Led by mobile phones and computers, China's share in India's total imports has risen to 15.1 per cent so far in the current financial year (April-August 2015). Between 2010-11 and 2014-15, the country's share in India's import basket grew rapidly from 11.8 per cent to 13.5 per cent. This makes China the largest exporter to India.
A slowdown in China might do little to reverse this trend, as long as India's burgeoning middle class' appetite for consumer durables continues, says Biswajit Dhar, trade expert and a professor at Jawaharlal Nehru University.
The overall trade between the two countries has steadily risen from $57.65 billion in 2011-12 to $72.3 billion in 2014-15. During the April-August period, total trade stands at $29.2 billion. However, this growing trade relationship is because of the rapid growth in India's imports from China. Of the total trade of $72.3 billion in 2014-15 between the two countries, India imported goods worth $60.4 billion, while exports to China were a mere $11.9 billion.
So far in FY16, Saudi Arabia has been the second-largest exporter to India. But it is a distant second at $9.8 billion, or 5.8 per cent of total imports.
While many expect China's export growth to slow down as a consequence of labour scarcity and higher wages, which will lower its competitiveness, its export growth to India is likely to continue unabated. "In spite of a slowdown in China, imports to India have not slowed down. From other countries, we may see a slowdown in imports but we haven't seen that in China's case and may not see in the future as well," says Dhar.
Part of the explanation for this stems from the fact that as a manufacturer of finished products that are being consumed in large numbers, the demand for Chinese manufactured products in India continues to remain unaffected.
Electrical machinery and equipment is by far the biggest item of export to India. The segment's share in India's total imports from China has risen from 27.9 per cent in 2013-14 to 30 per cent in 2015-16 (April-August). This segment includes mobile phones, laptops, tablets, computers, televisions, air conditioners as well as heavy machinery, which is in high demand in India.
"The reason for that is that a big chunk of imports from China is that of electronic items and consumer durables. India has not been affected as much by a global demand slowdown and as long as there is demand from the middle class, imports from China may not get affected," says Dhar.
The second biggest segment in the import basket is that of nuclear reactors, boilers, machinery and parts, which contributed 17.1 per cent of total imports for the first five months of 2015-16. Organic chemicals accounted for 11.1 per cent of the export basket.
"On the import side, in certain product categories, imports from China are becoming more competitive. There is an element of import substitution. This is putting some pressure on Indian industry. Steel imports are also rising. This is due to the slowdown in China, which has created excess capacity in the country which is now flooding international markets," says Madan Sabnavis, Chief Economist at CARE Ratings.
The share of iron & steel imports has risen from 1.9 per cent in 2013-14 to 4.5 per cent in 2014-15. Between April and August 2015, it stood at 3.4 per cent of the import basket. Part of the increase in imports can be attributed to the fact that the huge capacity that China created over the past decades has allowed it to reap the benefits of economies of scale. However, Indian industry in certain segments is not competitive. While there is already a safeguard duty in place for steel, a public hearing is on to determine whether to continue it or impose an anti-dumping one.
On the exports side, there seems to be little downside.
The fear is that after decades of unbridled GDP growth, whether China is slowing down, impacting India's exports. China's growth was 6.9 per cent in the third quarter of calendar year 2015, down from seven per cent in the first and second quarters. For the fourth quarter, the country's GDP growth is expected to come in at 6.8 per cent.
However, as the country accounts for only four per cent of India's exports, the decline in India's exports will be marginal, says Sabnavis.
The indirect effect might prove to be more significant. As the world's largest consumer of commodities, a slowdown in China is bound to effect major commodity producing economies. It is also likely to affect the east-Asian economies, which are more closely integrated into the famous Chinese supply chains. A slowdown in these economies will lower the demand in these economies, which in turn could affect India's exports to them. "Exports to other economies, especially commodity producers who will see lower export growth to China, could possibly see a slowdown. This is part of the larger picture of sluggish global demand," Sabnavis adds.