India’s trade deficit with China set to narrow this year

India’s trade with China, including both exports and imports, have been cooling for several months, and may dip further this year, according to Q1 numbers.

India’s trade deficit with China may also dip this year for the first time in many years.

That may be good news for the rupee, which has been hit hard over deficit concerns, as China accounts for about one-fifth of the total trade deficit that India has with the rest of the world.

India’s imports from China peaked in 2011-12 at $57.5 billion, jumping by a breathtaking 32.2% from the previous year. In the previous year, Chinese imports into India had jumped 41% to $43.5 billion. Not surprisingly, both India’s total trade deficit and its trade deficit with China rose during the period as well.

In 2010-11, India’s trade with China contributed about 23.5% to India’s total trade deficit (see chart.) However, since then, China’s share of India’s trade deficit has been falling, as oil and gold stepped into the role of deficit drivers.

Indian exports to China include cotton raw & yarn, non-ferrous metals, iron ore, other ores and minerals, plastic& linoleum products, spices, Dyes/intermediates, machinery & instruments and petroleum (crude& products). Major imports from China include electronic goods, machinery, organic chemicals, project goods, fertilizers, iron and steel, transport equipments, electric machinery (except electronics) and manufactures of metals.

While India’s trade deficit (the gap between exports and imports) with China has been growing, as a proportion of the total trade deficit, it has been declining from the peak of 2010–11, indicating that the sources of India’s worry lies more in its gold and oil trade than in trade with China.

For example, China’s share in India’s total trade deficit grew from 17.6% in 2009-10 to 23.52% in 2010-11 (see chart above). But it fell to 21.3% in 2011-12 in 2011-12 – not because trade deficit with China fell, but because India’s overall deficit zoomed by 55% in that year to a record $185 billion.

So, while its deficit with China also rose by 41%, the growth was overshadowed by the overall jump in deficit. It may be noted that gold and oil prices rose sharply during this period.

2012-13 (last financial year) saw an interesting development. For the first time ever, India’s trade with China, both imports and exports, fell.

But the new year has thrown up more interesting statistics. Imports from China fell more than 5%, while exports to that country fell more than 25%. Part of the reason may be the fall in the value of the rupee (as all these figures are tallied in dollars.)

According to numbers for the June quarter, that trend may continue this year as well. The quarter saw exports of $2.44 billion and imports of $12.08 billion. On an annualized basis, they point to a fall of 11% in imports and 28% in exports.

While the falling exports may not be good news, the figures point to the possibility of a 5.5% fall in India’s trade deficit with China in 2013-14.

India recently inked a deal with China to promote the export of buffalo meat, and feed and feed ingredients to China. Indian generic drugs are also expected to get better market access in China with the operationalization of the MoU on co-operation on Pharma between CCCMHPIE and the Pharmexcil – two organizations located in the two countries.