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India’s Trade Deficit with China Grows Despite Import Curbs
Context:
India’s trade deficit with China rose by 13% during April-October 2024, reaching $57.83 billion, up from $51.12 billion in the same period last year.
What is a Trade Deficit?
- A trade deficit occurs when a country imports more than it exports, potentially causing currency depreciation, increased debt, and challenges for domestic industries.
- Factors like exchange rates, global economic conditions, and domestic demand impact trade deficits.
Key Highlights:
- Rising Imports from China:
- Imports from China increased to $65.90 billion, up from $60.01 billion last year.
- Major imports include electronics, telecom instruments, machinery, organic chemicals, and solar equipment.
- Falling Exports to China: Exports dropped to $8.06 billion from $8.89 billion last year.
- China’s Dominance:
- China remains India’s largest import partner, followed by Russia and the UAE.
- Imports from China are double those from Russia and 2.5 times those from the UAE.
Reasons for Dependence on Chinese Imports:
- Industrial Reliance
- China supplies 62% of solar equipment and dominates inputs for electronics, telecom, and electric vehicles (EVs).
- India’s green energy and EV sectors heavily depend on Chinese products like lithium-ion cells and transformer materials.
- PLI Scheme Impact: The Productivity Linked Incentive (PLI) schemes, aimed at boosting domestic manufacturing, still depend on 80-95% Chinese inputs.
- Overdependence on Key Inputs: Sectors like solar, EVs, and telecom are reliant on China, making the trade deficit challenging to manage.
Challenges and Risks:
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- Widening Deficit: The annual trade deficit with China, already at $80 billion, could double in the next five years.
- Economic Vulnerability: Dependence on Chinese imports raises concerns about long-term sustainability and national security.
- Strategic Concerns
- National Security Risks: Dependence on Chinese imports for critical sectors, such as telecom and renewable energy, raises concerns over supply chain vulnerabilities and potential geopolitical risks.
- Economic Leverage: China’s dominance in India’s imports can translate into leverage in bilateral negotiations, limiting India’s strategic options.
- Technological Dependency
- Lack of Indigenous Capabilities: High-tech imports like semiconductors, lithium-ion cells, and CRGO steel indicate a gap in India’s domestic technological capabilities.
- R&D Deficit: India’s expenditure on R&D as a percentage of GDP remains low (~0.7%), compared to China (~2.4%). This hampers the development of alternatives to Chinese imports.
- Impact on India’s Green Transition
- Renewable Energy Goals: India’s ambitious targets for renewable energy (500 GW by 2030) hinge on Chinese solar panels, which dominate the global market.
- Critical Mineral Imports: Minerals like lithium and rare earths, crucial for EVs and batteries, are sourced directly or indirectly from China, leaving India exposed to supply chain disruptions.
Economic Asymmetry in Bilateral Trade
- Skewed Trade Relationship: India’s export basket to China is limited to low-value goods like raw materials and intermediate products (e.g., iron ore and cotton), while imports consist of high-value finished goods.
- Structural Imbalance: This asymmetry prevents India from leveraging trade as a tool for economic parity with China.
Proposed Solutions:
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- Focus on Deep Manufacturing and R&D: Investments in research and development are essential to create a self-reliant industrial base.
- Encourage FDI from China: The 2023-24 Economic Survey suggested leveraging Foreign Direct Investment (FDI) from China to integrate India into global supply chains and boost exports.
- Diversify Supply Chains: Align with the China-plus-one strategy, which encourages reducing dependence on China by diversifying supply chains.
- Promote Domestic Alternatives: Strengthen local industries to manufacture critical inputs for sectors like renewable energy, telecom, and EVs.
Leveraging FDI from China: A Strategy to Address Trade Deficit
In the 2023-24 Economic Survey of India, Chief Economic Advisor V. Anantha Nageswaran highlighted the potential of leveraging foreign direct investment (FDI) from China to address the rising trade deficit.
Two Pathways for India in the “China Plus One” Strategy:
India can benefit from the global “China Plus One” strategy through two primary approaches:
- Integrating into China’s Supply Chains: Becoming a part of China’s existing supply networks.
- Promoting FDI from China: Attracting Chinese investment to boost domestic production and exports.
The Case for FDI Over Trade Integration
The 2023-24 Economic Survey highlights that focusing on foreign direct investment (FDI) from China offers a more promising route for enhancing India’s exports, particularly to markets like the United States. This approach mirrors the successful strategies employed by East Asian economies in the past.
China Plus One” strategy
- The “China Plus One” strategy has emerged as multinational companies, including Apple, seek to reduce their reliance on China—traditionally the “world’s factory.”
- This shift is driven by COVID-19 disruptions, US-China tensions, and rising costs in China.
- The strategy involves diversifying supply chains to mitigate risks associated with over-dependence on China for high-tech products and components
