India's Rising Trade Dependence on China: What's at Stake?

A country like India faces all kinds of threats and challenges. Some are visible, like the Khalistanis, but many others are covert. They hide in plain sight until they become too big to ignore or overcome, like India’s dependence on China for goods. Despite tensions at the border, India is importing Chinese goods in increasing numbers. Look at the trade deficit first. It has grown dramatically in the last five years and crossed $387 billion. The biggest chunk of imports is industrial goods, stuff like your telecom gear, machinery and electronics. 15 years ago China share was 21%, meaning 21% of industrial goods imported by India came from China 21 percent 15 years ago. Today its around 30%. So the dependence has increased. So has the pace of Chinese imports compared to other countries. India, Indias imports from China are rising 2.3 times faster. So not only are we purchasing more from China, the volume of imports is also expanding and that too rather quickly. So India remains addicted to Chinese imports and like any addiction, this one is proving hard to break. There are a couple of reasons for that. First of all, the lack of alternatives. That is a big reason. Take a look at this list. These are Indias leading imports where China has the biggest share. The 1st is electronics. More than 43% of them, 43% of electronics come from China. Same with machinery. Almost 40% of the machines used in India come from China, which includes sophisticated technology like integrated circuits. In 2022, India bought circuits from China worth over $4 billion. Why this dependence? Because we lack the know how to make sophisticated equipment and parts. China, on the other hand, has a large number of such factories. Also, a large pool of patents to access from Chinese factories contribute over 28% of the world’s manufacturing output. So in 2022, they received almost 800,000 patents. China offers both size and scale to importers. It can produce a large number of goods and at a high speed, which makes Chinese suppliers harder to replace. That’s one factor. One problem, the second factor is cost. Let’s take the example of APIs. That’s Active Pharmaceutical Ingredients API. They’re the raw materials used to make drugs your medicines. India relies heavily on China to supply these APIs. They come from China. Why this dependence? Because Chinas API supplies are cheap. Take Paracetamol for instance, one of the most commonly used medicines. It is used to treat fever. What is the price of paracetamol in India? Around $4.00 per kilo. And how much is China selling it for? Around 3.3 to 3.5 dollars for 1K. What makes the Indian supply expensive? Raw material costs, the cost of electricity and labor and logistics. All of these add to the price. And compared to India, China is far more cost effective on all these three fronts. But it’s not all gloomy. This is beginning to change. During the pandemic, India tried to break Chinas monopoly on the API supply. India introduced production linked incentives and the effort has seen some success. Earlier, India imported 80% of its APIs from China. Now that figure has come down to 68%. But there’s still a long way to go. If India wants to reduce its dependence on China, it must build up its own manufacturing capacities and it must do so fast. The border situation has left us little choice. A few days ago, Beijing offered this piece of advice to New Delhi. A healthy and stable relationship between China and India serves the common interests of both sides. It is conducive to peace and development in the region and the world. The border shows not the entirety of the China, India relations and it should be properly managed in an appropriate place with a bilateral relationship. Forget about the border, let’s do more trade together. That’s what China wants from India. But India should not give in because the trade deficit only favors the Chinese. As long as the numbers are one sided, this will be a vulnerability for India, something that Beijing can exploit. Just imagine this China decides to restrict pharma supplies to India. It limits the export of pharma raw materials to India. This will hit Indias medical supplies and we need to be prepared for such scenarios to mitigate these risks.