India can potentially reduce its yawning trade deficit with China by $8.4 billion that is equivalent to 17.3 per cent of its overall deficit in the current fiscal alone, an analysis by eigth-year old credit ratings agency Acuite Ratings and Research ltd has said.
This could be achieved by reducing imports by at least a quarter in 40 sub-sectors like chemicals, automotive components, bicycles parts, agro based items, handicrafts, drug formulations, cosmetics, consumer electronics and leather-based goods. This would not require any significant additional investments by the domestic industry, the agency said.
"Collectively, these sectors contribute to $33.6 billion worth of imports. Without any significant additional investments, the domestic manufacturing sector can substitute 25 per cent of the total imports from these specified sectors under consideration in the first phase, thereby enabling India to reduce $8.4 billion worth of trade deficit in a single year," said Suman Chowdhury, chief analytical officer, Acuite Ratings and Research.
India's bilateral trade with China stood at $81.86 billion in fiscal 2020 while trade deficit stood at $48.66 billion. China was by far the biggest importer of goods for India at $65.26 billion.
"While the imports from China have moderately declined by 15 per cent since FY18 due to imposition of anti-dumping duties on some products, the dependence of the domestic economy on Chinese imports remains high with direct contribution to over 30 per cent of India's aggregate trade deficit," Chowdhury added. "Over the past three decades, India's exports to China grew at a CAGR of 30 per cent, but its imports expanded at 47 per cent, leading to lower capacity utilisation of domestic players in a few sectors. We can consider certain measures to reduce the dependence gradually which will also have a positive impact on the Indian economy."
Substituting imported goods from China by locally manufactured products will have a positive cascading effect on the economy as equivalent quantum of revenues would not only be added to the turnover of domestic enterprises including MSMEs but also likely to translate to benefits through forward and backward linkages, better economies of scale along with cost competitiveness and importantly, enhancing the scope of employment generation, the agency said.
In the chemical industry for example, India stands to save an import bill of nearly $3 billion by opting for locally made chemicals even after excluding specialised chemicals where manufacturing capability is yet to develop. India is the world's sixth largest chemical manufacturer but the annual chemical and polymer imports are still substantial in the vicinity of over $12 billion.
Similarly, the agency said the once fledgling domestic cycle and cycle parts industry needs to be revived to bring down import worth $100 million every year from China. Recently, homegrown bicycle major Atlas Cycle shuttered its last factory in Sahibabad in the outskirts of Delhi due to lack of business viability.
"We believe that Indian industry has the wherewithal to successfully safeguard its interests and reduce India's dependency on China albeit in phases," said Sankar Chakraborti, Chief Executive Officer, Acuite Ratings & Research. "With a strategic intent and highly calibrated approach from both the government and industry, Indian economy can see a new narrative that can not only reduce its trade deficit but also kickstart the long-awaited cycle of fresh private sector investments."