicals and allied products, the demand for which remain high and is expected to rise with India’s growth revival.
Not only are Indian exports to China low value-added by nature, they are also less diversified. For instance, China is the top destination for cotton, copper and articles and ores, which form roughly 45% of India’s total exports to China. So, a slowdown in Chinese economy is bound to impact India’s export of these items significantly.
At the same time, India has not been able to harness its full export potential to the neighbouring nation in many of its key export commodities due to non-trade barriers. For instance, Indian exports of agricultural products have faced sanitary and phytosanitary (SPS) issues, whereas pharmaceutical exports are unable to make their way into highly controlled and at times opaque Chinese markets, which are largely state-owned. Also, China has long been accused of dumping. The maximum number of anti-dumping measures and initiatives taken up by India against any WTO member so far have been against China. As on January 2015, China faced 171 out of 715 cases initiated by India, i.e. close to a quarter of all cases.
As the Chinese economy is set for a slower growth phase and Indian growth is expected to pick up, India’s trade deficit with China could worsen further, lest Indian exports to China start moving up the value chain and the Indian government takes up the issues of unfair trade practices with its Chinese counterpart.
An important milestone in India-China or more generally India-Asia trade and investment relationship is going to be the forging of the Regional Comprehensive Economic Partnership (RCEP) deal. It is currently being negotiated amongst the 10 member states of the Association of Southeast Asian Nations (ASEAN) and the regional trading partners including Australia, China, India, Japan, New Zealand and South Korea. However, if the tariff structure, scope and coverage are not worked out prudently, India may lose more rather than benefit in terms of garnering a larger market share for its exports, as has been the case in the past.
Dharmakirti Joshi is chief economist and Adhish Varma is junior economist, CRISIL Ltd