Diplomatic Progress With China May Not Ease Trade Deficit in Short Term

Chennai: The recent breakthrough in India-China diplomatic ties is unlikely to significantly improve investments or trade relations in the short term. Correcting the trade imbalance and reducing dependence on Chinese imports require long-term efforts.

Prime Minister Narendra Modi and Chinese President Xi Jinping's meeting during the BRICS summit in Russia and the new patrolling arrangement along the Line of Actual Control (LAC) in Eastern Ladakh is seen as a diplomatic breakthrough after relations strained in 2020.

After 2020, investments from China were restricted, but the trade deficit kept ballooning. Between FY20 and FY24, India’s exports to China edged up marginally from $16.61 billion to $16.65 billion. But the imports from China surged from $65.26 billion to $101.74 billion, leaving India with a cumulative trade deficit of over $387 billion over the past five years, finds GTRI.

Over the last 15 years, China’s share of India’s total industrial imports has grown from 21 per cent to 30 per cent. Electronics, telecom, electrical products, machinery, chemicals and pharmaceuticals, iron, steel and base metals, plastics, textiles, and automobiles are heavily dependent on Chinese imports.

According to Ajay Srivastava, founder of GTRI, heavy investments are not expected to come in from China going ahead as it was not a major investor even before 2020. Between 2000 and 2024, China’s cumulative investments in India amounted to just $2.5 billion.

As China has been reluctant to share technology in critical sectors, investments may come into labour-intensive industries like garments or shoes, but not electronics and electric vehicles. Chinese companies may focus on assembling products in India.

“India’s low exports and high reliance on Chinese imports, especially in industrial sectors, are structural issues that can be addressed with long-term policy efforts,” said Srivastava.