Exploring India's Trade Deficit with China
   2013-02-20 14:44:52    CRIENGLISH.com      Web Editor: Luo Chun

By Stuart Wiggin

Abstract: CHINATALKS speaks to one of the world's leading experts on strategy, globalization and emerging markets, Dr. Anil K Gupta, about India's current trade deficit and the likely path ahead with regards to bilateral trade between India and China. Dr. Gupta is the Michael Dingman Chair in Global Strategy and Entrepreneurship at the Smith Business School, University of Maryland.

India and China are two of the world's largest emerging markets and are set to be among the world's four largest economies come 2020. Bilateral ties between the countries have increased as their respective governments have pursued economic growth. As a result, China is now India's largest trading partner. However, the same cannot be said from the other side, though India does rank within China's top ten trading partners. Bilateral trade is increasingly on the agenda within the Indian government and has become something of a prickly issue due to the country's trade deficit, which accounts for 2 percent of its GDP, and the unfavorable trade balance when it comes to Sino-Indian trade, in the form of 20 billion dollars in Indian exports against 60 billion dollars in Chinese imports.

CHINATALKS caught up with one of the world's leading experts on strategy, globalization and emerging markets, Dr. Anil K Gupta, who is the Michael Dingman Chair in Global Strategy and Entrepreneurship at the Smith Business School, University of Maryland, to talk about India's current trade deficit and the likely path ahead with regards to bilateral trade between India and China. With economists, politicians and even casual observers able to agree upon the fact that the current trade mix between China and India is unsustainable, discussion on finding ways to improve the trade balance has taken place both publicly and privately within the respective governments.

China's imports from India mainly comprise of raw materials, specifically iron ore. India, in comparison, imports a large numbed of manufactured capital goods, which are much cheaper to purchase from China than elsewhere. As Dr. Gupta told CHINTALKS, "The underlying cause for the trade deficit is when it comes to manufactured goods, China out-competes India. So, therefore, there is not a whole lot in terms of manufactured goods that India could export to China competitively." This trade mix ultimately means that India is incredibly sensitive to raw material price fluctuations, as witnessed last year when the cost of iron ore dropped along with the value of India's exports to China.

However, Dr. Gupta highlighted the almost unavoidable nature of the current trade balance in the context of India's economic and social development. "India is now in the early stages of the infrastructure revolution that China started in the mid 1990s," Dr. Gupta explained, "Chinese capital goods are 30% cheaper than western capital goods. Given where India is in terms of its stage of economic development, it needs a lot of capital goods and it needs financing. Chinese capital goods are cheaper and Chinese banks are willing to give financing. And so therefore, the bulk of Chinese exports to India are machinery. Toys or other things are a tiny, tiny fraction; less than 5% of China¡¯s exports to India."

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