India’s trade deficit with China rose beyond the $100 billion-mark for the first time in 2022. Trade deficit with China widened last year, with imports from that country touching $118.5 billion and exports $17.48 billion, according to data released by the Chinese customs.
While India’s economic recovery boosted imports, slowdown in China saw India shipping fewer goods to the Asian giant.
Finance Minister Nirmala Sitharaman, due to present Budget 2023 on February 1, will grapple with a current account deficit that is due to breach the red line of three percent of gross domestic product (GDP) this financial year.
China tops the list of countries with the widest merchandise trade deficit with India. It is also the top source of merchandise shipments, but China’s share of imports has remained at the pre-pandemic level, data from the commerce ministry showed. While Chinese goods continue making inroads into India, the industry here complains they are not getting the same access to China.
The rising trade deficit with China is a cause of concern, Ajay Sahai, Director - General and CEO of the Federation of Indian Export Organisations (FIEO), told Moneycontrol.
“Probably, the production-linked incentive (PLI) schemes will address a major concern of imports from China because 50 percent of that is basically electrical, electronics and machinery,” Sahai said.
“Luckily for us, all these sectors come under the PLI scheme. So, we hope that, in the next three to five years, India’s imports will come down. Imports from China, in particular, will drastically reduce,” he added.
China’s share of imports
The worsening global growth situation has put the spotlight on India’s perennial trade and current account deficits, leading to calls for higher tariffs in Budget 2023.
India’s trade deficit widened slightly in December 2022 to $23.76 billion from $23.89 billion in the previous month, even as both exports and imports shrank from a year ago.
India imported goods worth $75.87 billion from China in April-December 2022. China accounts for 14 percent of India’s total imports. Imports from China have risen 12 percent from the corresponding year-ago period.
This share of 14 percent is unchanged from fiscal year 2019-2020, when India imported goods worth $65 billion from China. Among the top five importers to India this fiscal year are the United Arab Emirates, the United States, Saudi Arabia and Russia.
Russia is also a large contributor to India’s widening trade deficit this fiscal. Shipments from Russia to India have risen 400 percent in the nine months to December 2022.
India has been importing cheap crude oil from Russia in the wake of the Ukraine war, making Moscow the second-largest contributor to the trade deficit this fiscal year.
Iraq, Saudi Arabia and the UAE have also contributed to India’s widening trade gap. India imports nearly 85 percent of its crude oil requirements.
The top imports from China are electronic components, computer hardware and peripherals, telecom instruments, organic chemical, residual chemicals, electronic instruments, consumer electronics, bulk drug, drugs and intermediaries and fertilisers.
While the government contends that raw materials like Active Pharmaceutical Ingredients (APIs), drug formulations and electronic components from China are used for making finished products like generic medicines, which are then exported from India, some argue that domestic capacities need to take off in these areas as well.
As such, there is a need to substantially raise tariffs on imports of certain goods, especially those being dumped by China, according to Ashwani Mahajan, the co-convener of Swadesh Jagran Manch. “Atmanirbhar Bharat is the only way to ensure that we narrow the trade deficit and reverse deindustrialisation,” Mahajan told Moneycontrol in an interview.
Non-oil, non-gold imports
In FY23, India’s non-oil and non-gold imports have risen at a faster clip. These shipments stood at $330.78 billion in April-December 2022, compared with $266.86 billion in April-December 2021, according to the commerce ministry.
While one of the reasons for the increase in imports is that the overall value of imports has risen with inflation, Indian industry is also doing well and importing a lot of parts, components, and raw materials from China, according to FIEO’s Sahai.
US tops exports from India
Meanwhile, the US continues to remain the top destination for Indian merchandise shipments, with its share of total exports rising slightly to 18 percent so far this fiscal year.
The UAE, the Netherlands, China and Bangladesh make up for the rest of the top five destinations of Indian exports. Hong Kong and Singapore, which figured in the list in 2019-2020, have dropped off.
Current account deficit set to ease
While India’s trade deficit has stayed large by historical standards over the past few months amidst an easing of exports, the current account deficit will moderate in 2023, according to Shilan Shah, Senior India economist at Capital Economics.
“In all, the current account deficit is likely to have hit 3 percent of GDP in 2022, the biggest external shortfall since 2012 when India was on the brink of a balance of payments crisis,” Shah said.
With exports likely to drop further as the global economy heads into recession this year, imports should also weaken as commodity prices ease and as domestic demand softens, he said, pegging the current account deficit to narrow down to around 2 percent of GDP in 2023.
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