India and China have agreed to set up a joint working group to look into trade-related matters, following a high-level meeting on economic relations recently. India is particularly concerned about both the lopsided nature and the composition of its trade with China. As Table 1 shows, India’s trade deficit with China has growth steadily, though the growth rate of the trade deficit has come down of late.
It is, however, a steadily increasing component of India’s total trade deficit. Indeed, as Table 2 shows, India’s imports from China are now well above 12 per cent of India’s total imports, nearly doubling their proportion over the past eight years. In value terms, they have increased nearly seven times. India’s exports to China, on the other hand, have actually decreased in terms of China’s total import basket, as Table 3 lays out. In value terms, too, they have not increased comparably.
This is not particularly surprising when they are decomposed. As Table 4 shows, India is importing mainly machinery of one sort or another, products from China’s powerful manufacturing sector. India’s exports to China, on the other hand – outlined in Tablew 5 – focus especially on primary goods. Cotton, copper and related articles, and ores, particularly iron ore, are the main components of India’s exports. The slowdown of China’s manufacturing has hit primary-goods exports, especially iron ore; as Table 6 shows, the increasing trend seems to have reversed in recent years.(Click here for tables)
India will want to ensure that the trade basket changes composition. China raised the issue recently of higher import duties on power equipment. But China’s manufacturing output has already become less competitive, thanks to the change in the rupee-yuan exchange rate shown in Table 7. The rupee is much cheaper in terms of China’s currency than it was a few years ago.