Context: As per data released by the Global Trade Research Initiative (GTRI), China has overtaken the US to become India’s largest trading partner after a gap of two years.

Key Data Analysis 

• In the fiscal year 2024, India’s bilateral trade with China totalled $118.4 billion, with imports rising by 3.24% to $101.7 billion and exports increasing by 8.7% to $16.67 billion.

• The main sectors which recorded healthy growth in exports to that country include iron ore, cotton yarn/fabrics/made ups, handloom, spices, fruits and vegetables, plastic and linoleum.

• India imported $4.2 billion worth of telecom and smartphone parts, accounting for 44 per cent of total imports in this category, indicating significant reliance on Chinese components. 

• Additionally, India’s import of lithium-ion batteries for electric vehicles, primarily from China, was valued at $2.2 billion, representing 75% of such imports, underscoring the critical role China plays in India’s push towards electrification of transport.

India’s Economic Ties with China

• Bilateral Trade: The rapid expansion of India-China bilateral trade since the beginning of this century has propelled China to emerge as India’s largest goods trading partner by 2008, a position which China continues to hold today.

• From 2015 to 2022, India-China bilateral trade grew by 90.14%, an average yearly growth of 12.87%. 

• Trade Deficit: In 2022 the deficit has widened by  45.60% year on year reaching USD 101.28 billion.

• Bilateral Investment: Growth in bilateral investment has not kept pace with the expansion in trading volumes between the two countries.

• Chinese investments to India in the year of 2021 was USD 63.18 million down 68.3% year on year and the cumulative Chinese investment to India by the end of 2021 amounted to USD 5.403 billion. 

• Indian investment into China for the year 2021 was USD 6.32 million declining by 47.4% year on year and the cumulative Indian investment to China by the end of 2021 reached USD 943.96 million.

Institutional Bilateral Economic and Commercial Dialogue Mechanisms

• Joint Economic Group (JEG) was established in 1988 during the visit of Prime Minister Rajiv Gandhi to China, to discuss trade cooperation issues. 

• Strategic Economic Dialogue (SED) was established during the visit of Chinese Premier Wen Jiabao to India in December 2010, to discuss macro-economic cooperation.

• The NITI Aayog – Development Research Centre of China (DRC) Dialogue was established pursuant to the MoU signed during the visit of Prime Minister Narendra Modi to China in May 2015, to discuss global economic cooperation issues.  

• Banking Sector Cooperation: Many Indian banks had established their presence in mainland China through branches or representative offices in major cities in China.

• SBI is the only Indian bank to have authorization to conduct local currency (RMB) business at its branch in Shanghai.

Multilateral Development Banks

• Asian Infrastructure Investment Bank: In May 2014 India was invited by China to join the Bank after committing to the ‘Key Elements of AIIB’, to join in the multilateral negotiations on the MoU for establishment of AIIB.

• India is the second largest shareholder with approx 8% shareholding and has a single member constituency in the Board. 

• New Development Bank: NDB established its office in Shanghai and Mr K.V.Kamath took charge as the first President of the NDB.

• India is the biggest borrower in NDB with 19 projects approved with commitment of USD 6.92 bn as on 31 August 2022.

• Other Economic and Commercial Issues: India and China are working on the areas of cooperation in the petroleum sector to leverage upon the sheer size of the market of two countries.

• Double Taxation Avoidance Agreement (DTAA): India and China signed the DTAA on 18 July 1994 and the Agreement came into force on 21 November 1994. Both the countries agreed to revise the DTAA in its entirety and the revised DTAA was signed in May 2018.

• India’s economic ties with China have been under close scrutiny due to a heavy reliance on Chinese imports in critical sectors such as telecommunications, pharmaceuticals, and advanced technology.

• In response, India has implemented various measures to reduce this dependency, including production-linked incentive schemes (PLI), anti-dumping duties, and quality control orders. 

Factors contributing to the trade imbalance between India and China

• China’s Manufacturing Dominance: China has a well-established and robust manufacturing base, allowing it to produce goods at a much lower cost compared to India. Factors like economies of scale, efficient supply chains, and government subsidies contribute to this advantage.

• Product Diversification: China manufactures a wider variety of products, including high-tech goods and machinery, which India imports in large quantities.

• Limited Manufacturing Capacity: India’s manufacturing sector faces challenges related to infrastructure bottlenecks, complex regulatory procedures, and a skilled labor gap. This hinders India’s ability to compete effectively with China in global markets.

• Focus on Primary Goods: India’s exports are heavily concentrated on raw materials and low-value-added products like agricultural goods and textiles. These products generally have lower profit margins compared to finished manufactured goods.

• Non-Tariff Barriers: In some cases, China may impose non-tariff barriers (NTBs) like stricter regulations or lengthy customs procedures, making it difficult for Indian goods to enter the Chinese market.

• Currency Exchange Rates: Fluctuations in currency exchange rates can affect the relative competitiveness of Indian and Chinese exports.

• Foreign Direct Investment (FDI): China attracts a significantly higher level of FDI compared to India. This can contribute to faster growth in China’s manufacturing sector.

Road Ahead

• Boosting Manufacturing: India’s initiatives like “Make in India” aim to improve the ease of doing business, attract investments, and upgrade manufacturing capabilities.

• Promoting Innovation: Encouraging research and development in India can lead to the creation of new products and technologies, enhancing export competitiveness.

• Diversifying Trade Partners: India is actively negotiating trade agreements with other countries to reduce dependence on China as a source of imports.