Recently global developments have tested the Indian economy in various ways. Firstly, Covid had put brakes on the increasing economic trend. Secondly, the Russia-Ukraine war has plunged the world, including India, into inflation and global recession. The central banks have resorted to harsh monetary tightening policies and in the process have impacted the exchange rate of the Indian currency. A fall of about 7 per cent to 8 per cent has been seen in the exchange rate of the Indian rupee, but still, the huge foreign exchange reserve has helped India to maintain macro stability. To maintain healthy foreign reserves and growth, a country needs to have a trade surplus. But for India trade deficit has been a big bane to the economy, especially the unhealthy humongous deficit we share with China.
All the countries in the world who participate in international trade keep an account of import and export transactions, which is called the balance of payment. Imports and exports can be of two types broadly. Firstly, goods or tangible items included in the trade account and, secondly, services, profit transfers, donations, interest, dividends etc., which consists of intangible items included in the invisible account. And both the accounts together make up the current account. If the value of exports in any of these accounts is less than imports, then that account is considered to be in deficit. Looking at India's current account deficit issue, the trade account is always in deficit and the invisible account is mostly in surplus. But the trade account deficit is so high that the invisible account surplus cannot balance the overall deficit. In 2021-2022 India's current account deficit was 38.76 billion dollars in which there was a deficit of around 189.45 billion dollars in the trade account and a surplus of 150.7 billion dollars in the invisible account.
India's top 5 trade partners include the USA, China, UAE, Saudi Arabia and Iraq. According to the RBI, India enjoys a 33 billion dollars trade surplus with the USA. But with the other four countries India faces a sizable trade deficit. In 2021-22, India imported goods from China worth 94.57 billion dollars as against 21.26 billion dollars of China's imports value from India which led to around 73 billion dollars of trade deficit. India is dependent on Iraq, UAE and Saudi Arabia for gas and oil which is responsible for the rising trade deficit. Especially looking at the trade with China, India exports mainly iron ore, refined petroleum and cyclic hydrocarbons to China and imports computers, telephones and broadcasting equipment etc. Electronic items are the main reason behind India's dependence on Chinese imports. In recent times, India has also imported active pharmaceutical ingredients, automobile components, oxygen concentrators, personal protective equipments etc., in large quantities which increased the rift in the trade deficit between the two countries. If India wants to become an economic superpower in the near future then the huge trade deficit with China needs to be curbed.
China is the second-largest economy in the world and so its trade will obviously be more developed and widespread. India is the world's fifth-largest economy which shares a 3,500-km-long boundary with China. Geographical proximity and size of economy of the two countries have led to high trade volume between them. India thought of reviving the economy with the industrial revolution. But the ignorance towards agriculture caused high poverty, low economic growth and low demand in India. Even India had ignored social expenditure in the education and health sector which led to uneducated and unemployed youth, indirectly hampering the growth of the Industrial Revolution. India's reforms in labour, land and capital utilisation were not up to the mark and thus it has lagged far behind its economic potential. India remained lethargic in this work and much-needed economic reforms were delayed. Due to delay in industrialization, India's export basket also skewed heavily towards raw materials like cotton, gems, precious metals etc., whereas high technology finished products dominated China's exports. And obviously raw materials are sold much cheaper than finished products leading to Indian exports being valued less than its imports. China became a global exporter of finished goods by implementing bold economic reforms at the right time whereas India kept exporting only its raw materials. Thus, China became a prominent figure in the global supply chain and India on the other hand became highly dependent on China for its finished products. Due to low cost manufacturing capacity, China became the hub of global manufacturing and thus the products were low cost, making them very lucrative and affordable to import.
India's products are regulated by the government but low cost and low quality Chinese imports aren't effectively regulated by the government. Moreover, the Chinese government has restricted India's access in many of its key sectors like pharmaceuticals, agriculture and IT services, which are India's strongest sectors, making it hard for India to keep a positive export system directly affecting the trade deficit. According to the CII Core Group on China, Indian companies lack serious knowledge and information about the Chinese market because of which Indian companies are not able to access it. Also, the Chinese government does positive discrimination in favour of its PSUs depriving the Indian private sector investments.
The Covid pandemic seems to be turning from disaster to opportunity for India. The zero-Covid policy of China and its snap lockdowns have impacted its industries. In the process, the manufacturing base of IPhones, arms and ammunitions etc., are shifting downwards towards India and other south Asian countries. India can capitalize and capture the string manufacturing areas of China and convert its imports to exports which can help in decreasing the trade deficit. Electronics designing and manufacturing have always been on the top of the Indian government's agenda. But the electronics sector lacks adequate infrastructure and domestic supply chain and logistics. Moreover, high cost of finance and inadequate availability of quality power have marred the sector's development. But steps have been taken by the government in this regard. To attract international companies and investments, the Indian government has devised National Policy on Electronics 2019 and production linked incentive scheme. India has been performing well in the pharma sector, but the lack of raw materials has been a severe limiting factor for India. The Indian government has taken steps to establish Domestic Bulk Drug parks with a total outlay of Rs 13,760 crore to make India atmanirbhar in Active Pharmaceutical Ingredients, thereby reducing the import dependency on China. This, in the long run, will provide much needed stability to the vast trade imbalance between the two nations. India can also create a unique position for herself in the field of renewable energy like solar energy, wind energy and green hydrogen, making China dependent on India in this sector. According to a report, India has set a target to achieve 500 GW renewable energy and 50 per cent of its energy demand from non-fossil fuel sources by 2030. Thus, India will be able to export materials used in solar panels and wind turbines. The Indian government also needs to improve the diplomatic channels with China so that the Indian IT sector and the services sector get a fair chance in their markets. Apart from making China dependent on Indian products, India should also try to save our domestic players from cheap Chinese imports. Although the Indian government has imposed anti-dumping duty on 99 products including petrochemicals, yarn, fibre etc., bringing their prices at par with the Indian domestic products, but still our domestic market is filled with many more of such cheap imported items from China. Moreover, in the Drones and Space sectors, India is trying to achieve high-end and high-valued exports. Indian startups are also making a name for themselves in the space of drone manufacturing.
To convert the trade deficit into a surplus, the Indian government needs to give more priority to high value exports. India also needs to increase its R&D expenditure to around 3 per cent of the GDP, which is now at around 0.66 per cent. Although the Indian government has taken steps towards reducing the trade deficit, much more needs to be done so that one day the hats on Chinese men and the phones in their hands are not made in China but made in India.
Siddharth Roy
(siddharth01.roy@gmail.com)