Rising India–China Trade Deficit

Rising India–China bilateral trade has led to two hypotheses: the Chindia, wherein the expansion in bilateral trade between the two Asian powers would reduce their joint pressure on the economy of the rest of the world; and, India and China, jointly affecting the third world, which is attri­buted to their strong complementarities (Boillot  and Labbouz 2006). However, the past two decades have described a different story. India’s trade deficit with China, which stood as $671 million, increased to $23 billion in 2010, and reached the historical high level of $87 billion in 2022, characterised by India’s large exports of low value-added products and massive imports of technology-intensive manufactures. This finding leads to a relevant question as to why the fruits of bilateral trade have favoured China and not India, despite three decades of opening up of India’s economy.

India’s merchandise trade with the world reached more than $1 trillion in 2022–23. During the year, India exported $447 billion worth of goods while it imported $714 billion, implying a merchandise trade deficit of $267 billion, with two-fifths only with China, suggesting an excessive dependence on a single country, at a time when the land dispute is at a vulnerable stage. China’s trade deficit has almost doubled in the past decade from the previous level of $36.2 billion of FY 2013–14. This trade deficit with China has been despite the decline in China’s share in India’s imports by 1.64% in FY 23 compared to the previous year, largely pushed down by almost 7% in the electronic goods, thereby suggesting the continuous pressure on India’s exports to the Chinese market. Considering the growing deficit with China, India has tried to strengthen domestic production on various fronts, including the most recent move to curb the imports of computer products from China. The phenomena of the rising deficit with China appears to be irreversible in the short run, but also casts a doubt on whether India can overcome the same in the coming decades. The background is sufficient to draw the attention of policymakers to a debate on whether China’s growing presence in India’s market or the over-reliance of India on the Chinese market can sustain the long-run trade deficit of India. This is in the context of the wider implications on growth prospects as endorsed by the trade theories that call for augmenting the role of globalisation in economic transformation and betterment. The answers to the above problem lie in whether India can gain competiveness in exports in the long run in the sectors where China enjoys a presence in the global markets, or alternatively, whether India can source the intermediate imports to finally bridge the demand–supply gap of high value-added products in the domestic market. This article sheds light on these issues, especially on how India can sustain its trade deficit with China in the long run.