Paranoid about the deficit

Despite the sluggish growth, China remains India’s topmost trade partner.

Posted: September 23, 2014 

By: Amitendu Palit

Chinese President Xi Jinping’s visit to India was noticeable for not having been accompanied by the declaration of a bilateral trade target. While ex-premier Wen Jiabao’s visit in December 2010 was followed by the announcement of a bilateral trade target of $100 billion by 2015, no such numbers were put out this time.

Avoiding a target might have to do with the fact that bilateral trade (merchandise) has not increased from its peak of $73.4 billion in 2011-12. The last two years have had trade hovering around $66 billion. As a result, achieving the target of $100 billion by 2015 appears almost impossible. This will be the first time since Zhu Rongji’s visit in 2002 that the declared trade target will remain unfulfilled.

Despite the sluggish growth, China remains India’s topmost trade partner. Most analysts, given India’s obsession with the trade deficit, usually accept this grudgingly. It is impossible to come across discussions on China-India relations that do not refer to the bilateral trade deficit.

The paranoia over the trade deficit with China could have been justified if India were a net exporter of goods to the rest of the world and its trade with China was an exception. The structure of India’s trade with China is not exceptional in any way. India buys much more from the rest of the world than it sells, and is a net importer of goods. It runs trade deficits with 16 of its top 25 trade partners.

The imbalance in India’s trade with some of its major partners is far more than that with China. During 2013-14, India’s trade deficit with China was $36.2 billion. As a proportion of the total bilateral trade of $65.9 billion, the deficit was roughly 55 per cent. India’s trade deficits with Iraq, Switzerland and Australia in the same year were 90 per cent, 83 per cent and 62 per cent respectively of its total bilateral trades. Deficits with Saudi Arabia and Korea were also almost half of the bilateral trades.

Trade deficits with China and other countries cannot be wished away as long as India does not produce enough of what it needs. Pushing for greater market access in some products in China can partly increase Indian exports. But that will not stop Chinese imports into India.

These have hardly been subsided, despite Indian industry successfully lobbying for the imposition of anti-dumping duties across more than 200 tariff lines. Indeed, the futility of these actions is evident from the fact that China remains the largest source of organic chemical imports for India, despite these imports inviting maximum anti-dumping action.

India needs to approach its economic relationship with China with the understanding that correcting the deficit is wishful thinking. From a consumer’s perspective, India does not produce enough to take care of its large market. It is not for nothing that Chinese mobile phones, the latest being the Xiaomi budget phones, occupy significant market space in India.

The talk of greater investment from China covering the trade deficit is difficult to understand. From a balance of payments perspective, current account deficits in India are covered up by capital inflows leading to accumulation of foreign exchange reserves. But the bulk of these flows are short term. If this is the logic being peddled to convince deficit sceptics, then the peddlers are on uncertain ground. Such logic will hardly work at the level of bilateral trade.

Even if India works on the assumption that it can turn the tables on China by drawing from it long-term investment equivalent to the trade deficit, statistics are hopelessly against it. The best FDI inflow year for India during the last decade was 2008-09, when it received $41.7 billion from all sources.

The average FDI inflow during the last decade has been at around $30 billion. This is less than the trade deficit of $36 billion with China. Expecting China to regularly pump in around $30 billion of long-term investment funds into India, when that is roughly what India manages to mobilise from all its investors across the world, is evidence of a fertile imagination.

Indeed, the fertility of imagination is amazing given that China’s total long-term investment in India since 2000 has been around $411 million. Though India’s FDI statistics tend to under-reflect Chinese investments, given that some of these get clubbed as “project goods” imports in trade statistics, China has clearly not been the largest source of investment. It ranks 28th on India’s source country list for FDI inflows. This is all the more reason why the talk of China pumping in $100 billion in India is preposterous.

Xi’s visit reaffirms that China’s focus on the Indian economy is increasing. India is an important destination of final demand for Chinese products and will continue to be so. Along with imports, Chinese businesses will invest in India to produce more for the domestic market.

This is good news for Indian consumers, including industrial consumers. It is high time India accepted that an unbalanced economic relationship is not necessarily a bad relationship.

The writer is senior research fellow and research lead (trade and economics) at the Institute of South Asian Studies, National University of Singapore. Views are personal