Indian-China Trade Relations

SYLLABUS:

GS 2 >International relations  >   India and Neighbours   >  India-China

IN NEWS:

• According to data from the Global Trade Research Initiative (GTRI), imports from China exceeded USD100 billion in FY24, making China India's top trading partner once again, surpassing the United States after a two-year gap where the U.S. held that position.

OVERVIEW OF INDIA-CHINA TRADE:

• The rapid expansion of India-China bilateral trade since the beginning of this century has propelled China to emerge as India’s largest goods trading partner by 2008, a position which China continues to hold today.
• India’s bilateral trade with China in FY24 stood at USD 118.4 billion as imports increased by 3.24 per cent to USD 101.7 billion and exports rose by 8.7 per cent to USD 16.67 billion in FY24 compared to FY23(Source :GTRI report).
• From 2015 to 2022, India-China bilateral trade grew by 90.14%, an average yearly growth of 12.87%. (Source: Ministry of External Affairs).
• As per the GTRI report, exports to China have remained near stagnant between FY19 and FY24, while imports have surged by nearly 45 percent, which has resulted in a widening of the trade deficit from USD53.57 billion in FY2019 to USD85.09 billion in FY2024.
• India trade relations with China have been under scrutiny largely due to India’s dependence on the neighbouring country’s critical products such as telecom & smartphone parts, pharma, advanced technology components among others.

ITEMS IMPORTED:

• Some of India’s key imports from China include smartphones, components for smartphones and automobiles, telecom equipment, plastic and metallic goods, active pharmaceutical ingredients (APIs), and other chemicals.
• In several cases, China’s contribution is much higher than the second-largest exporter countries of these products to India. For example:
  • China accounts for 45 per cent of India’s total electronics imports.
  • A third of machinery and almost two-fifths of organic chemicals that India purchases from the world comes from China
  • Of the total of India's import of APIs, the dependency on China is for about 65-70 per cent of the APIs.
  • Automotive parts and fertilisers are other items where China’s share in India’s import is more than 25 per cent.
• Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain. For instance India sources close to 90 per cent of certain mobile phone parts from China.

ITEMS EXPORTED:

• Raw material exports constituted a significant portion of India’s outbound trade with China, with iron ore, organic chemicals and cotton figuring among key export items.
• Other key exports to China included iron and steel, seafood and engineering goods.

ISSUES/CHALLENGES IN TRADE WITH CHINA:

• Widening trade deficit:
  • The growing trade deficit between India and China is a significant concern, especially given that India's imports from China, valued at USD 101.7 billion, are now nearly six times higher than its exports, which stood at USD 16.67 billion in FY24.
  • Trade with China constitutes more than 40% of India’s total trade deficit.

• Dumping:
  • Dumping refers to the practice of exporting goods at a price lower than their market value in the originating country. India’s anti-dumping duties on Chinese goods are being evaded by misclassification of products
• Unfair trade practices:
  • Chinese goods are much more competitive than Indian goods. Chinese competitiveness is mainly the outcome of the efforts and support of the Chinese Government.
  • China is not recognized by WTO as a market economy mainly because of the lack of transparency in its trade policy. Parliamentary committee on commerce finds that Chinese Government gives export rebate to the tune of 17% to their exporters.
• Lack of competitiveness of Indian industry:
  • Lending rates: In China, industry-friendly lending rates average around 6%, while in India, industrial lending rates are significantly higher, ranging between 11-14%.
  • Logistic costs in China are one of the lowest in Asia and much lower than India. The Chinese cost of logistics is 1% of their business. In India, it calculates to 3%.
  • Cost of electricity: The effective cost of electricity in India is anywhere between twelve and fourteen rupees which is higher in comparison to China.
  • In short, India suffers cost competitiveness by almost 9% to their competition with China on account of energy, finance and logistics.
• Heavy reliance on Chinese imports for raw materials in certain sectors:
  • Pharmaceutical industry: India imports two-thirds of its active pharamaceutical ingredients (APIs), or key ingredients of drugs, from China.
  • Solar Industry: 84% of the solar panel requirement of the National Solar Mission is met through imports from China.
  • Electric Vehicle sector: India heavily relies on China for lithium-ion batteries, importing USD 2.2 billion worth (FY 24), which constitutes 75% of total imports in this category, highlighting their key role in India's transportation electrification efforts.
• Misuse of FTAs:
  • India has free trade agreements (FTAs) with countries such as Bangladesh. Chinese fabric is manufactured into garments in Bangladesh, and imported at cheap rates into India.
• Impact on MSMEs:
  • Poor quality Chinese products with cheap rate dominate the unorganized retail sector, largely affecting domestic MSMEs
• Illegal imports and smuggling:
  • The value of seized smuggled goods from China was Rs 1,024 crore in 2016-17. Directorate of Revenue Intelligence (DRI), India’s chief anti-smuggling intelligence and investigations agency, works in a challenging environment with a small workforce.
• Health concerns:
  • Some of Chinese imports contain items that involve severe public health concerns.
  • For example most Chinese firecrackers contain potassium chlorate, a highly explosive chemical which is banned in India.
• Job loss:
  • A number of industries that have been adversely affected by the import of Chinese goods are labour intensive. These industries have traditionally been large employment generators in India (e.g., textiles) or are likely to become so (e.g., solar industry).
  • For example; a number of MSMEs have had to close down, particularly manufacturers of stainless steel due to Chinese import.
• Poor enforcement of quality control:
  • Delays in firming up the Quality Control Orders (QCO) by the Government helps the Chinese industry monopolise its low quality goods in the market.
• Tax collection:
  • Downsizing or closing down of units in India will naturally affect tax collections and impinge upon the Make in India programme.
• Affects banking sector:
  • Closure of industry will also stress the banking sector which already is reeling under the burden of huge NPAs
• Environmental concerns:
  • Low-quality Chinese imports also have an adverse impact on the environment.
  • For instance, import of impure chemicals affects the environment,                  and results in low quality agrochemicals (pesticides) thus affecting Indian farmers

WAY FORWARD:

• Cooperation:
  • India and China should work upon the areas of cooperation in the oil and gas sector to leverage upon the sheer size of the market of two countries
  • India and China could cooperate in areas of health, education and sanitation, by sharing best practices and technology, to improve standard of living of its population.
• Recommendations of Parliamentary Standing Committee on Commerce:
  • Implement the recommendations of Parliamentary Standing Committee on Commerce. The major recommendations include,
    • The establishment of a single integrated national authority, the Directorate General of Trade Remedies (DGTR), which will be effective in providing a comprehensive and timely trade defence mechanism in India.
    • Directorate General of Anti-Dumping (DGAD) should address the problem of lax implementation of anti-dumping duties, and rationalise the duties and make them more in line with current domestic production costs.
    • Single Window Interface for Facilitating Trade (SWIFT) need to optimally utilised for effective quality control of all the imports of products
    • Public procurement order giving preference to domestically manufactured goods must be put to good use and made an effective tool to counter imports.
    • Support Indian domestic manufacturing industries through improved infrastructure and logistics facilities to make it more cost efficient and quality effective
• Predictable and transparent trade policy:
  • Resorting to unpredictable and opaque moves, like delaying port clearances for pharma consignments from China in the wake of tensions LAC, may prove counterproductive as investors may feel insecure in India’s trade policy.
• Data localisation policy:
  • A data localisation policy for regulating access to data, mandating data storage requirements and controlling cross-border data flows, needs to be put in place.
  • Companies should be required to set up data centres in India to minimise the need for storing sensitive data on foreign servers
• Accountability in trans-border data flows:
  • There are legal best practices to be learned from other countries. For example; “The 13 Australian Privacy Principles” are designed to effectively protect the collection, holding use and disclosure of all personal information

PRACTICE QUESTION:

Q. Examine the key issues and challenges in the trade relationship between India and China. (10 marks, 150 words)