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China has become India’s largest trading partner. Bilateral trade between them has exceeded India’s trade with the US, which was India’s biggest trade partner till recently. However, trading ties have been severely skewed in favour of China with imports outstripping exports by a huge amount.

The trade deficit against China rose sharply over the years from Rs. 2,186 billion in 2013-14 to Rs. 3,428 billion in 2015-16. But more than the actual figures, China’s supremacy is greatly reflected in its rising share in India’s total trade deficit, which increased from 27% to 48% during this period.

Figures for the last financial year, however, indicate that India’s trade balance with China has improved marginally, although economists are skeptical about whether the shift will sustain. China’s share in India’s merchandise trade deficit declined to about 39% in 2017-18. The improvement in trade balance was driven by both - a fall in growth in imports and a pick-up in exports.

So far so good, but China’s recent demand to increase the number of duty frees products is feared to endanger India’s trade equation with China once again.  China has asked India to allow duty-free import of 85% of its products into the country. During the countries' bilateral discussions, Indian officials were told that China was willing to give duty-free access to 92% of Indian exports, provided the bar was raised for Chinese products. India has offered to open up 74% of its market to Chinese goods in phases but China is not satisfied with the proposal.

China’s demand is putting pressure on the policymakers as they are looking to create the world’s largest free-trade agreement under the Regional Comprehensive Economic Partnership (RCEP).

Admittedly, India offers lower concessions to China as compared to other countries where over 90% of imports can come duty-free. However, even the current arrangement deals are made with risk of Chinese goods dominating Indian markets, which would further impact the trade deficit estimated at over $63 billion in 2017-18.

One of the reasons for this unfavourable trade balance is that India exports mainly raw materials like iron ore, copper and cotton to China. Only three items of raw materials, copper, iron ore and cotton accounted for about 36% of India’s total exports to China in 2016-17.  A huge Rs. 11, 360 crore worth of iron ore was exported to China in 2016-17 accounting for 16.2% of India’s export to China. Cotton and copper at Rs. 9,038 crore and Rs. 4,710 crore accounted for 13.2% and 7% of total exports to China.

The deficit can be reduced only when India starts exporting value-added products. Unfortunately, the Indian manufacturing industries have to go a long way before they are geared up to export value-added products to China.

Even for products where India has better competitive power, China’s restrictive policies do not allow their entry. Take for example the case of generic drugs. India is one of the largest manufacturers of generic drugs. But it has not been able to export to China because of Beijing’s protectionist policies. While Indian pharmaceutical companies exporting generic drugs to the United States and Europe, as most of the drugs have received FDA and EU approval, it is quite striking that China does not allow imports of drugs from India.

Indian pharmaceutical companies have taken up the issue with the Indian Commerce Ministry to facilitate export of generic drugs to China, especially since a Chinese delegation completed inspections of their manufacturing facilities. The Indian Commerce and Industry Minister have also taken up the matter with his Chinese counterpart in this regard.

India on its part has tried to contain the imports from China by raising import duty on certain products.  The anti-dumping duties on chemicals and machinery items imported from China have already been in place for some time. Other Chinese products on which India has imposed anti-dumping duties include steel and other metals, fibres and yarn, rubber or plastic, electronics, and consumer goods.

The logic behind imposing anti-dumping duties is mainly to protect domestic industries, as they are not able to match the price of cheap Chinese products. Anti-dumping duties aim to create a level playing field for Indian manufacturers.

But such actions will turn ineffective if India has to agree to allow duty-free import of 85% of Chinese products into the country, as is demanded by China.