India’s trade deficit with China widens as commodity prices fall

Trade data for April and May show that India’s exports to China contracted about 31 percent to $3.07 billion while imports climbed 12.8 percent to $15.39 billion (Representative Image: Shutterstock)

India’s trade deficit with China widened sharply in the first two months of the current financial year as imports grew and exports fell.

Exports contracted because of a sharp decline in commodity prices as global recession fears grew. Sluggish Chinese demand amid COVID-19 restrictions contributed to the decline. Specifically, iron ore and copper exports slumped.

Trade between the two countries grew a mere 2 percent in April-May 2022 from a year ago, compared to a rapid 34 percent rise in the trade between India and the United States. Country-level trade data for June had not been published at the time of writing this report.

Trade data for April and May show that India’s exports to China contracted about 31 percent to $3.07 billion while imports climbed 12.8 percent to $15.39 billion. Petroleum product exports grew as private refiners stepped up overseas sales to offset losses from selling domestically during those months.

This made petroleum products the top export to China, displacing iron ore. The rise in the value of petroleum product exports was small compared to the decline in exports of iron ore and copper.

India’s exports of iron ore to China, in value terms, soared when global prices climbed. Prices rose to an all-time high of $220 per tonne in July 2021. Prices slid below $100 a tonne in November and then rebounded early this year.  Global prices have eased again and iron ore is trading at about $100 a tonne.

Graphic 1 – Top exports 2022 & 2021

There were other changes in India’s exports to China. While cotton, iron and steel, aluminium products and telecom instruments were among the top exports in 2021-22, none of these figured in the top 10 exports of the current financial year’s first two months.

They were replaced by items such as non-basmati rice, castor oil and residual chemicals, data compiled by the Director-General of Commercial Intelligence and Statistics in the Ministry of Commerce and Industry show.

Import growth was led by a sharp increase in the value of organic chemicals entering the country. Other top import items such as electronic components, computer hardware, telecom instruments and consumer electronics also rose.

All these items contributed to the widening of the trade deficit and there weren’t any significant changes in the composition of the top items in the import basket.

Graphic 2 – Top imports 2022 & 2021

Indeed, India’s balance of trade with China was most adversely affected by the imports of electronics components, organic chemicals, computer hardware and telecom instruments, all of which together contributed nearly $5 billion to the deficit, trade data show.

Policy interventions of the last few weeks and a continuing slide in commodity prices are likely to lead to more export contraction in the months ahead.

Exports of petroleum products and iron ore have become unattractive after export taxes were imposed on them. Given the composition of the import basket and the likely surge in consumer demand in the ensuing festival season that begins later next month, the inflow of Chinese goods can be expected to remain strong.