Five Reasons India Shouldn't Worry About Its Trade Deficit With China

Discussion in 'Economy & Infrastructure' started by Srinivas_K, Sep 29, 2014.

  1. Srinivas_K

    Srinivas_K Senior Member Senior Member

    Joined:
    Jun 17, 2009
    Messages:
    4,676
    Likes Received:
    3,355
    Five Reasons India Shouldn't Worry About Its Trade Deficit With China

    Two steps forward and one back: That was the general theme for Sino-Indian economic ties after Chinese leader Xi Jinping’s recent visit to India.

    According to statements made by Xi and Indian Prime Minister Narendra Modi, China promised to help update India’s railway system, establish industrial parks in the Indian states of Gujarat and Maharashtra, and open its MARKETS to Indian products like pharmaceuticals and agricultural goods. A spokesperson for the Chinese foreign ministry said Xi’s TRIP removed “some suspicions” between China and India.

    At least in India, however, the comment seemed premature. As Xi’s visit approached, Indian media were reporting that Chinese troops were constructing a temporary road into Chinese territory, leading to a standoff in the Himalayas. Agitated Indian media reports cited Xi as urging his troops to be ready for war.

    Due partly to the lingering legacy of the 1962 Sino-Indian border war, Indians remain deeply suspicious of China. Chinese have a slightly more sanguine attitude: A 2012 Pew poll showed that some 39% of Chinese SURVEYEDsay the China-India relationship is cooperative, while only 23% of Indians agree.

    Unfortunately, this suspicion extends to the economic relationship. India has blocked Chinese INVESTMENTS in sectors such as telecom, ports, and shipping due to security concerns, made it difficult for Chinese employees to obtain visas to work in India, and complained loudly and frequently about its TRADE deficit with China. Chinese imports to India were $48.44 billion in 2013, while Indian exports to China were only $17.03 billion.

    Unknown

    China is hardly blame-free – it restricts Indian companies from ENTERINGmany sectors, shows an institutionalized preference for its state-owned enterprises, and provides subsidies to its companies that some claim contravene international TRADE law. Even so, India’s preoccupation with its TRADE deficit with China is misguided.

    The danger in imbalanced TRADE

    First, a little background: Like some Americans, many Indians complain that China is flooding the market with cheap products and driving local manufacturers out of business, resulting in a growing trade deficit. But unlike for the US, a too-large trade deficit poses an imminent risk for India.

    The dollar’s position as the world’s reserve CURRENCY gives the US the “exorbitant privilege” of always being able to print more money to finance its trade deficit. Printing more MONEY could lead to inflation in the short term; as debt piles up, it could also convince creditors that the US isn’t financially sound, cause interest rates to spike, and eventually end the dollar’s reign as the world’s biggest reserve currency. Until that point, however, the US can always meet its foreign debts by printing DOLLARS.

    India clearly does not share the same privilege. Its central bank needs to amass a large supply of dollars or other foreign currency to have ready to exchange with its citizens for rupees – currently around $300 billion. When Indians import a lot of stuff, they pay for it using this foreign currency obtained from the central bank. If the central bank starts running out of foreign currency to give to these would-be importers – or if investors sense that this point is approaching, and conduct a speculative attack on the central bank – it is quickly game over. The government may have to default and revalue its currency, probably at great loss to creditors.

    India had a balance of payments crisis in living memory, which forced the country to take on liberalizing measures in 1990s. So when Indians worry about an excess of imports over exports, there is a cause for concern.

    To insulate against this threat, India has put up extensive barriers to limit imports and stave off another balance of payments crisis. Yet these barriers also shut out cheaper imports that could benefit Indian consumers and might spur faster development among Indian companies.

    Ladies and gents, the listicle

    So how much does all this have to do with China? Not much at all. Here are five reasons that Indians should not be fixated on Chinese TRADE.

    1. The structure of India’s TRADE with China is not so exceptional. India buys more from the rest of the world than it sells; it runs trade deficits with 16 of its top 25 trade partners. One reason for India’s trade deficit is its weak manufacturing SECTOR, which in turn stems from restrictive labor, land and tax laws, rickety infrastructure, and inadequate power supplies. India simply doesn’t produce enough goods, or goods of high-enough quality, to meet the demand of its billion-plus consumers.

    2. India’s trade with China is actually more balanced than some of its other trading relationships. According to a recent piece in The Indian Express, India’s 2013-2014 trade deficit with China represented roughly 55% of total China-India trade, while its trade deficits with Iraq, Switzerland, and Australia were 90%, 83%, and 62% of total bilateral trade, respectively. In other words, India is sending a relatively large amount of goods back to China.

    3. That said, economists agree that bilateral trade figures are pretty much irrelevant. The presence of global supply chains and regional hubs of production means that always-balanced bilateral trade is neither possible nor desirable.

    This is especially true for China, as the last stop in the East Asian manufacturing supply chain. China is the place where high-tech components made in Korea, Japan, Taiwan, and elsewhere are assembled and shipped out for sale. As many economists have observed, trade figures record the total value of the exported good as a “Chinese export,” even though China is responsible for only a small proportion of the added value – only $6.50 of a $187 iPhone in 2010, for example.

    The countries that buy these iPhones and other goods assembled in China run large bilateral TRADE deficits with China in part because China is just the last stop on the manufacturing train. Korea and Japan, meanwhile, run a TRADE surplus with China. The only way for India to circumvent this process would be to integrate itself in the East Asian supply chain.

    4. Looking at the numbers, it’s clear that the main culprit for India’s trade deficit is not China, but energy. Roughly 70% of India’s trade deficit is due to net imports of oil and coal; gold imports further elevate the figure. This has nothing to do with China, but rather with ill-designed policies that prevent the efficient excavation and use of India’s substantial coal and natural gas deposits.

    5. To a certain extent, Chinese imports are beneficial both to Indian consumers and companies. Cheaper Chinese consumer goods allow Indian living standards to rise. Chinese imports also provide more competition for local products and encourage their innovation.

    What’s more, one of China’s main exports to India are capital goods, which are used to accelerate the building of Indian infrastructure and thus positive for India’s economic growth, says Anil Gupta, a professor at The University of Maryland at College Park. Since Chinese capital goods are cheap and often come with low-cost financing, the Indian companies that buy these goods receive big savings they can INVEST elsewhere.
    [​IMG]

    Trade between China and India has exploded from $2 billion in 2000 to almost $70 billion today. But that figure still seems small compared with to the $569 billion in goods and services that the US and China exchanged in 2013. In November 2011, India and China set a target for raising bilateral trade to $100 billion by 2015. It’s unlikely that will be met.

    There is a huge OPPORTUNITY to expand these figures. Instead of limiting imports, India should concentrate on unraveling onerous regulations to increase its manufacturing capacity and thus its exports. Chinese business practices leave plenty to complain about, to be sure. However, India could benefit far more from putting its own house in order.

    http://www.forbes.com/sites/anaswan...dnt-worry-about-its-trade-deficit-with-china/
     
    Ashutosh Lokhande likes this.
  2.  
  3. Hari Sud

    Hari Sud Senior Member Senior Member

    Joined:
    Mar 31, 2012
    Messages:
    1,054
    Likes Received:
    862
    Location:
    Ontario
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    Americans invented a way to deal with huge trade deficit with China by retaining half of the export cash back in America. Chinese can take the remaining half back home.

    This is roughly what this paper above obliquely is saying. Force Chinese to leave cash back in India via investments. I believe that is what President Xi was suggesting when initially he offered $100 billion in investments. What he was saying - let me sell everything you need at a great damage to your industry but China will invest in areas which will help in trade surpluses.
     
  4. amoy

    amoy Senior Member Senior Member

    Joined:
    Jan 17, 2010
    Messages:
    5,524
    Likes Received:
    1,548
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    why still obsessed with fictitious 100bil $ offer hyped by the Indian media? even if there were such a package would India open up its market completely or those red tapes go away? still a lot of road blocks ahead.

    common sense should prevail - there is NO such a state-to-state deal of a state pouring 100b into another state. investment is to be made by individual enterprises based on their own case-by-case evaluation of risks and return, and above all subject to Indian regulatory approval regardless of Chinese or Japanese.

    paranoid of Chinese investment damaging Indian industries should be overcome by the common sense.


    Sent from my 5910 using Tapatalk 2
     
  5. Ahsan Bin Tufail

    Ahsan Bin Tufail Regular Member

    Joined:
    Sep 5, 2014
    Messages:
    120
    Likes Received:
    73
    Location:
    Lahore
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    In my opinion, the way forward is India should invest more money for food safety, education, science and technology, justice, health and well being of its citizens rather than worrying about external pressures without overlooking them. Same is true for any nation that wants to progress in the stiff global competitive environment.
     
  6. Blackwater

    Blackwater Veteran Member Veteran Member

    Joined:
    Jan 9, 2012
    Messages:
    21,002
    Likes Received:
    11,842
    Location:
    Akhand Bharat
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    india is investing heavily in all those sector. it can also be evident from last few months of modi foreign policy
     
  7. Ahsan Bin Tufail

    Ahsan Bin Tufail Regular Member

    Joined:
    Sep 5, 2014
    Messages:
    120
    Likes Received:
    73
    Location:
    Lahore
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    Agreed. Anything else dear.
     
  8. Blackwater

    Blackwater Veteran Member Veteran Member

    Joined:
    Jan 9, 2012
    Messages:
    21,002
    Likes Received:
    11,842
    Location:
    Akhand Bharat
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    aap tapsara kare hum tarjia krenge:p:p
     
  9. amoy

    amoy Senior Member Senior Member

    Joined:
    Jan 17, 2010
    Messages:
    5,524
    Likes Received:
    1,548
    Re: Five Reasons India Shouldn't Worry About Its Trade Deficit With Ch

    as Indians put Modi is Ronald Reagan, Lady Thatcher, Vladimir Putin, Shinzo Abe… all rolling into one, furthermore an spotlight of the world media, a master in look-east geopolitics, an anti-corruption warrior, a champion for development, and a magnet for investment…… well how much he will have heaped can be measured in six months fm now :D "only when the tide goes out do u discover who's been swimming naked."



    Sent from my 5910 using Tapatalk 2
     

Share This Page