Economics International Relations

NITI Aayog Warns Against Severing Trade Ties With China.

In the midst of calls to cut trade ties with China over border violations, a former NITI Aayog Vice-Chairman has stated that doing so would imply sacrificing India’s potential economic growth.


  • Panagariya stated that both countries are capable of engaging in trade sanctions.
  • The ability of a $17 trillion economy (China) to harm a $3 trillion economy (India) is far greater than the opposite.


  • Between April and October of this fiscal year, India and China’s trade deficit, or the difference between imports and exports, reached $51.5 billion.
  • The deficit in 2021-22 increased to $73.31 billion, up from $44.03 billion in 2020-21.

The Hindi-Chini buy buy

  • China supplies one-third of India’s machinery and nearly two-fifths of its organic chemicals.
  • Other items where China accounts for more than 25% of Indian imports are automotive parts and fertilizers.
  • Several of these products are used in the production of finished goods by Indian manufacturers, effectively integrating China into India’s manufacturing supply chain.
  • For example, China supplies nearly 90% of certain mobile phone parts to India.

India’s export to China

  • China is an important partner for India even as an export market.
  • China is India’s third-largest export destination.
  • At the same time, according to the Federation of Indian Export Organizations, India accounts for slightly more than 2% of total Chinese exports (FIEO).

Should we worry about this?

  • Trade deficits/surpluses are merely accounting exercises, and having a trade deficit against a country has no effect on the domestic economy.
  • In this context, India’s trade deficit with China should not be considered in isolation.
  • For example, pharmaceuticals that India exports to the rest of the world require ingredients imported from China.
  • Chinese imports of Indian seafood are one area that has recently seen strong growth and has room to expand in the future.

So, a trade deficit is beneficial?

  • Certainly not. The persistence of trade deficits across all countries raises two major concerns.
  • Foreign exchange reserves are available to “buy” imports.
  • Inadequate domestic capacity to produce efficiently.

Can we ban trade with China?

Ans. Certainly NOT!

  • It will disproportionately affect the Indian poor, who are more price sensitive. For example, if Chinese TVs were replaced by either more expensive Indian TVs or less efficient ones, wealthy Indians may opt for the more expensive option.
  • It will penalise Indian manufacturers and exporters: Several Indian businesses import intermediate goods and raw materials, which are then used to produce final goods for both the domestic Indian market and the global market (as Indian exports).
  • The pharmaceutical industry may be the hardest hit: For example, China accounted for roughly 68 percent of the nearly $3.6 billion in ingredients imported by Indian drugmakers to manufacture several essential medicines.
  • The ban will have little impact on China: According to United Nations Conference on Trade and Development (UNCTAD) data for 2018, China accounts for 15.3% of India’s imports and 5.1% of India’s exports.
  • Chinese money invests in Indian unicorns: In recent years, India and China have become more integrated. Chinese capital, for example, has infiltrated India’s technology sector, with companies such as Alibaba and Tencent strategically investing billions of dollars in Indian startups such as Zomato, Paytm, Big Basket, and Ola.
  • India’s policy credibility will suffer: It has also been suggested that India should breach existing contracts with China. This could harm India’s efforts to attract foreign investment.

China our Frenemy

  • The first thing to realize is that turning a border dispute into a trade war is unlikely to solve the problem.
  • Worse, given India’s and China’s respective positions in global trade and relative to each other, this trade war will harm India far more than China.
  • Again, these measures will come at the worst possible time, as the Indian economy is already at its weakest point in history, facing a sharp GDP contraction.

Way ahead

  • Panagariya proposed expanding trade with other trading partners more quickly rather than cutting it with Beijing with a blunt instrument like trade sanctions.
  • We should seize India’s excellent growth prospects for the next decade and focus on expanding the economy as quickly as possible.
  • When we become the third largest economy, our sanctions threats will have more credibility.
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