Neighbours With Benefits

There has never been a better time to pursue a trade deal with China

- SANTOSH PAI

The trajectory of India's economic relationship with China has largely defied the desired course set by New Delhi in the past two decades. Heightened distrust after the Galwan clashes in 2020 has further widened the gap. Modi 3.0 faces two major dilemmas-how to tame the burgeoning trade deficit with China and how to screen foreign direct investment from China while striking a balance between national security and industrial policy. Both these objectives are intertwined with India's ambition to expand its share in global supply chains. Can India steer a creative path in its economic ties with China and harvest gains?

India enjoyed a trade surplus with China till 2005. Between 2005 and 2010, this turned into a $20 billion deficit. India was then importing two dollars worth of goods for every dollar of exports. The two countries then set a joint target of $100 billion for bilateral trade. From India's perspective, this was a preemptive step to rein in the deficit by boosting exports. It was already clear that the demand for Chinese imports in India would grow without much encouragement. The target was achieved in 2021 when imports from China grew by a whopping 45 per cent in a single year.

Within a year, trade deficit alone crossed $100 billion, when India’s exports stood at a paltry $17.5 billion. India is now importing almost six dollars worth of goods from China for every dollar of exports.

Ironically, this can be attributed to two triumphs of the Indian economy. One is the consumption story where growing income levels have fuelled the demand for finished products from China. Second is the success of the ‘Make in India’ campaign which has expanded India’s manufacturing sector and global exports on the back of intermediate products imported from China.