The stern protest registered by India with China about the restrictions that hinder the export of goods and services to that country has more than just a little justification. Trends over the decade show that India’s trade deficit with China has steadily shot up from just under $2 billion at the start of the decade to more than $22 billion now. The share of Chinese merchandise imports that has been financed through Indian merchandise exports to China has also come down from 79% in 2004-05 to 30% in 2008-09.
But if one were to exclude low-value primary commodities like iron ore from total exports, India’s trade deficit with China would be close to $25 billion. And the share of Chinese merchandise imports into India, financed through India’s merchandise exports to China would come down to a fifth. This is a rather pessimistic scenario for India, which has steadily increased its exports for almost two decades now, and even managed to grab a slightly larger global share.
The growing trade imbalance with China has ensured that India’s trade deficit with China now accounts for one-fifth of India’s total trade deficit—it is the single largest deficit with any nation. Otherwise, India’s only major trade deficit zone was the Opec, where India’s deficit was a colossal $56 billion accounting for almost half of India’s merchandise trade deficits.
India’s growing trade deficit with China is also in sharp contrast to the experience elsewhere. For instance, India’s trade deficit with the EU has hovered around the $3-billion mark in the last three years, which is close to India’s trade deficit with the bloc in the late eighties. In the case of the US, though India’s trade surplus has shrunk, it still was a substantial $2.6 billion in the most recent year.
Trends also show that excluding China, India’s trade balance with the rest of the developing world was positive throughout the current decade with the surplus moving up to $5.2 billion in 2007-08. It was only in 2008-09, perhaps on account of the global recession that the trend was suddenly reversed with the positive trade balance turning into a deficit of $5.1 billion.
So what explains the sharp acceleration in India’s trade deficit with China?
The trade numbers show that between 2000-01 and 2008-09 the share of India’s exports to China more than doubled to 5.1% of the total while its imports more than trebled pushing up China’s share in India’s total imports to 10.8%. This shift in trade towards Chinese markets is a part of the larger shift in India’s trade towards the Asian region. In fact, other major countries where India has made substantial gains in increasing exports’ share during the decade include Singapore (2.5 percentage points), South Korea (1.2 percentage points) and Malaysia (0.5 percentage points). This is in sharp contrast to the declining share of India’s exports to developed markets like Germany, Hong Kong, Japan and the US. The sharpest fall was in the share of the US, where India’s exports share declined by 9.5 percentage points and fell to 11.4% during the decade.
The question then is, what is the feasibility for further buoying up India’s exports to China and narrowing down the disproportionately large deficit? A cursory glance at Indian exports shows that many of the important Indian products have not been able to gain any significant toehold in China even though they have made inroads into other developed markets.
For instance, the data for the first six months of 2009-10 shows that China’s share of Indian exports was minuscule and far below India’s total export share to China in many of the top 25 Indian export products, such as gems & jewellery (1.7%), petroleum products (0.3%), transport equipment (0.3%), pharmaceuticals (1.3%), cotton readymade goods (0.2%), machinery & instruments (4.8%), metal manufactures (0.6%), iron & steel (1%) and marine products (4.8%).
But some other products in the top 25 ranking have made more substantial headway with the Chinese share in India’s export market going up considerably in products like electronic goods (6.2%), oil meals (6.4%), spices (8%), dyes & intermediaries (8.1%), processed minerals (8.6%), plastic & linoleum products (12.5%), non-ferrous metals (24.5%) and iron ore (91%).
Boosting export growth in the laggard products would require India to take up the issue of non-tariff barriers in China, including for products like pharma, automobile parts and steel. The array of policies protecting and promoting the so-called “pillar industries” and discriminatory VAT policies place exporters at a disadvantage.
Arbitrary practice by the Chinese customs is also another deterrent to exporters. Persuading China to tone down these restrictions would certainly give Indian exports a big boost and help narrow the trade deficit to reasonable levels.
Source : Financial Express