We Assume India Can’t Export to China, But There’s a $161 Billion Market Waiting
Insights on how India can seize an opportunity with China that it has too long overlooked
In this episode, journalist and author Puja Mehra speaks with economist Dr. Nisha Taneja, Professor at ICRIER and author of a comprehensive study on India–China trade, about how India can recalibrate its economic relationship with China. Taneja explains why India’s imports from China continue to rise despite policy tightening and geopolitical tensions, and why efforts to restrict trade have not reduced dependence. She outlines how India can expand its export base by targeting a $161 billion opportunity in pharmaceuticals, machinery, shrimp, gems, and tourism, while building competitiveness in medium and high-tech sectors. Taneja also highlights the need for a clearer institutional framework to separate politics from trade, encourage investment in manufacturing, and deepen business-to-business dialogue. Drawing on decades of research, she argues that India’s real leverage lies in its human capital and its ability to diversify. Tune in for insights on how India can seize an opportunity with China that it has too long overlooked.
Resource Links
https://icrier.org/pdf/Calibrating_India_s_Economic.pdf
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TRANSCRIPT
Puja Mehra: Nisha ma'am, thank you so much for coming to the show.
Dr. Nisha Taneja: Thank you Puja, pleasure to be here with you.
Puja Mehra: Ma'am, you have brought out a study of India and China economic relationship, extremely in-depth covering trade, investments, etc.
I'd really like you to help us understand what is this economic relationship all about. We hear a lot about the huge imbalance in trade, but we sometimes don't fully grasp what is the nature of that imbalance, so if you could please help us understand.
Dr. Nisha Taneja: Sure, so when we're talking about an imbalance, we're talking about two kinds of imbalances. One that you're all familiar with, which is the trade imbalance, where we're talking about India's huge trade deficit with China, and the other deficit that we're talking about is the FDI deficit, which means that FDI flows have been really low for the last several years. In fact, I would say that in the last few years since 2020, it's been even lower than the lower levels they were at earlier.
So if you talk about the trade imbalance, then what we're seeing is that imports are huge and rising, and exports have been steady over the few years. For instance, right now, the imports are $114 billion, and over the last decade, they've increased by 88%. And exports that are currently at $14 billion have risen by only 19%.
So that's really where the imbalance is coming from. If you look at the FDI data, then in the last decade, we've had a flow of less than $1 billion, but only $68 million has come since 2020. So it was already low, but it's even lower.
But what's interesting is that of the entire FDI that has come in so far, 68% is in manufacturing, and that's what's interesting.
Puja Mehra: We'll come to FDI, let's start by talking about the trade side of the equation. We all know that India has huge dependence on Chinese exports. Your study brings out how in a large number of items, 80% of India's imports of those items, and these are critical items, 80% comes from China.
So if you could just tell us a bit about some of these items, and also how come we have come to be dependent on China? And then I'll ask you about how we need to reduce this dependence.
Dr. Nisha Taneja: Sure. So what we're importing from China is largely capital goods and intermediate goods, which are very necessary for our manufacturing sector. So in terms of requirements, in terms of need, yes, of course, we need these products.
But what is concerning is the over-dependence on some of these items. So in 562 items, we import 80% or more from China alone. So clearly, there is an over-dependence on several of these items.
And some of these are actually in the top 15 import items.
Puja Mehra: And the dependence, we didn't see any moderation in it, even after the Galwan incidents on the border when political tensions between the two countries were so high.
Dr. Nisha Taneja: Yeah, if anything, it only increased since Galwan. And I'll come to exports in a bit. But that is what is striking, that post-Galwan, the imports have actually risen, and the trade deficit has actually increased.
But exports have remained steady post-Galwan also. Items like penicillin and data processing machines, for instance, come in the top 15 items. For penicillin, it's 91%, the dependence on China.
So there is a need to look at other markets for imports. And if you look at the top 50 imported items from China, almost half of them are uncompetitive. By uncompetitive, I mean that the prices at which we import are actually higher than they are if we imported it from other countries, other suppliers.
So then why is it that our importers are still drawn towards Chinese imports, even though the prices are higher? And then I think what really lies behind this trend is the way the Chinese government supports its exporters. And that is what is very striking.
Their export-import bank called SinoShare offers credit insurance. And the magnitude of that insurance is huge. For instance, they insured goods worth, merchandise worth $700 billion in 2022.
And that covered 240,000 exporters. So imagine these exporters, and they're completely covered for risk against non-payment. So they can actually reach out to small importers, large importers, any kind of importer anywhere in because they have the backing of SinoShare.
This magnitude of $700 billion is very telling because if you compare it, say, with the kind of export credit insurance that the US offers, it's only $2.6 billion. So that's the kind of difference that there is. And that's why it's not surprising that not just India, it's the entire world that is so dependent on China for its imports.
So even though we are finding now that other countries are trying to bring in packages, resilience packages to deal with over-dependence on Chinese imports, the magnitude is way smaller. We've heard about Japan, which is about a billion dollars. Australia is also offering this kind of assistance to its exporters, but it can't really make up for what China is doing.
India has also offered to its exporters rupees 20,000 crore under the export promotion mission, but we don't really know how this will be implemented, how it will pan out, how would it improve the competitiveness of Indian exporters. So all this is still a big question mark. But then one way of reducing dependence on imports is by attracting FDI.
And especially because we are seeing that there is a little bit of investment in manufacturing, especially in the labour intensive items, maybe we should attract more FDI. First of all, what we need to do is basically revisit Press Note 3 and recalibrate it to allow for FDI through the automatic route. Because we do know that there was a time before 2020 when Chinese imports were actually coming through the automatic route.
So we should do that. But at the same time, we could put in bar drills for scrutinising investments.
Puja Mehra: Ma'am, many of my listeners may not know what Press Note 3 is because not everybody is as versed in economics. So if you could help us.
Dr. Nisha Taneja: Press Note 3 is basically under the FDI policy, it's called Press Note 3, but it's a notification, which the DPIIT brought out, basically saying that neighbouring countries that are investing into India will have to go through the government route and not through the automatic route. And with neighbouring countries that share a land border. So that really covers all countries like Nepal, Bangladesh, Pakistan, and China.
But we all know that the investments that are coming from the other countries other than China is just a trickle. And so it was really meant for China. So that is what needs to be revisited, Press Note 3.
And it was issued, I think, in wake of the Galwan incidents? Not really. It precedes.
It precedes? Okay. It precedes the Galwan incident.
Yes. Because there were, I think, investments that were of concern to the Indian government and some companies. For security reasons?
Yes. So which is why we would have to put in guardrails. And this is not, this would not be specific to India.
These guardrails are being applied by many countries all over the world for strategic sectors, you know, like telecommunications or any sector that is of critical importance, like ports, critical infrastructure, telecommunications. So for all these sectors, the countries like Germany, Australia have put in guardrails for sensitive sectors. Yes.
Puja Mehra: And I did see data, the Press Note 3 did result in a precipitous drop in FDI coming in from China. I would really like you to help listeners understand the relationship between trade and FDI, which is like when you say that when we allow more FDI, of course, subject to scrutiny, so that we are quite sure of the security aspect of it. But by allowing FDI, how we reduce dependence and how we reduce vulnerability to what Chinese government may do?
Dr. Nisha Taneja: Absolutely. So the reason why we're interested in attracting FDI is because it's far more embedded in the real economy. It's contributing to our economic development directly.
The production could be meant for the domestic market or for exports anywhere in the world. And it's bringing in foreign exchange as well. Trade flow is temporary and vulnerable.
FDI is more embedded in the real economy and therefore more welcome. It hooks us into global value chains. What we would like is that China invests in labour-intensive industries where they have comparative advantage and where we are losing comparative advantage, for instance, textiles, leather.
These are sectors, and we've been grappling with this issue for almost a decade. It precedes the recent geopolitical developments. So it's only become worse with these developments.
And we've not really been able to become more competitive in these sectors. And so maybe this is the time for us to gain from Chinese experience and get our own housing order, especially in these kinds of sectors.
Puja Mehra: And also the other side of the trade equation is India's exports. And you've said that they've been stagnant. They're not growing.
What are the reasons for this? And where is the potential for India to increase our exports? I know your study has said that we are right now not doing as much of high-value-add exports as we can.
So if you could also explain some of that.
Dr. Nisha Taneja: I think before I get into the export side, one very striking observation is that post-2020, we've seen a rise in imports and stagnation in exports. But let's look at the trading community in India. We have exporters and we have importers.
Why is it that the importers are able to import, but exporters are not able to export? So there is something to do with signalling. So the importer is feeling safe.
Even though the political relations are not good, we can still import. But why is it that the exporter is not confident about exporting when the political relations are not good? And so that is where I feel that maybe the government needs to play a proactive role in getting the chambers together or in signalling that exporting is fine or saying that if our political relations are poor, our trade dependence is very high.
And therefore, this is the package that we're offering or this is the insurance that we're offering in case your payments don't come through. So we could develop a mechanism because how do we gain the confidence of the exporter to be able to export and kind of cushion them against the political uncertainty?
Puja Mehra: The importer has been cushioned against that political uncertainty by the Chinese side because they are cushioning their exports.
Dr. Nisha Taneja: Yes, yes, exactly, exactly. And therefore, we need to play the same role. If we have limited resources, then let's at least do it for countries that are being impacted adversely and especially where we think that the trade balance is adverse.
Even though theoretically we're all students of economics, we know theoretically a bilateral imbalance shouldn't matter. But today, we're thinking differently. So we're talking about a more balanced economic relationship so that no country has leverage over the other.
And that's the context in which we are again talking about bilateral deficits and bilateral surpluses. And therefore, we're looking about a more balanced economic relationship, which is why we're also talking about FDI. And we've always talked about, oh, what do we do about our imports, the over-dependence on imports, but never have we talked about what do we do about expanding our exports to China.
So that's a huge gap. And when the political relations are adverse, you will not see any study that is being done on trade with China. We've been studying India-US tariffs, thread wearing it, what does each commodity item mean, what does each HS code mean for India.
And all newspapers are full of it. But have we seen any study on China? We haven't.
But it is equally important. Let's not forget that China is the second largest importer in the world, only next to the US. So it's importing $2.6 trillion worth of merchandise. So can we ignore it? We can't. It's a huge market sitting there.
We're talking about diversifying our exports. We're talking about Latin America. We're talking about Africa.
We're talking about ASEAN. We're even talking about CIS. We never hear about China.
Puja Mehra: In fact, ma'am, I have to say this to you, every time I do a show on China, we get comments from listeners, the approach is so defeatist. It is as if we have already lost the battle to China and we have no hope of ever recovering from this situation. I'm so glad you're saying this, provided we take the right steps.
China is a market for our exports. It's just that we have to take it up as a challenge.
Dr. Nisha Taneja: Right. And the trade dialogue is different. And the political dialogue is different.
One is between the private sector, driven by profits. And the other is a government to government. So the two stakeholders are completely different.
Puja Mehra: Which I think people understand the best in the case of the EU, when we deal with the EU Commission for Trade, or actually when the US deals with the EU Commission on Trade. And for security and political discussions, the White House speaks specifically with different EU leaders. So that wall between their airtight compartmentalisation comes out very clearly in those relationships.
But sometimes we don't appreciate it in our case.
Dr. Nisha Taneja: Yes, yes. So basically what we need is an institutional mechanism which would cushion trade and separate it from the political dialogue. That's why this messaging is very important.
And again, I was so struck by the numbers in terms of what the potential in China is. You know, for instance, India accounts for only 0.7% of China's imports. And we rank 34th.
Compare this with the US. US accounts for 18% of India's exports. So look at the contrast that we have between the two largest importers in the world.
No matter how much we diversify, unless we tap into the Chinese market, we can never expand our exports. So my first point is that it's an extremely important market for exports. It cannot be ignored.
And we've also estimated the potential. It's $161 billion. And that's because they are importing.
And we're talking about items in which India is globally competitive. Also, it's interesting to look at the composition of our exports. So in the last few years, we have done very well in medium and high-tech exports.
But if you look at our current export basket to China, only 24% of our current export basket is comprised of medium and high-tech items. But if you look at the composition of the potential items, then 42% is accounted for when medium and high-tech. So that's a completely untapped market.
And so we are talking about items like aircraft, turbojets, motor vehicle parts. All of these, there is a potential. Or even pharmaceuticals is another untapped market.
But we also have other items where there is a huge demand, like shrimps. Now, shrimps is an item which has been much in the news because US is our largest market for shrimp exports. But China is also a huge importer of shrimps.
And we're not exporting enough to China. There's also potential in bovine meat. So that, again, is a huge market.
Puja Mehra: And your study shows that in case of shrimp, if US tariffs continue to remain high on Indian exports, then China is an alternative market. But our consignments apparently keep getting rejected. Is that because there is a quality issue on our side?
Or is it because China is a difficult country? Because China is notorious for its trade practises. So do you feel that China deliberately tries to sort of guard its markets and be difficult for us to export to?
Or is it just that we are not doing enough?
Dr. Nisha Taneja: I don't think China is being discriminatory. It might be a difficult market, but it would be equally difficult for all. So it's about cracking the market.
It's about catering to their demand. So when we looked at the data, we found that out of 600 items, almost 46% of the food items were shrimp and fish exports. Now, that's a huge number.
But the reason for rejection is basically pesticides found in these items. So clearly, we need to do our homework too. So we need to also cater to the demand for these markets and ensure that our products meet their standards.
So again, there has to be an institutional mechanism. For instance, when we're exporting to the US or to the EU, the importers actually come to India and inspect the premises where the shrimp processing and packaging is done. So are the Chinese able to do that?
Maybe that is the reason. But we need to dig deeper into why that's happening. And so maybe when there is a back and forth and we know what the importer requires and how the exporter can meet those requirements, it would make a lot of difference.
Also, I think the other interesting insight into the data on rejections from the Chinese authorities is that in all other items, we see over time, the number of rejections has gone down. So it's only in shrimps that we see that it hasn't gone. If we know that there is one particular item, then it's easier to address it.
So if our marine exporters are able to connect with the importers in China and understand or invite them to come and inspect the premises, maybe that would make a difference. I'm guessing language barriers may be also one reason. Language is a huge barrier and that becomes a deterrent.
I mean, like if you open any of the Chinese websites, most of them are in Mandarin. We also got the data translated on rejections and then we were able to kind of analyse it. So language is a huge barrier that prevents people from getting into the trade.
But then again, I would say, why is it that importers are able to import? You know, the language barrier is there for exporters and importers. I would say that it's a greater barrier.
There are other barriers that we need to look into. And I'm now only looking at what the importing community is doing and what our exporters can learn from them. What is the kind of mechanism that is working for imports that can work for exports as well?
How does the communication happen? How are deals struck? How does the political environment impact the importers?
And then see what we can do for the exporters. And there are some regulations, again, unless there is a channel that allows for this dialogue, we won't be able to resolve these issues.
Puja Mehra: We used to have a India-China strategic economic dialogue, no? Was that too sort of top heavy? Are you suggesting something is needed more at the ground level?
And is that strategic dialogue still on? At the private sector level.
Dr. Nisha Taneja: At the private sector level, business to business. Which has the support of the government, but functions independently.
Puja Mehra: Like we have the US Chamber of Commerce interacting with the Indian chambers.
Dr. Nisha Taneja: There is an Indian-China business chambers of commerce, but why is it that our exporters couldn't export? True. So we need to also understand how the chambers is functioning and what is the kind of support that they need?
How can they tide over uncertainties, political uncertainties?
Puja Mehra: And now, if these imbalances of trade go unaddressed for too long, what would the risk be? So what I'm asking is that, is this nature of growing imbalance sustainable? And what is the cost of staying with this status quo?
Why is it important that we need to address it and do all these things that you're saying we must do?
Dr. Nisha Taneja: Today, I think in this geopolitical fragmented world, diversification is the key. No country can survive today without diversification. Because any country can impose any kind of sanction.
So whether it is exports or it is imports, our entire trade policy has to take this new scenario into account. And the keyword here is diversification. So the imbalance automatically gets corrected if diversification becomes your keyword, whether it is in terms of exports or it is in terms of imports.
And at the same time, we need to have open markets because we have to ensure that we are plugged into the global supply chains.
Puja Mehra: Nisha ma'am, you've partly already addressed this, but just once again, China is so notorious for its trade practises. You did say that it's not discriminatory. They are likely to give India the same treatment that they're likely to give to other trade partners.
But still, we have a long, long border, historically unsecured border with them and territorial issues with them. I just want you to take up this again on to what extent can we trust China on trade policy and FDI?
Dr. Nisha Taneja: I would say today, you can't trust any country. So what do you say about China? I mean, it used to be only China.
Today, any country can do anything. And unless you have something that you can bargain with today, when I say you, I mean any country has something to bargain with, they will not be able to survive. What does the US have?
It has innovation technology. What does China have? It has critical minerals.
It has financial resources. So when you see how the US trade deals have been struck between, say, Japan or South Korea, the quid pro quo has been investment. What do we have as a quid pro quo?
But if we build an economic strategic asset that we can leverage with the rest of the world, that is how we should be thinking. Because that is what is going to give us a bargaining lever. And what do we have today?
We have people. We have a demographic dividend, which is going to last for another 10 years. So how can we encash on that?
How can we have a skilled, highly skilled labour force that can not only produce goods and services in India, but can also offer this resource to the rest of the world? And I can take IT, the IT sector as an example right now, where we're seeing large number of layoffs. But look at what the large Indian firms are doing.
They are retraining their workforce. And what we do is our workforce is not just employed in India, we're offering this trained workforce to the rest of the world. So this is like five or six companies doing that, restructuring their companies to offer this resource to the rest of the world.
Can India do something to build this huge resource that we have, train it for the entire world? Because just corporates can't do this on their own. So that is what can be used as a lever in the future.
Puja Mehra: And there's going to be a growing demand given the age profiles of other countries, other populations and other... That's right. So that's why for the next 10 years, we have this asset.
So we need to quickly cash in on this. Right, right. And we didn't talk much about India-China trade on the service side.
How is that picture?
Dr. Nisha Taneja: Well, the service side, yes. You know, I think we're talking about imbalances. I'm glad you raised this.
Because China has the largest tourist outflow in the world. Okay. If you look at our own tourist inflow data, we find that foreign tourist arrivals in the last few years has actually declined.
And here's China, which is the largest origin of tourist travellers. Why are we not cashing in on that? I mean, this is the right time to do it.
So our travel agents, the government should be giving them support and saying, the visas have been liberalised. So we should actually be going all out and inviting Chinese tourists. That one sector can correct a large part of the imbalance.
Or even IT, our trained workforce can be kind of used for that. We already have some of our IT firms located in China. So on that front, we're doing well.
But tourism, I feel is a sector where we can really work on.
Puja Mehra: Right, right. I recall on the goods side, you're also talking about diamonds. Yes, jewellery.
Dr. Nisha Taneja: Again, jewellery is a sector where we don't understand the Chinese tastes. Okay. But there is a huge potential.
They are importing jewellery from the rest of the world. So if we have a Gems and Jewellery Export Promotion Council, so the council should definitely be looking at opportunities in China and understand the tastes and understand what they require. We have the skill, we have the metal, we have the designs, but it has to cater to what the Chinese want.
In fact, China also imports ready-made garments, exports, but it also imports. And from the little interaction that I've had with some Chinese nationals, what I find is that they really have a taste for Indian ethnic prints. So why can't we cash in on something?
You know, textiles is a very heterogeneous product. So that's why it's the taste and what we have and how we can adapt it to their tastes. What is our expertise?
And it's unique to our culture. So we haven't exploited that. And, you know, whoever is based in India will always have something from Anokhi or Fab India.
So this is an untapped market. And we always think that, oh, but China is such a large exporter of ready-made garments. What would they want from us?
I think we should definitely look into this segment as well.
Puja Mehra: I think maybe handlooms and luxury items, because China is a huge market for international luxury products, luxury cars, luxury products. So might be a market for Indian exports on that front, but we probably haven't looked at it enough. Right, thank you. Thank you so much.
Dr. Nisha Taneja: Thank you. And pleasure being with you. I love talking about China and thank you for giving me this opportunity.
Puja Mehra: I would recommend to all listeners to read this. We'll put the link to read this report. It is by far the most in-depth, analytically, you know, in-depth study on India-China economic relationship that I have read.
Dr. Nisha Taneja: Thank you so much, Puja, for those kind words. It very, very motivates us to do more work. Thank you so much.
Puja Mehra: Thank you, ma'am. Thanks.
