The trade threat from the Chinese dragon

It is well known that we import far more from China than we export to it. But the gap has been widening. In fact, an analysis from 2010 shows India’s trade deficit (imports less exports) with China touched a monthly high in September this year. The adjacent chart has the details.

“The widening deficit can be partly attributed to the sharp appreciation in INR (Indian rupee) against CNY (Chinese yuan) in the last two years, which has weighed on India’s competitiveness,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank Ltd. Additionally, the initial glitches (although transitory) post-demonetisation and the goods and services tax, which led to disruptions in the supply chains, may have further weighed on the deficit, added Bhardwaj.

Businesses of medium- and small-sized exporters operating in India’s large informal economy bore the brunt of both these events. Exporters in key employment-generating sectors like gems and jewellery, and leather products took a hard knock.

An array of items including high-tech electronics like mobile phones, and chemicals, industrial goods and iron ore, among others, are imported from China. Given the cost difference, imports of technology-led products are likely to remain high going ahead.

According to a recent Morgan Stanley China 2018 outlook report, resilient external demand will support China’s export growth to remain notably higher than the 2014-16 average of 3%. What’s more, China’s competitive advantage is getting better. The report pointed out that China’s R&D (research and development) spending as a percentage of gross domestic product has increased from 0.9% in 2001 to 2.1% in 2015, closing the spending gap with the world’s most innovative economies—the US, Japan and Germany. China is likely to surpass Japan to become the second-largest patent applicant in the world (behind the US) in 2017.

India’s broadening trade deficit with China and significantly rising share of the latter in the country’s overall imports is a concern, cautioned economists, given its adverse impact on India’s manufacturing sector.

“While I wouldn’t call this as a threat, it is certainly an alarm and an opportunity which requires a coordinated reorientation on key policies related to the manufacturing sector covering all input categories,” pointed out Gaurav Kapur, chief economist at IndusInd Bank Ltd.

“Our exports to China are nothing to write home about. The problem is we are not a part of the global value chain,” said Kapur, adding that one way to deal with this is to “develop our own manufacturing facilities, with focus both on domestic market and exports”.

As Dharmakirti Joshi, chief economist at Crisil Ltd, points out, the only way to deal with this challenge and correct the imbalance is by becoming more competitive.
Source: Live Mint