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Indo-China trade: Time for India to reverse the trend

India’s trade deficit with China marginally improved in 2016-17. However, the rise in export value was too small to make a significant impact on trade deficit, writes Sanjay Kumar Kar for South Asia Monitor

Jun 17, 2017
By Sanjay Kumar Kar
 
India’s trade deficit with China has been widening over the years. In 2015-16, trade deficit reached $52.7 billion from $38.7 billion in 2012-13. In 2016-17, India’s exports registered some recovery with about 13% growth over the previous year. 
 
After two consecutive years of decline; exporters have a reason to smile. India’s import from China marginally declined from $61.7 billion in 2015-16 to $61.3 billion in 2016-17, about 0.7% erosion. Based on these export and import figures, India’s trade deficit with China marginally improved in 2016-17. However, the rise in export value was too small to make a significant impact on trade deficit.
 
China has been among India’s largest trading partners. India’s import dependency on China for products ranging from power equipment to electronic products has been quite high. Over the last two decades Chinese industries have thrived on export markets including India. In the past, multiple reasons, including lack of basic infrastructure like 24X7 electricity supply, less developed transport and logistic infrastructure, tax complexities, tricky labour laws, and absence of transparent and well-developed financing mechanisms for small entrepreneurs hampered competitiveness of Indian industries. Chinese manufacturers therefore developed competitive advantage over their Indian counterparts.
 
Prime Minister Modi’s strong push for the “Make in India” initiative could change the trade dynamics by 2020. For instance, the Modified Special Incentive Package Scheme (MSIPS) intends to achieve ‘Net Zero Import’ in the electronics sector by 2020. Investments in the Electronics System Design and Manufacturing (ESDM) and MSIPS schemes are geared to create a strong electronic manufacturing ecosystem in the country.
 
According to the National Policy on Electronics 2012, around 69 clusters for ESDM have been identified across the country. To provide funds for research & development in the sector, an Electronic Development Fund (EDF) is being developed. In the 2017 budget,  the government announced multiple incentives to promote of manufacturing of Point of Sale (POS) and other digital payment devices, LED (Light Emitting Diode) lights, solar cells and modules, populated printed circuit boards (PPCBs) of mobile phones. Such strategic intent and action by the government is likely to soon bring desirable results.
 
Foreign direct investment statistics during April 2000-March 2017 suggest that China has been very conservative in terms of investing in India. During the period, FDI inflows from China to India stood at $1,635.7, 0.49% of the total inflows ($332.1 billion). However, transformative measures by the Modi government, consumption growth potential, and many other factors are forcing Chinese investors to rethink about their conservative investment strategy.
 
Chinese mobile handset makers such as Huawei, Xiaomi, Oppo and Vivo are trying to replicate what Korean companies like Samsung and LG achieved in the white goods segment in the past. Alibaba, Ctrip-Chinese online travel company, and Hillhouse Capital are aggressively investing in the Indian ecommercial market. Due to emerging cost competitiveness, multinationals like Foxconn and Indian companies such as Godrej, Havells, and Micromax have shifted their manufacturing base from China to India. The change in mindset of global, Chinese, and Indian investors augurs well for the Indian economy.
 
Manuel Anja (2016) opines that “China’s economy will be more competitive than India” owing to plenty of natural resources, capital, labour, strong domestic consumption, and high savings. I believe many parameters which give China a global competitive advantage are likely to shift towards India in the near future. Consequently, India may emerge as a manufacturing hub in Asia. 
The shifting of manufacturing bases by many Chinese, Indian and global manufacturers indicates that India is becoming more attractive for investors. Further, the recent market-discovered solar tariff of Rs.2.44 ($0.039)/kWh, lower than coal based power tariff, is likely to be a game changer in terms of making energy available, accessible, and affordable to manufacturers in India. This could improve cost competitiveness in the energy intensive industries.
 
Can India replicate what China did over the last three decades? If India can manage to replicate China, or even travel its present trajectory, India will be on course to reverse the trade trends with China. China must watch India’s growth, development, business and economic strategies more carefully than its foreign policy.
 
(The author is Head, Department of Management Studies, Rajiv Gandhi Institute of Petroleum Technology, Jais, Uttar Pradesh. Comments and suggestions on this article can be sent to editor@spsindia.in)

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