Syllabus: GS2/IR

• India’s trade deficit with China reached an all-time high of $99.2 billion in the fiscal year 2024–25, raising economic, strategic, and policy concerns.

Overview of Trade Dynamics

• Bilateral trade between India and China totaled $127.7 billion in 2024–25, making China India’s second-largest trading partner after the United States.
• Imports from China: Rose to $113.5 billion, driven by demand for electronics, solar components, and batteries.
• Exports to China: Fell sharply to $14.3 billion, deepening the trade imbalance.

Causes of India’s Rising Trade Deficit with China

• High Dependence on Chinese Imports:
• Key sectors such as electronics, pharmaceuticals (APIs), chemicals, and textiles rely heavily on intermediate goods and raw materials from China.
• Dominance in Capital and Consumer Goods:
• China is a primary source for electrical machinery, telecom equipment, and mobile phones, owing to its cost competitiveness and manufacturing scale.
• Narrow and Low-Value Export Basket:
• India’s exports are largely primary commodities like iron ore, cotton, and copper, with minimal value addition and limited diversification.

Market Access Barriers:

• Indian products face regulatory restrictions, non-tariff barriers, and weak consumer demand in the Chinese domestic market.

Global Supply Chain Positioning:

• Chinese firms have deep integration in global value chains, supplying diverse and competitively priced goods worldwide.

India’s Evolving Industrial Base:

• Despite initiatives like ‘Make in India’, domestic manufacturing—especially in high-tech and industrial machinery—is still not at par with China’s capabilities.

Concerns Arising from the Trade Imbalance

• Rising Imports Forecast: Chinese imports are projected to increase by 20% as exporters seek alternative markets amid rising tariffs in the U.S.
• MSME Vulnerability: Influx of low-cost Chinese goods adversely impacts India’s MSME sector, leading to job losses, reduced competitiveness, and industrial stagnation.
• Strategic and Cyber security Risks: Heavy imports of telecom and surveillance equipment raise alarms about data security and national cybersecurity.
• Macro-Economic Pressure: The trade deficit exacerbates the Current Account Deficit (CAD), putting downward pressure on the rupee and straining foreign exchange reserves.
• Geopolitical Paradox: Dependence on China for critical imports appears strategically contradictory, given ongoing border tensions and strained diplomatic ties.
• Innovation Gap: Reliance on Chinese technology underscores India’s lag in high-tech R&D and manufacturing, challenging long-term economic sovereignty.

Government Initiatives to Address the Deficit

• Trade Remedies: The Directorate General of Trade Remedies (DGTR) monitors and counters unfair trade practices.
• ‘Vocal for Local’ Campaign: Aims to generate consumer awareness and promote domestically manufactured goods.
• Production Linked Incentive (PLI) Scheme: Covers 14 strategic sectors, providing financial support to boost domestic manufacturing and export capacity.

Export Promotion Schemes:

• TIES (Trade Infrastructure for Export Scheme) and MAI (Market Access Initiatives) enhance export readiness.
• APEDA supports agro-exporters through financial aid.
• MPEDA promotes marine exports via infrastructure upgrades, lab testing, and technical assistance.
• Districts as Export Hubs:Focuses on identifying district-level export potential, resolving bottlenecks, and empowering local manufacturers.

Conclusion and Way Forward

• India’s growing trade dependence on China has supported cost-effective production and consumer affordability but has also created significant economic vulnerabilities.

To ensure strategic autonomy and economic resilience, India must:

• Diversify its import sources to reduce over-reliance.
• Strengthen domestic manufacturing through the Make in India mission and PLI schemes.
• Enhance technological capabilities to boost high-value exports.
• Import substitution must not mean protectionism but a balanced trade framework rooted in competitiveness, innovation, and strategic foresight.