By Santosh Mehrotra and Sarthi Acharya,
India-China trade has undergone significant changes in the last two decades. India went from a positive balance of trade with China at the turn of the century to a heavily negative trade balance a decade later, which continues to grow. In the last three-four years, trade and other relationships have been tense, stemming from geopolitical tensions. India implemented Make in India to reduce economic dependence on China. Has it made a difference?
In 2011-12, the trade deficit with China was about $39.4 billion. Yet the manufacturing sector had grown, and so did manufacturing employment from 10.5% to 12.8% (2004-2012). From 2015, when Make in India became an official policy, oddly, things went south: demonetisation, a badly designed GST, no consistent industrial policy, no change in R&D structure or volume, and increased inequality in the economy resulted in India’s GDP growth rate to gradually slow until Covid when it actually contracted at almost twice that of the world economy. Manufacturing share in gross value added (GVA) fell from 17% to 13%, and manufacturing employment also fell in absolute terms for five years after 2016-17. Make in India evidently did not take off also because of aggressively priced Chinese imports making inroads; manufacturing employment fell in absolute terms for five years from 2014 onwards, only recovering in 2022. India’s goods exports also fell from their peak of $318 billion in 2013-14 for five years, and did not recover to the same level until 2020.
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Meanwhile, the bilateral trade in 2019-20 was roughly $87 billion, with India’s exports to China accounting for around $16.6 billion and imports at about $70.3 billion ($53 billion deficit). In 2022-2023, India’s trade deficit with China ballooned to $83.2 billion — about 32% of India’s total merchandise trade deficit.
The main exports from India to China are mineral products, chemical products, and metals — raw materials. The main imports from China to India are machines, electronics, chemicals, white goods, textiles, and chemical products — value-added finished products. China discourages manufacturing exports from India on one or the other technical grounds. Efforts to address trade imbalances, enhance market access, and promote mutual investments have been ongoing. However, India decided not to join the Regional Comprehensive Economic Partnership precisely because it was concerned about China getting even higher access to India’s markets, and the trade deficit worsening.
Several Indian industries have been impacted by the rising Chinese exports. For example, China’s exports of solar panels to India was equivalent to 2.3 gigawatt (2023), which was a reduction over the previous year as India imposed an import duty of 40%. However, Reuters now reports that India might cut its import duties on solar panels from 40% to 20% to meet its non-conventional energy targets for 2030. This will again provide a huge advantage to Chinese exports and a blow to the fledging Indian manufacturers.
Next, India’s pharmaceutical sector also significantly relies on China for bulk drugs and drug intermediates; they form 43% of India’s total pharma imports. Moreover, India’s dependency on China for key starting material surpasses 50%. Also, India sources active pharmaceutical ingredients (API) from China, essential components in medicinal formulations, though some of it decreased in the last two years due to the performance-linked incentive scheme. Yet, nearly 70% of India’s API needs are met by imports, with 60% still from China. India earlier had the capacity to make APIs (especially in public enterprises), but due to aggressive price-cutting by Chinese firms and minus an industrial policy they could not survive.
Third, India claims it has made strides in modern electronics. Surprisingly though, it remains critically dependent on China for several products: electronic integrated circuits and micro assemblies; electrical apparatus for line telephony or telegraphy; transistors; semiconductor devices; transmission apparatus for radiotelephony; televisions; and many white goods. Another example is mobile phone. While India has become the second-largest handset maker by the country of origin definition, 70-85% of the main parts are sourced from China, Korea, Japan and other countries.
All the sectors consistently suffered from an inverted duty structure (IDS). Since 1991, the structure of tariffs have been at the source of India’s manufacturing problems, and de-industrialisation. Twenty years ago, India signed a series of free trade agreements with Korea, Japan, and ASEAN. As a result, finished/consumer goods tariffs were reduced, so imports flooded in; but tariffs on raw materials/intermediates used as inputs for domestic manufacture of the same goods were higher — thus an IDS emerged, reducing the effective rate of protection (ERP) — which allowed finished goods to flood India’s markets. ERPs show IDS existed for paper/paper products, chemical/chemical products, pharma, computer, electronics and optical products, machinery and equipment, and other transport equipment.
One sector that did not suffer from IDS was automobiles. As a result, India has become one of top four global manufacturers of two-, three-, and four-wheelers, and also an exporter. However, India’s auto industry is dependent on China for auto parts which embed more electronics. Data from trade and industry sources indicate an influx of various auto parts from China, including but limited to engine parts, electronics, plastics, ion-lithium batteries, and body components. This trend is particularly pronounced in segments such as e-vehicles: two-wheelers, and passenger and commercial vehicles. The proportion of Chinese imports in India-made cars is estimated at about 30% (~$20.3 billion).
In sum, in the absence of an explicit industrial policy, the share of GVA contributed by manufacturing, that stood at 17%, fell from 2015 but has just recovered. Three aspects stand out:
1) India spends 0.69% of GDP on R&D compared to 4+% by China. Being a five times larger economy, this translates to China spending 20-25 times more on R&D than India does.
2) In the absence of indigenous design capacity, innovation is still limited in India. Without a policy focus on building both design capacity and R&D, industrial policy is incomplete.
3) China has a far-reaching industrial and trade policy, coupled with an aggressive foreign policy to destroy others’ manufacturing capacities and make them indebted to it.
Indian policies are short-sighted, which thwart its industrial and thus employment growth.
Author Santosh Mehrotra is an independent economist; author Sarthi Acharya is with the Institute of Human Development.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
By Santosh Mehrotra and Sarthi Acharya,
India-China trade has undergone significant changes in the last two decades. India went from a positive balance of trade with China at the turn of the century to a heavily negative trade balance a decade later, which continues to grow. In the last three-four years, trade and other relationships have been tense, stemming from geopolitical tensions. India implemented Make in India to reduce economic dependence on China. Has it made a difference?
In 2011-12, the trade deficit with China was about $39.4 billion. Yet the manufacturing sector had grown, and so did manufacturing employment from 10.5% to 12.8% (2004-2012). From 2015, when Make in India became an official policy, oddly, things went south: demonetisation, a badly designed GST, no consistent industrial policy, no change in R&D structure or volume, and increased inequality in the economy resulted in India’s GDP growth rate to gradually slow until Covid when it actually contracted at almost twice that of the world economy. Manufacturing share in gross value added (GVA) fell from 17% to 13%, and manufacturing employment also fell in absolute terms for five years after 2016-17. Make in India evidently did not take off also because of aggressively priced Chinese imports making inroads; manufacturing employment fell in absolute terms for five years from 2014 onwards, only recovering in 2022. India’s goods exports also fell from their peak of $318 billion in 2013-14 for five years, and did not recover to the same level until 2020.
Meanwhile, the bilateral trade in 2019-20 was roughly $87 billion, with India’s exports to China accounting for around $16.6 billion and imports at about $70.3 billion ($53 billion deficit). In 2022-2023, India’s trade deficit with China ballooned to $83.2 billion — about 32% of India’s total merchandise trade deficit.
The main exports from India to China are mineral products, chemical products, and metals — raw materials. The main imports from China to India are machines, electronics, chemicals, white goods, textiles, and chemical products — value-added finished products. China discourages manufacturing exports from India on one or the other technical grounds. Efforts to address trade imbalances, enhance market access, and promote mutual investments have been ongoing. However, India decided not to join the Regional Comprehensive Economic Partnership precisely because it was concerned about China getting even higher access to India’s markets, and the trade deficit worsening.
Several Indian industries have been impacted by the rising Chinese exports. For example, China’s exports of solar panels to India was equivalent to 2.3 gigawatt (2023), which was a reduction over the previous year as India imposed an import duty of 40%. However, Reuters now reports that India might cut its import duties on solar panels from 40% to 20% to meet its non-conventional energy targets for 2030. This will again provide a huge advantage to Chinese exports and a blow to the fledging Indian manufacturers.
Next, India’s pharmaceutical sector also significantly relies on China for bulk drugs and drug intermediates; they form 43% of India’s total pharma imports. Moreover, India’s dependency on China for key starting material surpasses 50%. Also, India sources active pharmaceutical ingredients (API) from China, essential components in medicinal formulations, though some of it decreased in the last two years due to the performance-linked incentive scheme. Yet, nearly 70% of India’s API needs are met by imports, with 60% still from China. India earlier had the capacity to make APIs (especially in public enterprises), but due to aggressive price-cutting by Chinese firms and minus an industrial policy they could not survive.
Third, India claims it has made strides in modern electronics. Surprisingly though, it remains critically dependent on China for several products: electronic integrated circuits and micro assemblies; electrical apparatus for line telephony or telegraphy; transistors; semiconductor devices; transmission apparatus for radiotelephony; televisions; and many white goods. Another example is mobile phone. While India has become the second-largest handset maker by the country of origin definition, 70-85% of the main parts are sourced from China, Korea, Japan and other countries.
All the sectors consistently suffered from an inverted duty structure (IDS). Since 1991, the structure of tariffs have been at the source of India’s manufacturing problems, and de-industrialisation. Twenty years ago, India signed a series of free trade agreements with Korea, Japan, and ASEAN. As a result, finished/consumer goods tariffs were reduced, so imports flooded in; but tariffs on raw materials/intermediates used as inputs for domestic manufacture of the same goods were higher — thus an IDS emerged, reducing the effective rate of protection (ERP) — which allowed finished goods to flood India’s markets. ERPs show IDS existed for paper/paper products, chemical/chemical products, pharma, computer, electronics and optical products, machinery and equipment, and other transport equipment.
One sector that did not suffer from IDS was automobiles. As a result, India has become one of top four global manufacturers of two-, three-, and four-wheelers, and also an exporter. However, India’s auto industry is dependent on China for auto parts which embed more electronics. Data from trade and industry sources indicate an influx of various auto parts from China, including but limited to engine parts, electronics, plastics, ion-lithium batteries, and body components. This trend is particularly pronounced in segments such as e-vehicles: two-wheelers, and passenger and commercial vehicles. The proportion of Chinese imports in India-made cars is estimated at about 30% (~$20.3 billion).
In sum, in the absence of an explicit industrial policy, the share of GVA contributed by manufacturing, that stood at 17%, fell from 2015 but has just recovered. Three aspects stand out:
1) India spends 0.69% of GDP on R&D compared to 4+% by China. Being a five times larger economy, this translates to China spending 20-25 times more on R&D than India does.
2) In the absence of indigenous design capacity, innovation is still limited in India. Without a policy focus on building both design capacity and R&D, industrial policy is incomplete.
3) China has a far-reaching industrial and trade policy, coupled with an aggressive foreign policy to destroy others’ manufacturing capacities and make them indebted to it.
Indian policies are short-sighted, which thwart its industrial and thus employment growth.
Author Santosh Mehrotra is an independent economist; author Sarthi Acharya is with the Institute of Human Development.
Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.
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