India and China : A Growing Imbalance

This is an introductory article that aims at elaborating on the growing economic imbalance between India and China. This is a first in a series of five articles aimed at introducing the myriad of common economic concerns that the two South-East Asian powers share.

Besides sharing important strategic and geopolitical interests, as two of the fastest growing economies of the world, India and China have created significant economic ties. China is India’s largest trading partner and this arrangement, in a nutshell, involves the procurement of manufactured goods and implements from China and the export of raw materials to the Chinese industry. While the bilateral trade relations remain essential to the Indian success story, there exists a massive imbalance in the trade patterns. India had a trade deficit of USD 27 billion in 2011, a figure that according to Chinese trade figures released in January 2013, was slightly over USD 29 billion by 2012 (Aiyar,2013).

Source : Bilaterals.org

There is no doubt that the trading relationship between both nations has grown at a rapid rate. In the year 2000, trade between India and China was less than USD 3 billion. By 2012, it was USD 66 billion, a marginal decline from the 74 billion in 2011 (DNA,2013 ; Aiyar 2013). Krishnan (2013) reports that when the current fiscal year began trade was down 6.2 per cent. However a statement from the Chinese Vice-Minister of Commerce suggested that the PRC genuinely believed that the $100 billion target for 2015 would be ‘realised on schedule’. In light of greater trade being anticipated, the Indian government and industry must ensure that the trade deficit must not also grow proportionally; rather this growth must ideally be seized and used to reduce the deficit (Ibid)

In recent times, the trade deficit has increased due to a variety of reasons. Out of India’s five greatest exports to China, the decrease in average trading patterns is worrying. Key Indian exports like cotton, iron ore and copper have sustained their downward spiral. Iron ore declined sharply by 76 per cent to $ 595.42 million over the last trading year. Cotton and copper declined over the last year by 40 per cent to $ 1.39 billion and 24 per cent to $ 688.53 million respectively. (Economic Times, 2013)

The year on year data from the last fiscal year to this one is quite worrying. The Indian share in Chinese exports has dropped to under 1 per cent from 1.33 per cent. Cotton and diamond are the other key items of trade between the two nations. Cotton yarn shows a considerable leap. It grew by 115 per cent to reach a value of $ 740 million from 2011-12 to 2012-13. Diamonds have increased at a relatively slow 14 per cent to record $ 562.1 million. The Chinese exports to India have sustained themselves on a steady average of 2.7 per cent year-on-year. (Ibid)

What gave birth to (and sustains) this trade deficit is the massive dependence of the Indian economy on Chinese imports. The PRC single-handedly contributed to 12% of India’s imports in the year 2012-13 making them a vital import source. 

While Chinese goods have a competitive place in the Indian markets, China is not dependent on Indian imports. On the contrary, China has also sought to find cheaper alternatives for their imports. One key example of this is the potential South African and Chinese trade growth. This diversification in the sources of raw materials, if implemented successfully, could indicate worse trading patterns for India.

Given the recent slowdown in China’s growth, the demand for Indian raw materials has fallen.  Also, the key industries that India supplied to are facing concerns of their own. With the real estate sector in China facing stricter regulation and overcapacity in its iron and steel industry, the Indian exporter needs to reassess his production and/or export priorities (Howanietz, 2013)

Source : Foreign Policy

There are efforts being carried out on both sides to ensure that the disparity isn’t as great as it is. China has aided Indian conglomerates with loans while India has tried to match China’s demands in sectors where India does not hold a regional advantage. Both sets of governments have spoken out against the deficit, though it is too soon to take China’s new government at face value. Their incursions into Indian territories and economic dumping in the past leads to mistrust on the Indian side. On the other hand, whether the current Indian government survives or not in the upcoming elections is under contention and as a result there is little to assure the market. The other alternatives seem set to take a hardened stance on China but ambiguity still persists.

In light of this trade deficit, we realise that while it is essential for India to keep strong trading patterns alive with China, India must also ensure that this growing trade doesn’t cause a growing trade deficit. As mentioned before, despite the Indian and the Chinese governments having spoken out against this imbalance, there seems to be little short-term respite at least in the short run.

Anmol Soin

Anmol Soin

Managing Editor at InPRA
Anmol Soin has finished his post-graduate education from the University of Oxford and the University of St.Andrews. Anmol will always credit his academic growth to his time at St.Xavier’s College, Mumbai.

Formerly engaged as a consultant and a researcher for the 14th Finance Commission (Government of India), he has also worked for the Knowledge Partnership Program (IPE Global and UK Government’s Department For International Development).

He was also the Professor for ‘The Economics of International Relations and Geopolitics’ for the final year undergraduates at NMIMS. Having worked at multiple think-tanks, he brings his experiences as a professor and a consultant together to try and frame a comprehensive overview of International Economics for InPRA.
Anmol Soin