Even amid a persisting 22-month-long border stand-off, the two-way trade between India and China rose to a historic high, wherein the trade balance stands in favour of China. What explains this phenomenon? How is India dealing with this reality?
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A continuing phenomenon that has deeply transformed the international economy and trade in the past two decades has been the deep penetration of goods made in China, initially low-cost and later technologically advanced, into the markets of almost all the countries around the world. India alone was not immune to this phenomenon, causing the trade figures to shoot up even as tensions along the border continued. In such a scenario, considering the fact that India also refuses to concede to Chinese hegemonic ambitions in Asia, which effectively undermines its interests, makes the former’s thriving trade ties with the latter ‘paradoxical’.
What the numbers say
Even amid an unresolved border question and the continuing series of talks at the military and diplomatic levels to diffuse a 22-month-long border standoff, 2021 witnessed India’s bilateral trade with China crossing a hundred billion US dollars for the first time, reaching $125.6 bn., and growing by about 43.3 per cent from the year before, according to the latest figures released by China’s customs administration last month. Meanwhile, Indian figures show a slight mismatch, but it does reflect the same trend. However, 2020, being the first year of the pandemic, witnessed a fall in overall trade as the industrial sector contracted. At the same time, Indian import demands for medical equipment such as PPE kits, masks and gloves witnessed a surge during the year.
Of the total two-way trade in 2021, India imported goods worth $97.5 bn. from China, while it could export only $28.1 billion worth goods to China, putting India’s trade deficit at $69 bn, which was narrowing steadily for three years until 2019, only to rise again with the advent of the pandemic. This is a serious cause of concern for India as the prospect of China weaponizing trade sometime in the future looming large, if not an impending possibility, similar to what Australia had to go through during 2020-21.
What is bought and sold
India’s well-known pharmaceutical industry is still heavily dependent on Chinese supplies of active pharmaceutical ingredients (APIs), as nearly 70 per cent of them are imported from China, including the ones for making several life-saving drugs. Similarly, Indian automobile sector relies on Chinese imports for mechanical components and machinery goods. While China-made finished goods such as electronic gadgets, toys, and cheap plastic products continue to dominate Indian markets for several years now, India’s major exports to China happens to be intermediate goods such as iron ore, cotton, seafood, and raw material items.
Indian exports, particularly of finished goods, are constrained by a narrower kit of items to offer and there is a lack of market access in China for those sectors in which India has comparative advantage such as pharmaceuticals, agro products, and information technology. However, Indian exports to China have also registered a record rise last year, moving up from the noted fall of 2020, owing to the industrial contraction caused by the pandemic. While China is India’s second-largest trading partner, behind the United States, India is only China’s 15th largest trading partner as Chinese customs data for 2021 show.
Meanwhile, as per the data of India’s Department of Commerce, out the 8,455 different items imported from China in the previous year, 4,591 items showed an upward trend. A comparable scenario of security-trade anomaly also exists in the dynamics of China’s relations with the ASEAN countries. Despite tensions and overlapping claims in the South China Sea, where the Chinese have been recently assertive, the ASEAN bloc remains as China’s top trading partner in 2021.
The bigger picture
Despite China’s provocative behaviour in the security and diplomatic fronts, India’s import dependency on China showed no sign of respite in the recent past. The most recent examples of Chinese provocation include the fielding of a Chinese soldier involved in the 2020 Galwan incident as one of the torch-bearers in the recently-commenced Beijing Winter Olympics, which India chose to boycott diplomatically, the abduction and alleged torturing of an Indian boy from the state of Arunachal Pradesh, and the assigning of the so-called ‘standardized’ names for places in the Indian state, and the promulgation of a controversial border law as means to unilaterally enforce its baseless claims on India’s borderlands. Moreover, the reciprocal infrastructure build-up in both sides hints at a presumable scenario of ‘security dilemma’ that the nuclear-armed neighbours could be stuck in for decades now.
While India chose to stay away from world’s biggest free trade agreement, the China-led Regional Comprehensive Economic Partnership (RCEP), which entered into force earlier this year, owing to the fear of an unrestricted dumping of Chinese goods and the prospect of an unprepared competition challenge for India’s domestic producers from the grouping’s members, China went ahead with doubling down its trade ties with the ten ASEAN countries, along with India’s two Quad partners – Japan and Australia – present in the grouping, of which most members have one problem or the other with China.
As a matter of fact, the size of the Chinese economy is nearly five times that of India’s and there also exists a huge gap in the overall comprehensive national power between the two countries, with China being the world’s second largest economy since 2010, claiming the spot by overtaking Japan, and a permanent member of the United Nations Security Council since 1971, taking the seat by superseding Taiwan. China is now an undisputed great power with high hegemonic ambitions in mind, with regard to its place in Asia and the world.
This is reflective in its tussle with the United States-led liberal international order and in setting forth its signature alternatives such as the trillion-dollar Belt and Road Initiative (BRI), parts of which passes through India-claimed territory under Pakistani control. The US’ image as a champion of free trade was heavily tarnished during the Trump Administration years (2017-2020), which China capitalised on to strengthen its own trade networks around the world as a new alternative offered to the nations of the world with a suspicious message of ‘shared prosperity’.
How is India coping up?
Of all the countries in China’s neighbourhood, India and Japan could probably be the only two countries refusing to be part of a potentially financially vulnerable Sino-centric inter-continental network of connectivity, trade, and infrastructure development. At the same time both the countries have deep-rooted trade ties with the Asian giant, so do Australia, a fact emphasised with RCEP’s entry into force earlier this year.
India, Japan, and Australia collectively fears that over-dependency on China involves various risks, but mitigatable, as uneasy ties in the political, diplomatic, and security fronts could prompt China to weaponize trade one day, and combined with the vulnerabilities posed by global disruptions such as the Covid-19 pandemic necessitated a proactive step from the three countries in April 2020, termed as the Supply Chain Resilience Initiative (SCRI). It was aimed at diversifying the supply chain risks across a group of reliable nations rather than depending on just one or a few.
Domestically, India has undertaken several steps over the years such as the billion-dollar economic stimulus package known as the Self-Reliant India Mission (Atmanirbhar Bharat Abhiyan), launched in May 2020, aimed at cutting down the country’s import dependency, without being protectionist, but at the same time giving due focus on capacity-building for domestic producers to make globally competent and quality goods, both for internal use and for exports.
Following the Galwan incident of June 2020, the Government of India introduced a fresh set of rules to effectively restrict foreign direct investments (FDI) from China and to avert the risks of opportunistic takeovers of Indian firms by Chinese companies, which could have links or legal obligations to the state. Scores of Chinese apps were banned in various phases by the Government of India as a follow-up move and Chinese firms were also excluded from India’s 5G trials and roll-out. A ‘Boycott China’ movement has also taken shape in India ever since the Galwan incident occurred. Notwithstanding all these developments, trade ties between the two countries reflect an upward trend, as stated before, but not the overall economic ties, including investment and other areas, owing to persisting tensions along the border.
In spite of all the efforts by the Indian government to decouple and diversify from the clutches of the Chinese economy, a complete delinking seems far-fetched at the present, considering the facts and figures at hand. However, with a clearly-defined, purpose-driven, and facilitating policy framework, combined with the boosting and diversification of the country’s industrial base with the support of businesses of all scales – micro, small, medium or large – it is not unattainable for a young and tech-savvy nation like India with ample entrepreneurial talent to at least reach a numerically safer trade balance with China in the near future, from which it can progress on towards higher targets.
