India may need to address trade imbalance with China

Traders are concerned about the large amount of low-cost Chinese goods flooding the Indian market, which they argue are hurting small local manufacturers

epa07447890 Indian traders burn Chinese manufactured goods during a protest against China, in New Delhi, India, 19 March 2019. According to news reports, Indian traders across country are protesting against China after it blocked India's to designate Masood Azhar as a global terrorist with the United Nations Security Council.  EPA/RAJAT GUPTA
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Trade ties between India and China could be revisited as Indian traders took to the streets across the country in March to protest the trade deficit with the world's second-largest economy. Traders are calling for consumers to boycott Chinese goods and for the Indian government to impose higher import taxes on them.

Traders are mainly concerned about the large amount of low-cost Chinese goods – ranging from smartphones to shoes – flooding the Indian market, which they argue are hurting small local manufacturers and job creation.

"The Indian government should take all action to minimise imports from China and empower domestic producers to produce goods," says Praveen Khandelwal, the national secretary general of the Confederation of All India Traders, the lobby group behind the demonstrations, which represents more than 70 million small traders.

China is India's second-largest trading partner, but most of that trade is lopsided. This is an issue that is also worrying policymakers and large companies.

The influx of budget Chinese goods into India resulted in a ballooning bilateral trade deficit, which reached $63 billion in the financial year to the end of March 2018, according to data from the Indian government.

“The trade imbalance between the two Asian economic giants has greatly impacted Indian IT companies, electronics, plastic, toys and pharmaceutical products,” says Rajesh Gupta, the managing partner at SNG and Partners, an Indian law firm. “India has also failed to leverage the vast market potential of the Chinese economy for agricultural products and commodities.”

Total trade between the two countries stood at $89.7bn in the last financial year, with $76.38bn of imports from China coming into India, while there were only $13.3bn of exports from India to China.

Aditya Berlia, the co-promoter of Apeejay Stya and Svran Group, a conglomerate in New Delhi, with interests ranging from pharmaceuticals to real estate, says his companies are heavily dependent on Chinese imports.

“Our companies regularly import chemical raw materials for pharmaceuticals, building and construction materials, textiles, electronics, and a range of smaller items,” says Mr Berlia.

“We would prefer to buy Indian products at all times but even then we know we are deeply exposed to Chinese inputs one way or the other.”

The protests come before India is due to hold a general election that begins this month and runs until May.

Boosting the economy and creating jobs are sensitive issues, given that economic growth slowed to a more than one-year low of 6.6 per cent in the quarter ending in December, while some leaked data to local media shows the unemployment rate has hit a multi-decade high.

But the consensus is that with elections looming, Prime Minister Narendra Modi’s government is unlikely to act on the demands of the traders who are calling for steep tariff hikes, which would cause a political dispute with China.

Such a move could also risk upsetting voters by raising prices, says Mr Berlia.

Meanwhile, consumers and companies are too dependent on cheap Chinese imports to boycott them, he says.

“The complexity of the China import chain impacts us at all levels,” says Mr Berlia. “If one part is impacted, it cascades to higher prices and inflation for us and the consumer.”

The reach of Chinese products cannot be underestimated in India, experts say. Even simple goods such as straws and pencil sharpeners come from China and are found across shops in India, along with footwear, furniture and steel, says Ahindra Chakrabarti, a professor, at the Great Lakes Institute of Management in Gurgaon.

All these are areas in which India manufactures its own products, but it is unable to compete with "the edge in large-scale manufacturing at a low cost that China has developed", and this makes China "a threat", he says.

“India is a huge market for Chinese manufacturers and they see to it that those products fit Indian baskets and pockets,” adds Mr Chakrabarti.

“Gradually, many new sectors like high-tech trade are also being explored while information technology and infrastructure development are already emerging as major areas for trade.”

The government has taken steps to try to reduce the trade gap, including efforts to push for a boost in exports from the IT and pharmaceutical sectors into China.

“The Indian government is engaging in parleys with the Chinese government for urging them to remove stringent regulatory requirements and ease greater market access for Indian products,” says Mr Gupta.

In order to eventually become less dependent on imports from countries including China, the Modi government has been striving to expand the manufacturing sector in India, under its "Make in India" campaign.

Despite this, manufacturing has declined to 15 per cent of the country’s gross domestic product in 2017 after peaking at 18.6 per cent in 1995, according to data from the World Bank.

When it comes to China, the government is unlikely to take any knee-jerk steps in reaction to political concerns that would “spoil bilateral international relationships”, says Mr Gupta.

“It is likely to adopt a wait and watch policy and seek a long-term solution to the issue.”

Mahesh Singhi, the founder and managing director of investment banking company Singhi Advisors, says the Chinese “have not responded positively” to India’s attempts to get more goods into China.

He concludes that “there may be no easy solutions”, and “we may have to take some hard decisions like imposing anti-dumping duties and hiking tariffs”.

But others point out that India could in fact learn a lot from China.

Chinese smartphone manufacturers including Xiaomi have been expanding their production bases in India. This presence of Chinese companies in the Indian economy is to be encouraged, says Alok Chandra, the founder of CK Business Solutions.

“India is welcoming businesses from China in every sector,” he says.

“As Chinese technology is far more advanced, it will give Indians an opportunity to understand the concept, how the technology can be used to improve the efficiency and effectiveness, it will help Indians to get familiar with it.”

This could ultimately bring more jobs to India.

“As India and China enjoy tremendous economic growth, each country is vying to increase its role on the world stage,” says Mr Chandra.

Some business leaders believe that an important means of addressing the trade imbalance with China would be for the Indian government to focus more on improving the ease of exporting from India, by improving infrastructure, for example, and putting more effort into enabling companies to develop mass manufacturing.

“Why would I make in India, when I can buy cheaper from China?” says Vijay Mansukhani, the managing director of Mirc Electronics in Mumbai, which is known for its consumer durables under the Onida brand.

It imports its air conditioner products and some of its large screen televisions from China for the Indian market.

Meanwhile, the Confederation of All India Traders says the lobby group is moving full- steam ahead with its efforts to try to reduce Chinese imports into India.

It has launched a national campaign, holding conferences and seminars to “educate importers about the ill-effects of the import of Chinese goods”, Mr Khandelwal says.