At nearly $70 billion, China is today India’s largest trading partner. More striking is the fact that India has a large and growing trade deficit with China. In FY13, India recorded the largest bilateral trade deficit of a whopping $39.4 billion. This has raised concerns among Indian policymakers—largely related to what constitutes this deficit and how this deficit can be bridged.
Trade data shows that India’s major exports are cotton, copper and iron ore which account for 51% of its total exports to China. Major imports from China comprise mechanical and electrical machinery and their parts and organic chemicals accounting for 44 % of total imports.
A more insightful inference can be drawn if we classify traded items into raw materials, intermediate goods, capital goods and consumer goods. Raw materials and intermediate goods were 89% of our exports and 83% of our imports comprised capital goods and intermediate goods.
More importantly, India’s exports are largely resource-intensive and non-fuel primary commodities while imports are basically high- or medium-skill and technology intensive commodities. How concerned should we be about the huge imports? Clearly, intermediate and capital goods at competitive rates are essential for our manufacturing sector and would contribute to the industrialisation process. An interesting observation is that consumer goods comprise only 15% of total imports. This sets to rest the concern that many analysts have raised regarding Indian consumer goods sector being affected by a surge in imports from China.
Can India increase its exports to bridge the trade deficit? India’s exports to China have been dominated by primary commodities. However, the composition in the last few years has changed. In 2008-2009, iron ore exports were the single-largest item, accounting for 60% of our exports. India’s response was to impose export restrictions on iron ore in the form of duties. In the subsequent years, iron ore exports have fallen but there has been an increase in the exports of copper items, leading to a rise in its share in India’s export basket to China from 1% in FY09 to 15% in FY13.
Thus, unless India diversifies its export basket, it is unlikely that it will be able to bridge its trade deficit with China through raising exports. One way to reduce India’s overall deficit is by expanding India’s export basket in manufactured products. Investment from China will not only bring in capital inflows but would also provide the much