India’s merchandise trade deficit, in the April-August period of the current fiscal year was $124.7 billion. This is significantly higher than the number has ever been in any corresponding period. While a rise in international commodity prices, especially energy, has played a big role in the widening of trade deficit, there are also fears that Chinese imports are growing. How true are such concerns? Here are five charts which try to answer this question.
The role of oil prices in India’s trade deficit
Because crude oil is one of India’s largest imports, the trade account is always tracked with and without petroleum products. Numbers from the Centre for Monitoring Indian Economy (CMIE) database for the April-August period show that India’s trade deficit in 2022-23 is the highest even if one were to take out the petroleum product sub-component from the country’s merchandise trade. As is to be expected, the petroleum trade deficit is a big part of the overall trade deficit. A more appropriate historical comparison of the trade deficit should be done by looking at it as a share of GDP. However, the September quarter GDP numbers will only be available in November.
See Chart 1: India’s trade deficit with and without petroleum products
The role of China in India’s trade deficit
Country-wise trade numbers, which are published by the ministry of commerce, come with a month’s lag. This data are available from January 2006 in the ministry’s website. This means that any analysis of India’s trade deficit with China can only be done till the month of July for the current fiscal year.
An HT analysis of these numbers shows that Chinese trade is a driver in the rise in India’s trade deficit, although it isn’t the only one. While India’s trade deficit with China is at an all-time high for the April-July period in the current fiscal year, trade deficit excluding China is also the highest ever.
Will the picture change if one were to compare the non-POL trade deficit of India with China and the rest of the world? CMIE data shows that both these numbers are at their highest ever level for the April-July 2022 period. To be sure, India’s non-POL trade deficit with China is bigger than non-POL trade deficit with the rest of the world, which underlines the importance of Chinese imports in India’s merchandise trade deficit. What is also noteworthy is the fact that while India does run a non-POL trade surplus with the rest of world sometimes, it has never had a non-POL surplus with China after 1993 ($56.8 million trade surplus) — again highlighting the vexing issue of Chinese merchandise imports.
See Chart 2: India’s non-POL trade deficit with rest of the world and China
What has led to an increase in India’s trade deficit with China?
Trade deficit is a function of two variables: exports and imports. In the case of India’s overall trade deficit, imports have risen so sharply that the trade deficit has increased despite an increase in India’s merchandise exports (they do not include earnings from India’s IT exports, which go under services). However, the story is different, as far as India’s trade pattern with China is concerned. Not only have Chinese imports increased, India’s exports to China have also fallen. This has proved to be a double whammy as far as India’s trade balance with China is concerned.
See Chart 3A and 3B: India exports and imports overall and with China
What are India’s biggest imports from China?
India’s import basket from China is more diverse than goods such as Diwali lights and household consumer goods, and includes capital goods and high technology products. An HT analysis of Indo-China trade data shows that just top five commodities at the two-digit HS classification (the harmonised system for analysing trade globally) make up for more than 70% of India’s imports from China in the period from April-July 2022. A comparison with past data for the same period shows that these commodities have always had important share in India’s imports from China . If one were to do a simple pre-pandemic (April-July 2019) comparison of India’s imports from China, then just three of the top five commodities – electrical machinery and equipment, parts of nuclear reactors , and mechanical appliances and organic chemicals – accounted for almost 68% of the increase in imports in the April-July 2022 period. Prima facie, this suggests that the increase in Chinese imports is driven by a pick-up in domestic economic activity.
See Chart 4: Top five commodities in India’s import from China
What are India’s biggest exports to China?
India’s exports to China include industrial inputs, construction materials and few perishable commodities such as fish. An HT analysis of Indo-China trade data shows that just top seven commodities at the two-digit HS classification make up for more than 60% of India’s exports to China in the period from April-July 2022. A comparison with past data for the same period shows that these commodities have always had important share in India’s exports to China as well. A simple pre-pandemic (April-July 2019) comparison of India’s exports from China shows that two of these top seven commodities – organic chemicals and ores, slag and ash – have seen a drop in the value of their exports in the April-July period.
See Chart 5: Top seven commodities in India’s exports to China