External Affairs

$56 Billion and Growing, it’s Time India Addressed the Trade Deficit With China

India should look to tap increasing Chinese foreign investments and imports, as well as make travelling in India more attractive for Chinese tourists.

Prime Minister Modi met with Chinese President Xi Jinping, 2015. Credit: PTI

File photo of Prime Minister Narendra Modi with Chinese President Xi Jinping. Credit: PTI

India’s trade deficit with China in 2015-16 stands at $52.69 billion. And it is expected that this will go up even further this year. This by itself should not be a cause for worry, as India runs deficits with 16 out of its top 25 trade partners. The fact is that India buys more than it sells worldwide. But the real problem is that there is no obvious solution in sight as yet and therefore the question that arises is, for how long can this huge deficit with China be maintained?

India’s trade relations with China have had a checkered history and, unfortunately, continue to remain hostage to political developments between the two countries, albeit much less now than earlier. It is to the enormous credit of Rajiv Gandhi that he was the first Indian leader to realise that a solution to the vexed issue of the boundary dispute was not going to be forthcoming in the near future and therefore to delay normalisation and development of trade and economic relations with China would only be counter-productive. It was Gandhi who took the decision to de-link the two issues. It was also during his visit to China in December 1988 that for the first time a ‘Joint Economic Group’ was established. However, it must be pointed out that no one in the Indian leadership at that time paid much attention to this aspect of the relationship, for no one anticipated that bilateral trade volumes would develop so fast. But they did develop, with bilateral trade jumping from a paltry $265 million in 1991 to a healthy $70.73 billion in 2015-16. Of interest is the fact that India’s current bilateral trade with China is larger than its combined bilateral trade with Britain, Germany and Japan.

Almost everyone recognises what the real problem behind this massive trade deficit is. India’s trade basket consists of cotton, gems and precious metals, copper and iron ore. All of these are commodities. China on the other hand, exports manufactured capital goods mainly for the power and telecom sectors. The fact is that India just does not produce enough high-quality manufactured goods for exports, let alone for its own billion plus consumers, and therefore has to rely on quality imports from the outside world. There are many experts who feel that the inordinately high trade deficit between India and China of $52.73 billion is not a very serious issue for a country such as India – since it is on its way to establishing an industrial base and seeks high growth rates, a larger import profile is but unavoidable. Since China is the major source of technology-intensive products that are cost effective, running a high deficit with China is but inevitable.

However running trade deficits with China may not be necessarily inevitable as presumed. According to the Chinese, the problems faced by India are elsewhere and essentially relate to restrictive labour practices, land and tax laws, rickety infrastructure and inadequate power supply. In addition, while China is a part of the global supply chain, being the last stop of the manufacturing chain in East Asia, India is nowhere near being a part of this global chain. Both India and China are likely to be among the four largest economies in the world by 2020, yet India still does not have a full-time trade negotiator on the lines of the US Trade Representative. Trade negotiations with China are therefore only but episodic.

What can be done?

Two things stand out for immediate consideration. The Chinese say that in the next few years, they will import goods worth $10 trillion and invest about $500 billion abroad. We need to tap into this urgently. At present, Chinese FDI into India is rather abysmal, with the total reaching a mere $396 million for the period 2000 to 2014. This figure is about 1% of the total received by India, and of this $251 million came in the last two years. During the visit of Chinese President Xi Jinping to India in September 2014, he promised a further Chinese investment of about $20 billion. The Chinese also proposed to set up industrial parks in India and every effort should be made to speedily execute these projects. Take the example of the manufacture of the iPhone in China. Most of its parts are imported into China from South Korea and Japan, and China is the last stop in the manufacturing chain in East Asia. China only value adds a small proportion to the full product, but the important point is that it is a part of the Asian value chain. India needs to join this chain.

The second point for consideration is that there is a general lack of awareness in India about tapping the highly lucrative Chinese foreign tourist market. About 150 million Chinese travel abroad annually and are estimated to spend about $229 billion abroad. 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. 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. 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.

R.S. Kalha is a former secretary at the Ministry of External Affairs