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The way forward for Indo-Chinese trade relations and how can India benefit?

The way forward for Indo-Chinese trade relations and how can India benefit?

By Amit Singh

The significance of bilateral trade between India and China is unquestionable, with China emerging as the largest trade partner of India ($ 65 Billion or ~9% of total trade). As both the civilizations mature, the attitude of mutual distrust is slowly being replaced by focus on growth through mutual co-operation. While the mutual co-operation is being extended on all the possible fronts like ‘support in UN resolutions’, WTO negotiations, and joint military exercises, the biggest avenue of co-operation is the bilateral trade, with significant measures being directed towards increasing it in a mutually beneficial manner. With both the countries targeting a growth rate of more than 8% (though Chinese economy is showing signs of slowing down), they have to find markets which are also growing at the same pace to absorb the goods produced by this growth. Here, the mutual dependence for markets is triggered by two factors:

  1. Rapid growth in production by both the countries and
  2. Almost stagnated demand in the western economies.

Beyond mutual dependence, the trade is characterized by high imbalance in favor of China (approx. $ 30 Billion deficit for India as of FY15). This imbalance has been a cause of concern for policy makers on both the sides and is resulting in short term measures like use of anti-dumping policy by India which is hampering the trade. This scenario places an interesting challenge in front of policy makers of both countries wherein they have to design measures targeted towards better trade balance as well as facilitating trade in the long run. But before that, a more relevant question to be asked is whether the trade imbalance is really a cause of concern. Or, is it a result of prevalent market dynamics in both the countries? The answer to this question lies in the close scrutiny of the trade basket between the two countries and understanding the nature of the trade. Recent media reports, which emphasize on ‘unsustainability of India-China trade’ also puts pressure on policy makers to address the issue, without questioning whether the issue really exists.

Another bone of contention for all the trading partners in China has been the security concerns raised by the United States of America (USA) due to the use of Chinese telecommunication products. While the real intentions behind these concerns are in question, this has been used as bargaining power by many countries. While trade facilitation has to be emphasized, it cannot be at the cost of national security.  One of the areas where India has been contemplating the balance trade is the Chinese FDI, which is again marred by security concerns.

Bilateral Trade Balance: A concern or market demand?

The most important outcome of trade is to increase the possibilities of consumption of goods through shifting the production to a location with minimum cost. But for trade to be sustainable at the same time, a country at an individual level has to achieve balance. But, can the condition of attaining balance be applied to bilateral trade, especially in a global scenario, where a country usually has more than 50 trade partners? In such a situation, can sustainability of trade be really defined for bilateral trade? The answer is not as straight forward as it appears. It is dependent on the composition of trade and prevailing business environment. If trade is hampering the growth of domestic production and creating non required dependencies of foreign products, it can possibly be considered unsustainable. (The term non-required here means dependencies for which domestic production capabilities exist. Dependencies on raw materials, capital goods are unavoidable if you do not have reserves.)

The trade with China has to be studied in this context, where the constituents of trade have to be evaluated based on the effect of their import on the Indian market. If there are evidences where the kind of imports are majorly manufactured goods with competing products being produced domestically, then definitely, some measures to boost local production and consumption can be initiated by the government through appropriate policy changes. But, if the imports are primarily in terms of raw materials or machinery to boost local production, then it becomes unavoidable imports and hence, the imports can only be facilitated.

On the other hand, increasing exports will be an interesting study to gauge if there are any deliberate trade restrictions from China to curb the exports from India. This can be done through studying the constituents of exports and their proportion in China’s imports.

chart 1

Source: Ministry of Commerce, GoI 2014

According to annual trade data of the Government of India (GOI), India’s major exports are cotton, copper and iron ore which account for 51% of its total exports to China. Major imports from China comprise of mechanical and electrical machinery and their parts, and organic chemicals accounting for 44 % of total imports.

If we rearrange the trade data and club it into heads: raw materials, intermediate goods, capital goods and consumer goods, a more in-depth and insightful conclusion can be drawn. The pie-charts given below show these insights-

chart 2

It can be seen that raw material and Intermediate goods consitituted 91% in 2013-14 and 88% in 2014-15 of our exports while more than 70% of imports comprised of capital goods and intermediate goods.  Thus, Indian exports are largely resource-intensive, including non-fuel primary commodities while imports are basically high or medium-skill and technology intensive commodities.

The point to ponder over here is that whether we should worry about the huge imports and thereby burgeoning trade deficit? Clearly, intermediate and capital goods at competitive rates are essential for our manufacturing sector and would contribute to the industrialisation process. Hence, importing large capital goods and machinery is not bad per se as the fruits of this investment take time to appear.

An interesting observation from the above charts is that consumer goods comprise only 5% of total imports. This raises a concern regarding the Indian consumer goods sector being affected by a surge in imports from China.

Thus, unless India diversifies its export basket, it is unlikely that it will be able to bridge its trade deficit with China through raising exports.

So, the question is: what is way to decrease the ever increasing trade deficit? There are two ways: either decreasing imports or increasing exports. It is advisable to go for the latter approach to have a productive and healthy competition with China. India’s exports to China have been dominated by primary commodities. However, the composition in the last few years has changed. In 2008-2009, iron ore exports were the single-largest item, accounting for 60% of our exports. India’s response to impose export restrictions on iron ore in the form of duties, and the ban on illegal mining led to decrease in this component of trade. However, other raw material and ore like copper and its items started picking up leading to a rise in its share in India’s export basket to China from 1% in FY09 to 15% in FY15. Thus, unless India diversifies its export basket, it is unlikely that it will be able to bridge its trade deficit with China through raising exports.

Chinese FDI, Security Concerns and India’s bargaining power

While China has concerns of an ageing population and slowing economy, India has concerns of a young aspirational population. These complementary needs create a favourable environment for Chinese firms to invest in India as their future production partner. For this, India has to cure its jaundiced eye of suspicion towards China and invite them with open arms to invest in India, particularly in manufacturing sector. Investment from China will not only bring in capital inflows but would also provide the much needed impetus to the manufacturing sector. Unlike trade, levels of investment between India and China remain relatively low. Total FDI inflows between April 2000 and February 2015 were a mere $396 million, accounting for less than 1% of the total FDI inflows received by India during the period. Of this, $251 million flowed in the last two years, indicating the potential synergies that can be realised between the two countries. India has many schemes of developing exports oriented islands like SEZ, NIMZ etc., most of which are running below capacity due to the lack of capital and technological know-how. China can provide both. FDI from China will not only bolster greater cultural ties, but also facilitate creation of more trade opportunities. It will also help India to utilize its excess labour to produce goods and export goods not only to China but across the world.

Security Concerns

The recent signing of a Memorandum of Understanding to set up Chinese Industrial Parks in India is a welcome step. The MoU is aimed at attracting Chinese investments in India and providing an enabling environment for Chinese companies to invest in industrial parks and zones. Some scepticism has been raised with regard to Chinese investment owing to national security issues like what was raised by IB about telecom equipment manufacturer Huwai and ZTE a few years ago. But this security fear is valid for any country.

However, what is needed is to remain vigilant and make some structural changes in the security setup of India rather than stopping the trade between the two countries. Moreover, there are sectors like manufacturing, infrastructure (though selected), agriculture and high technology where we can collaborate with China.

the focus area of India-China trade is not sustainability but the improving the trade relationship and converting it into a true partnership. For this region to truly lead the world economy in future to the level of current Eurozone, a very high level of collaboration is essential

As already discussed, the focus area of India-China trade is not sustainability but the improving the trade relationship and converting it into a true partnership. The two countries through mutual cooperation have the potential to convert the entire South Asian region in to a common market. For this region to truly lead the world economy in future to the level of current Eurozone, a very high level of collaboration is essential. This collaboration is possible only when these two countries start complementing each other’s strengths instead of targeting each other’s weaknesses. This is where the identification of complementary items is essential to increase bilateral trade. We begin by identifying such items in imports and exports of India and China. Identifying the products which India can target, is important as India is facing the challenge of utilizing its demographic dividend for producing items in demand by its major trading partners.


For sustainable growth of both economies, it is essential that their huge untapped markets are open for trade to each other. The historical baggage of suspicion has to be replaced with collaboration on all possible fronts, especially trade.

The hyped ‘unsustainable’ trade balance is ultimately a hype which our policy makers should not succumb to, as the trade data indicates our imports are primarily intermediate or capital goods for increasing domestic production.

One of the opportunities which businesses from both the countries can harness is the FDI in India, which can increase India’s resource utilization and give China better access to the Indian market. This also fits in well with the latest political developments in India, where the present government is actively pursuing the ‘Make in India’ policy. The Chinese economy is cash rich but slowing. They have Forex reserves of around $ 1 trillion, and India needs cash to make the initiatives like ‘Make in India’, ‘Smart Cities’ and ‘Digital India’ a success. What better complementary needs can one imagine for engagement!

This is India’s rebuilding phase after Independence. We should welcome funds from every country without the baggage of past. This is not to mean that we should turn blind eye to security concerns. We should be very vigilant in today’s digital world where information runs lightning fast. But that vigilance should be with every country and not just China. Moreover, the high level of engagement with the Chinese also gives us diplomatic support in dealing with Pakistan. Hence, it is a win-win situation for both nations with India envisaging a win more than just trade.

Amit Singh is presently an Assistant Vice President in Yes Bank. He is an IIM Ahmedabad and IIT Roorkee graduate. He has over 9 years of work experience in diverse fields. His area of interest includes Banking, World Finance, Politics, International relationships, and Start-up ecosystem in India.

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