India needs an overall trade-profile revision

India needs an overall trade-profile revision

Part 1 is here.

It is vital for India to identify critical dependencies, with criticality being defined in terms of the essentiality, quantitative utility and multi-sector relevance of the imported items (product categories and subcategories) as well as the singularity, stability, and vulnerability of their import origins vis-à-vis the viability and readiness of domestic and foreign alternatives.

Fuel (see Part 1) and raw materials are ultimate inputs for various sectors of the economy and hence dependency on them is critical. Furthermore, in a nation of 1.4 billion people, maintaining a robust food supply chain network is essential.

Fossil fuels and their derivative products, chemicals, and electronic components and devices are three major classes of products for which India is highly dependent on imports. These categories of imports have also seen sharp rises over the new decade.

The demand for electronics, in particular, has soared. India is highly dependent on mainland China and Hong Kong for electronics imports. Among import products, more than 60% of computers, 55% of telephones, and more than 25% of integrated circuits are sourced from India’s geopolitical nemesis, China. The share figures for the same are 13.5%, 25%, and 35% for Hong Kong, a place teetering on a grave political fault line for the past few years.

Given that its large and growing low-middle and middle-income population is the primary driver for its enormous demand for electronics, it doesn’t make sense to suggest that India abruptly switch to high-quality, high-price electronics exporters as Singapore, Germany, Japan, South Korea and the Netherlands.

Taiwan is already dealing with high demands and its high-sophistication production would afford prices unviable for fulfilling India’s quotas. Further, the associated severe medium-term geopolitical risks are obvious.

Instead of looking at the developed world, India should look toward building long-term intimate trade relations with large developing nations such as Mexico, Vietnam, Thailand and Malaysia. Assurance of sustained, multifaceted trade relations and multi-front close bilateral cooperation and solidarity would go a long way in helping India diversify its trade portfolio and minimize trade risks, hedging itself against potential crises of the near future.

India operates at a significant trade deficit – in 2020 its product imports amounted to a total of US$284 billion while its product exports stood at $372 billion. Although not as critical as import dependencies, dependency on export markets is also an area calling for introspection. 

India’s export portfolio seems fairly more secure compared with its import profile. Its largest export destination is the US, which claims 18% of its export trade. The United Arab Emirates and China hover around 6% while Hong Kong and Bangladesh clinch about 3% each.

Despite China’s persistence as India’s second- or third-largest export market over the years, India’s trade balance with its largest neighbor has remained skewed in China’s favor with the trade deficit reaching an all-time high in 2022.

According to data from the CEIC, India’s monthly imports from China were around eight times its monthly exports to China in November 2022. Hong Kong is a major buyer of India’s gems and precious metals exports, claiming almost a third of the category that comprises a tenth of its export mix.

Further, many small partners that take up tiny shares of India’s exports could pass off under the radar but become significant in case of a multinational regional destabilization event such as the Arab Spring. In any case, having a diversified trade portfolio is always better than singular dependency.

Given a large number of low-income dependents in such primary-sector industries as agriculture and mining, it is important for India to closely monitor the stability and viability of its export markets in related categories, even if the total monetary contribution of these categories in the total export trade is relatively small.

China, Africa and West Asia are key markets for India’s agricultural exportand disruption there could result in a mass livelihood loss for farmers who cater to these markets, at least for the time it takes to find an alternative domestic or foreign market.

Developing flexibility and resilience in this regard is thus important. Considering the possible scenario of geopolitical tensions leading to trade disruptions which China, it would be prudent to ensure that the shares of intended exports to China – including primary sector produce such as iron ore and other minerals as well as foodstuffs like spices – could be diverted to ulterior markets, or other means of livelihood be made readily available to the portion of workforce concerned.

A reverse-psychological analysis of its trade partners is also of essence to India – are there trade partners most of whose imports come from or most of whose exports go to India? In that case, the viability of their alternatives to India must be thought upon from their point of view.

There could be small nations that depend on India for buying most of their exports or providing most of their imports (especially of utility products and domestic availability-wise critical products) but whose trade share appears relatively minor in India’s total trade profile.

In case such trade partners rely on India for certain strong reasons, India could think of leveraging such reliances for bilateral and multilateral economic and diplomatic gains.

Finally, it is also important to look at the trends of India’s bilateral trade with its major trade partners. Trade growth rates for individual nations have been quite fickle over the years. However, some generalizations can still be drawn. 

Imports from China rocketed in 2021 and 2022, following a two-year subsidence from 2018. India’s imports from most of South America, Africa and Central Asia have steadily grown. Imports from the US slumped in 2020 but apart from that year have steadily grown since 2016. Growth in imports from IraqHong Kong and Eastern European nations had been high since the middle of the last decade but have been somewhat erratic in recent years.

The impact of Covid-19 and the war in Ukraine has been conspicuous on import growth rates from most affected regions.

On the brighter side, import trade figures with Singapore and South Africa have been robust over the past five years and have risen sharply in 2021.

India’s neighbors have remained steady-growth export markets, with the obvious exception of its arch-rival Pakistan. China and the US have also served as high-growth export markets for India, leaving aside recent slumps. Indian exports to various South American, African and Central-Asian nations have also exhibited sustained sharp growth over the past decade.

As Europe languishes in an energy crisis and much of the developing world struggles with food shortages, India would do well to conduct a thorough review of its global supply chains. Given its unique geopolitical situation, its dependence on maritime trade further complicates its trade affairs.

If there is a takeaway from the departed year, and the post-pandemic years in general, it is that one must be prepared for an onslaught of the unexpected.

India needs to devise a holistic plan to build its trade confidence through versatility, flexibility, and resilience and have the safety net of multiple contingencies in place in its precarious tightrope walk between independence and interdependence, amid unprecedentedly windy times.

This is the second article of a two-part series. Read Part 1 here.