Amid demands for snapping trade ties with China for its transgressions on the border, former NITI Aayog Vice-Chairman has opined that cutting trade ties with Beijing would amount to sacrificing India’s potential economic growth.
What is the news?
- Panagariya said both countries can play the trade sanctions game.
- The ability of a $17 trillion economy (China) to inflict injury on a $3 trillion economy (India) is far greater than the reverse.
Why in news?
- The trade deficit, the difference between imports and exports, between India and China touched $51.5 billion during April-October this fiscal.
- The deficit during 2021-22 had jumped to $73.31 billion as compared to $44.03 billion in 2020-21.
A quick backgrounder
- Trade ties began to boom since the early 2000s.
- This was driven largely by India’s imports of Chinese machinery and other equipment.
- It rose up from $3 billion in the year 2000 to $42 billion in 2008, the year China became India’s largest trading partner.
The Hindi-Chini buy buy
- A third of machinery and almost two-fifths of organic chemicals that India purchases from the world come from China.
- Automotive parts and fertilizers 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.
India’s export to China
- Even as an export market, China is a major partner for India.
- China is the third-largest destination for Indian shipments.
- At the same time, India only accounts for a little over two percent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).
Should we worry about this?
- Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
- In this light, India’s trade imbalance with China should not be viewed in isolation.
- For instance, pharmaceuticals that India exports to the world require ingredients that are imported from China.
- Chinese imports of Indian seafood are one area that has recently shown robust growth and carries scope to grow in future.
So, having a trade deficit is good?
- Of course NOT. Running persistent trade deficits across all countries raises two main issues.
- Availability of foreign exchange reserves to “buy” the imports.
- Lack of domestic capacity to produce most efficiently.
Can we ban trade with China?
Ans. Certainly NOT!
- It will hurt the Indian poor the most: This is because the poor are more price-sensitive. For instance, if Chinese TVs were replaced by either costlier Indian TVs or less efficient ones, unlike poor, richer Indians may buy the costlier option.
- It will punish Indian producers and exporters: Several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods — both for the domestic Indian market as well as the global market (as Indian exports).
- Pharma sector could be worst hit: For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 percent.
- Ban will barely hurt China: According to the United Nations Conference on Trade and Development (UNCTAD) data for 2018, 15.3% of India’s imports are from China, and 5.1% of India’s exports go to China.
- Chinese money funds Indian unicorns: India and China have also become increasingly integrated in recent years. Chinese money, for instance, has penetrated India’s technology sector, with companies like Alibaba and Tencent strategically pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket and Ola.
- India will lose policy credibility: It has also been suggested that India should renege on existing contracts with China. This can be detrimental to India’s effort to attract foreign investment.
China is our Frenemy. Here is why.
- The first thing to understand is that turning a border dispute into a trade war is unlikely to solve the border dispute.
- Worse, given India and China’s position in both global trades as well as relative to each other, this trade war will hurt India far more than China.
- Again, these measures will be most poorly timed since the Indian economy is already at its weakest point ever — facing a sharp GDP contraction.
Way forward
- Panagariya suggested to expand trade faster with other trading partners rather than cutting it with Beijing through a blunt instrument such as trade sanctions.
- We should take advantage of India’s excellent growth prospects for the next decade and concentrate on growing the economy bigger as fast as possible.
- Once we are the third largest economy, our sanctions threats are likely to carry greater credibility.
