By Suhani Adilabadkar

With US President Trump getting aggressive about the US' trade imbalances with rest of the world, especially China, India and China have drawn a lot closer. Trump’s success in alienating China has been good for India.

India and China vowed in 2014 to take their bilateral trade to the magic figure of $100 billion. So where are we? Just $15 billion short. This feat was achieved this March with our bilateral trade touching $84.44 billion. Along with that however, India’s trade deficit has also zoomed 9% YoY to $52 billion.

The India-Chinese trade relationship is a much older one compared to that of US-China. India and China have been trading partners since the 10th century, when the Song Empire in China and the Chola Empire in India traded silk, precious stones, pepper, cotton, and many other products. In 2018, that relationship is once again growing closer. 

Quick Takes

• India's trade deficit with China has increased 9% YoY to $52 billion
• China has been providing critical manufacturing inputs for India, while India's trading goods were largely replaceable by other countries
• This has changed with new trade agreements in 2018. China has opened up rice, sugar and pharma markets to India. 
• China has signed an agreement to import non-Basmati rice from India which was earlier denied access. The first consignment of sugar from India is expected to be exported in mid October.
• The Chinese government has slashed tariffs and agreed to import Indian anti-cancer drugs. The Chinese blockbuster movie, ‘Dying To Survive’ highlighted the need of cheap anti-cancer Indian drugs for about 4 million cancer patients diagnosed every year in China. Other tariffs on Indian products have also been slashed. 

A trade equation in favor of China

The major raison d'être for the deficit getting skewed towards our eastern neighbor lies in the composition of our trade basket. India imports telecom instruments, iron and steel vehicles other than railways, nuclear reactors, boilers, machinery and mechanical appliances, electronic components, computer hardware, organic chemicals, fertilizers, medical or surgical instruments, furniture, footwear etc to name a few.

Exports to China are mainly cotton, ores, copper, cement, slag and ash, precious stones, organic chemicals, vegetable oils, zinc, plastics, boilers etc. China has been providing critical components that support our manufacturing base while India is exporting goods that can be substituted by other countries. In the case of cotton, China has reduced imports from India and replaced it with Vietnam. No doubt our trade deficit with China has doubled over the decade.

An update to the relationship

With the Trump administration training its guns on the US trade deficit with China and imposing tariffs that China has countered, China has been warming up to India with informal meets between President Xi and PM Modi. At the informal meeting in Wuhan, India pitched exporting agriculture products such as rice, sugar and pharmaceuticals to bridge it’s $ 52 billion trade deficit.

In June, on the sidelines of the Shanghai Cooperation Organization, the target of $100 bn bilateral trade by 2020 was reset again by the respective governments. China conceded by signing an agreement to import non-Basmati rice from India which was earlier denied access as it did not meet its phyto-sanitary standards.

Next in line, raw sugar is being exported to China after almost a decade. China mainly imports about 4 million tons annually from Brazil and Thailand which have cost of production lower than India. The first consignment from India is expected to be exported in mid October. Suffering from surplus production of about 8-10 million tons and crashing sugar prices, India badly needs export markets, and intends to enter the Chinese market which still remains untapped by Indian sugar companies.

But the jackpot has been struck by the Indian pharma industry as Chinese government has slashed tariffs and agreed to import Indian anti-cancer drugs. The Chinese blockbuster movie, ‘Dying To Survive’ highlighted the need of cheap anti-cancer Indian drugs for about 4 million cancer patients diagnosed every year in China. India, one of the largest generic manufacturers in the world catering to US, EU and other countries, export a minuscule of their drugs to China due to its heavy regulations and strict approval norms as more than 200 product applications are pending before China Food and Drug Administration (CFDA) for years.

The catalog of probables doesn’t stop here. Soybean, steel & aluminium products, clothing, chemicals etc have also undergone tariff reductions to be imported from India and other ASEAN countries. The import duty on soybean has been reduced to zero from 3% as China looks for replacements to American imports.

The dragon is no longer hidden

India is the seventh largest export destination for China and Indian exports have jumped 39%. Chinese investment has been on the rise since 2000 and accelerated since 2014 in various sectors such auto, metallurgy, pharmaceuticals, power, electrical equipment, industrial machinery and of course the most visible ecommerce.

From $ 930 million in 2016, Chinese investment in India soared to $ 5.2 billion in 2017 and hit $1 billion in first two months of 2018. Chinese companies Alibaba, Tecent, Fosun & Baidu have spearheaded Chinese investment in more than 30 Indian startup companies such as Paytm Flipkart, Swiggy, snapdeal, Ola, Hike, Ibibo, Gaana and Zomato to name a few. Alibaba alone has invested $2 billion over the past three years and intends to pump $8 billion in the next four years. In summary, the economies are already closely intertwined: we cannot close our doors to Alibaba, Tencent, or new generation chinese firms such as Toutiao, Meituan Dianping and Didi Chuxing or smartphone makers Lenovo, Oppo, Xiaomi which control almost 50% of our market.

Besides, the Chinese with its aging population, slowing growth rate & excess production capacity need a youthful, growing market to export to. It’s time to start enjoying onion pakoras with Chinese Tea.