Although the balance of trade is still in favour of China, exports from India are rising in absolute terms while Chinese imports are showing some decline after 2017-18

New Delhi: Notwithstanding the ongoing border dispute with China, and efforts to dilute economic linkages and reduce dependence, India’s merchandise trade with China is growing and may cross the $100 billion mark this year.

While Indian exports to China have seen an 18.54% year-on-year growth at $10.66 billion in April-August 2021, imports of Chinese goods have surged by over 58.1% at $34.14 billion, according to ministry of commerce data. The trade balance was heavily tilted in China’s favour with a surplus $23.48 billion during these first five months.

According to the official data, trade between the two countries has jumped by over 46.5% to $44.80 billion in April-August 2021 as compared to $30.58 billion in the same period last year. The bilateral trade between India and China in 2020-21 was $86.4 billion and the value of trade in a non-Covid year was about $82 billion (2019-20).

But behind the headline figures lie subtle shifts in trade patterns — there has been a shift in the balance of trade, and India is making conscious effort to reduce its dependence on essentials and this is showing results.

Incremental Shift In Balance of Trade

Although the balance of trade is still in favour of China, exports from India are rising in absolute terms while Chinese imports are showing some decline after 2017-18.

According to the official data, Chinese import to India in 2017-18 was $76.38 billion and Indian export to China was a mere $13.33 billion that year. Since then, there has been constant dip in Chinese imports — $70.32 billion (in 2018-19), $65.26 billion (2019-20) and $65.21 billion (2020-21). India’s exports, however, shown an uptick especially in the past year — 16.75 billion (in 2018-19), $16.61 billion (2019-20) and $21.19 billion (2020-21), mainly because of Prime Minister Narendra Modi’s focused attention on the Aatmanirbhar Bharat Abhiyaan (Self-reliant India initiative).

Consequently, trade deficit has reduced in the last three financial years — from $53.57 billion in 2018-19 to $48.65 billion in 2019-20 to $44.02 billion in 2020-21.

Reducing Dependence - The PLI Way

Industry experts and government officials say both India and China are not in a position to snap business ties because of interdependence in many areas. This is particularly true for Indian businesses such as the pharmaceutical industry, which depends on Chinese raw materials. Over 63% of India’s pharmaceutical imports are active pharmaceutical ingredients (APIs) and intermediates, and almost 70% of it comes from China.

The sense in the government, across key ministries, is that over-dependence on one country for crucial items such as medicine is not prudent. In fact, India is making efforts to import APIs from alternate sources, besides taking policy measures to ramp up domestic production. India is also setting up bulk drug parks for ₹3,000 crore and has approved a production-linked incentive (PLI) package for promotion of domestic manufacturing of critical intermediates and APIs. The department of pharmaceuticals in June this year notified the PLI scheme for pharmaceuticals with an outlay of ₹15000 crore. Intermediaries and APIs are crucial chemical compounds (raw materials) required to manufacture formulations or medicines. While India is one of the leading exporters of formulations or generic medicines, for raw materials — intermediaries and APIs — China enjoys the number one position in the world. India imports about five dozens APIs and intermediaries from China.

New Delhi is taking similar measures in other fields also. Over a dozen sectors have been given priority and investments in these industries have been incentivised through ₹1.97 lakh crore PLI schemes — including in the areas of mobile manufacturing and specified electronic components, manufacturing of medical devices, advance chemistry cell (ACC) battery, electronic technology products, automobiles and auto components, telecom and networking products, man-made textiles and technical textiles, food products, high efficiency solar PV modules, white goods and speciality steel. The government aims to raise minimum additional production in India by around ₹37.5 lakh crore over five years.

It is perhaps not a coincidence that most of the PLI schemes cover top 10 Chinese imports. The top 10 Chinese imports in the current financial year (up to August 2021) are electronics components, computer hardware, telecom instruments, organic chemicals, industrial machinery for dairy etc, residual chemicals and allied products, bulk drugs and intermediates, fertilisers, electronic instruments and consumer electronics.

The Economic Shift After Galwan

India’s strategy is clear – reduce overdependence on Chinese imports by creating domestic capacity. It knows that this cannot be achieved overnight, but policy efforts are in this direction, especially after the border dispute with China last year. Sino-Indian tensions shot up in June 2020 after a violent brawl between Chinese and Indian soldiers along the Line of Actual Control in the Galwan Valley in eastern Ladakh in which 20 Indian army personnel and an unspecified number of Chinese were killed.

India took a series of actions against China after the violent brawl on June 15 last year in the Galwan Valley. On June 29 that year, the Narendra Modi government announced a ban on 59 mostly Chinese mobile applications such as Tik-Tok, UC Browser and WeChat, citing concerns that these are “prejudicial to sovereignty of India, defence of India, security of state and public order”. The following month, on July 23, India barred Chinese firms in bidding for public procurement of goods and services on the ground of national security.

But New Delhi adopted a pragmatic approach to ensure smooth supplies of essential items from China. In order to continue supplies of Covid-essential items from across the border, the July 23, 2020 order exempted certain “special cases” such as procurement of Covid essential medical supplies till December 31, 2020. Later, the deadline was extended up to October 31, 2021. The government, however, continues to strictly enforce its public procurement policy announced on July 23, 2020 that bars award of any project to contractors from countries sharing land borders with India without prior registration with a competent authority and security clearance from the ministry of external affairs (MEA) and the ministry of home affairs (MHA).