India-China strategic relations have been acrimonious since the Himalayan standoff in April 2020. In addition to military and diplomatic responses towards Chinese aggression, India has taken specific measures towards technological and economic derisking, including but not limited to banning Chinese apps, Huawei and ZTE from domestic 5G networks and limiting Chinese investments in crucial infrastructure projects.
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Despite these significant moves, India’s trade deficit with China has only steepened in the last 20 years. This trend has continued despite changing geo-political and strategic equations. India has emerged as the bright spot by clocking a 7.2% growth rate in 2022 as the world recovers from the supply chain disruption caused by the Covid-19 pandemic. But the trade deficit with China needs to be addressed as it remains like an albatross around India’s neck.
The trade deficit with the People’s Republic of China (PRC) stood at $83 billion in 2022, which does not reflect the true gravity of the situation. Accounting for the deficit from the ports of Hong Kong and Macau, the data of which is separately reported, the figure amounted to $96.5 billion in 2022.
Even this number is understated, considering the discrepancies in tracking third-party cargo shipments, which means that the worth of Chinese goods reaching Indian ports is much more considerable. In this context, the NITI Aayog’s Request for Proposal (RFP) to undertake a study on bridging the trade deficit with China cannot be more timely and consequential.
Why the trade deficit is worrying
Not all trade deficits are bad, but the degree of Indian trade deficit vis-a-vis China reveals strategic pressure points. A net import of luxury and non-strategic goods gives a nation control over the global market. An influx of raw materials facilitates industrial production.
However, a deficit driven by essential consumer goods and sectors strategic to national growth is worrisome because it leaves a nation vulnerable to economic coercion. Thus, the trade deficit with China is alarming because it creates four major strategic vulnerabilities for India’s economic future.
First, it has resulted in enormous wealth transfer from India to China. Even the US-China trade war was mainly driven to address the $417 billion trade surplus China was running against the United States. Large deficits might not sound much annually, but the amount accumulated over the years becomes concerning.
In 2022 alone, India spent money worth six Delhi-Mumbai Expressways to pay for the trade deficit with China. India’s total transfer of capital to China in the last two decades ($693 billion at the current rate from 2001-2022) is equivalent to the current-day GDP of Poland ($688.18 billion in 2022).
India’s major exports to China are mainly raw materials (coal, refined oil, marine food, iron ore). In contrast, its major imports are consumption goods (semiconductors, organic chemicals, fertilizers, plastics, and merchandise).
Second, this sustained trade deficit has contributed towards decelerating India’s industrial growth. The deficit has been unaffected by the change in governments and global economic trends. The problem is partly structural and partly due to over-reliance on the services sector for economic growth.
The service sector cannot produce employment at the scale needed for unskilled and semi-skilled workers. Further, no country in human history became a great power without having an industrial base. The American, German, Japanese, and Chinese ascendency to economic powerhouse status is driven by creating a strong industrial base.
However, Indian manufacturers can rarely compete against China’s state-supported manufacturing industries. The slapping of countervailing and anti-dumping duties by the government is only part of the solution. The other part is to create a strong industrial base, which is being directly affected by the trade deficit.
Vulnerability to Chinese coercion
Third, China sits on the upstream of India’s most critical supply chains. Sectors like agriculture, digital economy, information technology, pharmaceuticals, and green infrastructure are extremely vulnerable to Chinese economic coercion.
India’s food security is increasingly susceptible to China. It is our second-largest urea supplier and the world’s biggest exporter of phosphate, a key ingredient used in making fertilizers for rice production. ‘Digital India’ is dependent on the import of analog chips and electronics from China. It has a 50% import share of all integrated circuits and two-thirds even in basic semiconductor devices like diodes and transistors.
India’s pharma and healthcare industries are dependent on China. It supplies almost 70% of active pharmaceutical ingredients (APIs), and exercises 50 to 70% dominance on basic medical instruments like thermometers, bandages/wool and sphygmomanometers. Chinese dominance in solar cells, wind energy, and EV batteries make India’s green infrastructure initiatives overly dependent on China.
Fourth, a culmination of the above three vulnerabilities cascades into a potential national security threat. India shares a two-front military challenge from China in the Himalayas and the Indian Ocean. On top of it, New Delhi’s dependence on trade and technology provides Beijing with a potent strategic lever to exercise against India.
In the last decade, China has resorted to economic coercion with Taiwan, Australia, South Korea, Japan, and the Philippines. It is only a matter of time when this dependence is weaponised by Beijing to achieve its geopolitical goals.
These trends suggest that building the edifice of India’s growth story with Chinese bricks would not create a strong foundation for the nation. The government’s push towards Make in India and developing the manufacturing sector is a step in the right direction to address this dependence. But self-reliance, in its best spirit, would mean identifying both micro and macro-dependencies in China, especially in the strategic sectors.
Self-reliance does not mean a return to the socialist-style import substitution, which plagued the Indian economy for half a century. Instead, domestic strategic sectors should not be sacrificed on the altar of Chinese industrial overcapacity, which is manifested in enormous trade deficits run by China.
