India’s Trade with China

In News

• India’s imports from China reached record high in 2022, and the trade deficit surged beyond $100 billion.

Key Points

• India’s import from China: 
  • India’s imports accounting for $118.5 billion, up from $97.5 billion
  • Indian imports of Chinese goods were up by more than 21% last year.
• India’s export to China: 
  • India’s exports to China fell from $28.1 billion to $17.48 billion. 
  • The trade deficit reached $101.02 billion, up by 45%, from $69.4 billion in 2021.
• Overall trade: 
  • India’s bilateral trade with China reached a record $135.98 billion in 2022. 
  • It was up by 8.4% last year.
• China and other nations and Groupings:
  • ASEAN: Trade with ASEAN, China’s biggest trading partner, increased 11.2% to $975.34 billion. 
  • EU: The EU ranked second among China’s trading partners, with trade up 2.4% to $847.32 billion
  • The U.S.: Trade up 0.6% to $759.42 billion.
• Reason for Increasing imports:
  • Recovery in demand in India, 
  • Increasing imports of intermediate goods, and 
  • Imports of new categories of goods such as medical supplies.
  • In the past couple of years, India’s biggest imports from China included active pharmaceutical ingredients (APIs), chemicals, electrical and mechanical machinery, auto components, and medical supplies.

Trade Deficit

• About: 
  • A trade deficit occurs when a country’s imports exceed its exports during a given time period. 
  • It is also referred to as a negative balance of trade (BOT).
• Advantages of Trade Deficits:
  • It allows a country to consume more than it produces. In the short run, trade deficits can help nations to avoid shortages of goods and other economic problems.
  • It creates downward pressure on a country’s currency under a floating exchange rate regime. Domestic currency depreciation also makes the country’s exports less expensive and more competitive in foreign markets.
  • Trade deficits can also occur because a country is a highly desirable destination for foreign investment.
• Disadvantages of Trade Deficits:
  • It can facilitate a sort of economic colonization. 
    • If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation. 
    • That can mean making new investments that increase productivity and create jobs. 
    • However, it may also involve merely buying up existing businesses, natural resources, and other assets. 
    • If this buying continues, foreign investors will eventually own nearly everything in the country.
  • Trade deficits are generally much more dangerous with fixed exchange rates. 
    • Under a fixed exchange rate regime, devaluation of the currency is impossible, trade deficits are more likely to continue, and unemployment may increase significantly. 

Current Account Deficit (CAD)

• About:
  • It is the shortfall between the money flowing in on exports, and the money flowing out on imports.
  • It measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad. 

• Different from the Balance of Trade:
  • It is slightly different from the Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services. 
  • Whereas, the current account also factors in the payments from domestic capital deployed overseas. 
  • For example, rental income from an Indian owning a house in the UK would be computed in the Current Account, but not in the Balance of Trade.
• Causes for CAD: 
  • Existing exchange rate, consumer spending level, capital inflow, inflation level, and prevailing interest rate. 
  • For the Current Account Deficit in India, crude oil and gold imports are the primary reasons behind high CAD.
• Implications: 
  • Current Account Deficit may be a positive or negative indicator for an economy depending upon why it is running a deficit. 
  • It may help a debtor nation in the short term, but it may worry in the long term as investors begin raising concerns over adequate return on their investments.
• Method to Deal: 
  • It could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics. 
  • Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help. 
  • The government and RBI could also look to review debt investment limits for FPIs, among other measures.

Conclusion

• India’s growing imports from China are both a worry, reflecting continued dependence for a range of key goods, and as a positive indicator of the Indian economy importing more intermediate goods.

Source: TH