Saturday, March 24, 2012

Indo-Chinese trade deficit

India's own economic goal posts may be well beyond her reach. But bring up any topic that undermines China's super power potential. The latter will certainly gather more newsprint and catch more eyeballs in India. In the same tone, speculations about China cannibalizing on India growth story attracts as much concern from policy makers.

Take India's growing trade deficit with China for instance. At an estimated US$ 27 bn in 2011, the deficit between imports and exports to the oriental nation is seen as an economic peril. The government is alarmed by the fact that India's overall trade defict has soared over the past decade. It went up from US$ 13 bn in 2000 to US$ 150 bn in 2011. At more than 6% of GDP India's trade gap is undoubtedly huge. The deficit has soared even as India has been the fastest-growing exporter among the world's top 10 economies. India's exports have in fact grown at the same rate as China's all this while. However, all our worries seem to rest with our export focused neighbour.

But the fact is that the deficit with China accounts for less than 20% of India's total deficit. Hence even if the trade deficit with China were to drop drastically, it would do little to improve the situation. In the bargain stopping imports of critical electrical machinery, nuclear reactors, boilers etc may hurt India's infrastructure dreams. Import prices for the Chinese products are more than 30% lower than that from suppliers in the US, Europe and Japan. Hence, Chinese companies have been the natural beneficiaries of India's growing appetite for capital goods. But curtailing Chinese imports completely could deal a heavy blow to India infrastructure outlay. Instead, demanding Chinese suppliers to set up manufacturing bases in India could be a smart long term policy.

Imported oil, gas, and coal are the major culprits for India's fiscal problems. These do not come from China. But from countries such as Saudi Arabia, Iran, Australia, and Indonesia. Fuel imports accounts for more than 65% of India's trade deficit. With lack of indigenous fuel resources, India's deficit problem is therefore here to stay. Distancing itself from China as a trade partner could only hurt India's long term economic goals. The government would therefore do well to focus on economics rather than external affairs when it comes to fiscal policy making.

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