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India-China Trade Deficit [Mains Article]

China, following its reforms in 1979, encouraged exports to boost its economy, which has often resulted in a large number of products being dumped in markets like India. This policy, however, has resulted in a further increase of the deficit.
By IT's Mains Articles Team
November 13, 2017

Contents

  • Introduction
  • India’s trade deficit with China has steadily expanded
  • Reasons for Trade Deficit
  • What needs to do to reduce trade deficit?
  • Conclusion

India-China Trade Deficit [Mains Article]

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GS (M) Paper-2: “India and its neighbourhood- relations.”
GS (M) Paper-3: “Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.”

 

Introduction

  • India’s bilateral trade with China stood at $71.48 billion in 2016-17. India’s trade deficit with China has marginally dipped to $51 billion in 2016-17 from $52.69 billion in the previous fiscal.

India-China-Business Money Control

India’s trade deficit with China has steadily expanded

  • At slightly over $50 billion ($51 billion) in 2016, India’s trade deficit with China is about half the country’s overall trade deficit ($106 billion).
  • The trade deficit with China doubled in 2006 compared to the year-ago period, and since that inflection point, has kept on rising.
  • Much of the rise in imports is driven by India’s import of high-tech goods, including mobile phones and other electronic products.

India-China-Trade-Deficit-ET2

India-China-Trade-Deficit-ET3

Reasons for Trade Deficit

  • The problem of huge trade deficit is India’s export of raw materials as opposed to importing finished product with high technology from China.
  • India’s trade basket consists of cotton, gems and precious metals, copper and iron ore. China on the other hand, exports manufactured capital goods.
  • China, following its reforms in 1979, encouraged exports to boost its economy, which has often resulted in a large number of products being dumped in markets like India. This policy, however, has resulted in a further increase of the deficit.
  • Since India does not produce enough high-technology manufactured goods for exports and domestic use, it has to rely on imports from the outside world specially China.
  • Market access is a huge problem for Indian companies. Strict government regulations in China hinder Indian companies from penetrating the Chinese market. For example, India is very strong in three key sectors – pharmaceuticals, agriculture and IT services – but Chinese regulations impose restrictions that stifle the provision of Indian goods and services.

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  • There is a serious knowledge and information lag on China. India does not have in-depth knowledge of the Chinese market.
  • The Chinese system has lesser checks and balances because one party controls all aspects of political economy. So the implementation of policies is quick. India on the other hand has a democratic system and implementation of policies takes more time compared to China.
  • The complications occur when an over-zealous executive which is rule-bound interacts or counteracts with a private sector which is primarily result-oriented. Instances of judicial overreach may also threaten the economic logic of a particular policy in India.
  • An inconvenient business environment and bottlenecks in infrastructure, labour laws and poor environmental standards have, furthermore, discouraged foreign investment and consequently affected the growth of the manufacturing sector in India.
  • Various Indian governments have not been able to make the best use of India’s comparative advantages with China in order to tap into the under-exploited Chinese market.
  • The number of Chinese tourists visiting India is abysmally low, but this may also be due to the visa regime being rather strict due to perceived security reasons.

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What needs to do to reduce trade deficit? 

  • There is need for a comprehensive strategy to deal with China, for both the Indian private and public sectors. This is because in many ways China when dealing with other countries operates as a “system”- Government and Industry.
  • Strong efforts must be made to compile knowledge and information about Chinese market for the benefit of Indian Industry and consequently for the government as well. Without such knowledge, no opportunities can be seized.
  • Efforts are being made to increase overall exports by diversifying the trade basket with emphasis on manufactured goods, services, resolution of market access issues and other non-trade barriers.
  • This is done through bilateral meetings and institutional dialogues. Indian exporters are encouraged to participate in major trade fairs in China to show-case Indian products.
  • India is a potential market for agricultural inputs like fertilizers and processed chemicals. In turn, Indian firms can focus on Chinese markets in processed and frozen foods and dairy products.
  • The pharmaceutical sector has huge business potential for both countries. India is a large importer of pharmaceuticals ingredients and intermediates from China. Indian firms specialize in formula development and finished dosages.
  • Prime Minister Narendra Modi during his last visit to China took a decisive step and introduced the concept of e-visas for facilitating travel by Chinese tourists, but much more needs to be done to attract Chinese visitors.
  • The Buddhist circuit around Gaya and Nalanda in Bihar needs to be directly air linked to Asian cities such as Bangkok, Singapore and Shanghai to facilitate travel. It is time for India to play the Buddhist tourist card.
  • Ever since 1988, it has been India’s policy to limit our differences with China, contain them and to narrow the strategic deficit, but at the same time to enlarge the scope for cooperation and collaboration.

Conclusion:

  • Let not the mushrooming trade deficit become yet another milestone around the neck of Sino-Indian relations. The time for taking decisive steps is there for the asking.
[Ref: Economic Times, Times of India, The Wire, Live Mint]

 

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