In recent years, India's trade dependence on China has been increasing at an alarming rate, despite ongoing border tensions between the two nations. This growing reliance on Chinese goods poses several challenges and risks for India, which need to be addressed urgently. In this article, we will analyze the reasons behind India's rising trade dependence on China, its implications, and potential ways to mitigate these risks.
The Trade Deficit Conundrum
India's trade deficit with China has grown dramatically in the last five years, crossing the $387 billion mark. The biggest chunk of imports from China consists of industrial goods such as telecom gear, machinery, and electronics. Fifteen years ago, China's share of industrial goods imported by India was 21%. Today, it has risen to around 30%, indicating a significant increase in dependence on Chinese imports.
Moreover, India's imports from China are rising 2.3 times faster than from other countries, making it clear that not only is the volume of imports expanding, but the pace of Chinese imports is also accelerating. This growing addiction to Chinese imports is proving hard to break, primarily due to two reasons: lack of alternatives and cost-effectiveness.
Lack of Alternatives and Cost-Effectiveness
India's leading imports from China include electronics, machinery, and active pharmaceutical ingredients (APIs), with China having the largest share in these sectors. For instance, more than 43% of electronics and almost 40% of machines used in India come from China. One of the primary reasons for this dependence is the lack of know-how and infrastructure to produce sophisticated equipment and parts in India.
On the other hand, China boasts a large number of factories and a vast pool of patents, contributing over 28% of the world's manufacturing output. This enables Chinese suppliers to produce a large number of goods at high speed, making them harder to replace.
Cost-effectiveness is another factor driving India's dependence on Chinese imports. For example, India relies heavily on China for API supplies due to their lower cost. The price of paracetamol, one of the most commonly used medicines, is around $4 per kilo in India, while China sells it for around 3.3 to \3.5 per kilo. The higher cost of Indian supplies can be attributed to raw material costs, electricity, labor, and logistics, all of which are more cost-effective in China.
A Silver Lining and the Way Forward
Despite the challenges, there are signs of change. During the pandemic, India took steps to break China's monopoly on API supplies by introducing production-linked incentives. As a result, India's API imports from China have decreased from 80% to 68%.
To reduce its dependence on China, India must focus on building its manufacturing capacities quickly. The border situation has left India with little choice but to prioritize self-reliance and diversify its import sources. While China may advocate for increased trade between the two nations, India should be cautious and address the vulnerabilities created by the one-sided trade deficit.
Imagine a scenario where China decides to restrict the export of critical raw materials to India, impacting India's medical supplies. To mitigate such risks, India must be prepared to invest in its domestic manufacturing capabilities and explore alternative trade partnerships.
In conclusion, India's rising trade dependence on China poses significant challenges and risks. To address these issues, India must focus on enhancing its domestic manufacturing capabilities, diversifying import sources, and fostering new trade partnerships. By doing so, India can mitigate the risks associated with its dependence on Chinese imports and ensure a more stable and secure future.
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