India's widening trade deficit with China indicates growth as rising import of raw materials boosts manufacturing

India’s trade deficit with China has grown significantly in recent years, reaching a record high of over $100 billion in 2022. The data released by Chinese customs show that imports from China exceeded $118.5 billion, while exports from India to China were only $17.48 billion. The widening trade deficit with China is a cause for concern. But, as we look deeper, a silver lining emerges. A shift in manufacturing from China to India is becoming increasingly evident. This will eventually not only narrow the trade gap but also brings about a resurgence of indigenous industry, creating jobs and boosting the economy. There are four explanations for rising imports from China. (1) Chinese goods are cheap, and thus firms within India also choose to import goods from China. But one should understand why the goods are cheap. China’s compliance with the World Trade Organisation (WTO) rules is like a double-edged sword. On the one hand, Beijing has chosen to abide by some of the organisation’s regulations, but on the other hand, the list of violations is extensive. Intellectual property theft runs rampant, massive subsidies are given to Chinese exports, and hoarding rare earth metals and other raw materials is common. At the WTO, China has yet to achieve market economy status. Recently, it lost a dispute with the European Union on this issue. Chinese output and input prices are distorted and do not conform to market norms, resulting in artificially low-priced exports that are implicitly subsidised. The extent of this subsidy can be gauged by the anti-dumping or countervailing duties imposed by various countries, including India, against Chinese imports, which seem to be around 15-20 per cent. Once China aligns with all WTO principles, this differential will disappear, levelling the playing field for fair trade. (2) The influx of Chinese imports into India can be viewed as a catalyst for a technological revolution. These imports aren’t just your run-of-the-mill goods, they’re the building blocks of a technologically advanced society. With more electronic components, computer hardware, peripherals, and phone components flooding in, India is being propelled towards a digital utopia. As emphasized by the government, these imports are not just a commodity, but the driving force behind a technological revolution. (3) The imports from China, which include raw materials, parts, components and intermediates are like the building blocks of the Indian industry. As the volume of these imports increases, it is a sign that the manufacturing sector is coming back on track and demands are on the rise. According to a recent report from S&P Global, activity in the sector reached a 13-month high in December. This is due to the influx of new businesses and strong demand for products. (4) The recent import surge can also be viewed as a sign of growth and progress for India. The government has recently launched production-linked incentive schemes in several sectors, leading to a sudden increase in manufacturing. This, in turn, requires a vast amount of raw materials to sustain production. As domestic original equipment manufacturers and MSMEs are not yet fully developed for these sectors, new manufacturing units are importing raw materials from China. The production-linked Incentive schemes are like a rising tide that lifts all boats. The larger units that emerge as a result of the scheme will not only boost the Indian manufacturing sector but also act as a catalyst for the growth of the smaller Micro, Small and Medium Enterprises (MSME) sector. These bigger units, with their increased production capabilities, will create an ancillary support system, providing the necessary resources and support for the growth of smaller enterprises. This will lead to something that economists call as agglomeration effect. When a group of companies producing similar or complementary goods choose to set up shop in close proximity, it can lead to some exciting benefits for those businesses. This phenomenon is known as “agglomeration economies,” and it’s all about the power of clustering. By locating near one another, companies can take advantage of cost savings, increased efficiency, and a host of other perks that come from being part of a tight-knit community of businesses. This theory was first introduced by Porter (1998) which highlights the significance of geographic proximity in enhancing the productivity and competitiveness of firms. Once the domestic industry has matured enough, the trade deficit will go down automatically. Furthermore, in an effort to promote manufacturing and increase the market for its manufactured products, India has recently entered into two significant agreements - the Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates and the Economic Cooperation and Trade Agreement (ECTA) with Australia. These pacts aim to break down barriers and reduce import tariffs for micro, small, and medium enterprises (MSMEs) and other businesses. India’s trade diplomacy doesn’t stop here, as the country is actively engaged in talks with several other nations, including the United Kingdom, the European Union, Canada, Israel, and the Gulf Cooperation Council (GCC), to establish similar mutually beneficial trade agreements. These agreements are a testament to India’s strategic approach towards building a strong and diverse economic base and positioning itself as a global trade powerhouse. Nevertheless, the COVID-19 pandemic has brought the world to a standstill and changed the global economic landscape. Amid this chaos, China’s strict lockdowns and ongoing technological war with the US have created a window of opportunity for India. As a result, an increasing number of manufacturers, particularly in the technology hardware industry, are flocking to India. This not only presents India with the opportunity to establish itself as a manufacturing hub but also as a leader in technology. This move can be seen as a blessing in disguise, as it opens the doors for India’s manufacturing sector to reach new heights and make its mark in the global technological arena. Reducing the trade deficit with China is a challenge that requires a concerted effort. One solution is to tap into the vast potential of India’s domestic manufacturing sector. Countries like Vietnam and Thailand, with smaller populations, may find it hard to achieve this, but India has a distinct advantage. With a billion people, competitive wages, and a young, dynamic population, India has the potential to become a manufacturing powerhouse. The author is Additional Private Secretary (Policy & Research), Economic Advisory Council to the Prime Minister. he tweets @adityasinha004. Views expressed are personal. Read all the Latest News , Trending News , Cricket News , Bollywood News , India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.