



Roughly $4.2 billion and counting. That’s the size of the deficit that India faces, in its trade with China as of October this year. That trade deficit has soared by 26 per cent over the same month last year, as exports from India to China have effectively dropped off a cliff. Exports in September and October were down by a third from a year earlier, while imports by India from China are still growing. Engineering exports alone to India’s neighbour have fallen by 50 per cent, according to the Engineering Export Promotion Council (EEPC), an umbrella body of engineering exporters.“While there is a contention that China’s slowdown may not pinch us….it is clearly doing so as it also happens to be one of our main markets for exports,” says Anupam Shah, chairman of EEPC India. The India-China relationship goes beyond trade in goods. Some 24 per cent of sales in volume terms by Tata Motors owned-Jaguar Land Rover ( JLR), for instance, were from China in 2013-14. Just a couple of months ago, JLR inaugurated its first overseas factory in China with an investment of over $1.7 billion.But in macroeconomic terms, what matters is the trade in goods and services between the two economies. If a Chinese slowdown is news for the world economy, it is major news for the Indian economy. India-China trade accounted for about 9 per cent of India’s total trade in goods so far this year. But that trade deficit with China accounted for about a third of India’s overall trade deficit between April and October this year.As the first chart shows, by the standards of most other countries, including India, China is still growing strongly, at over 7 per cent. Yet that growth is down from 9 per cent earlier and the effects of slowdown have rippled through the world economy.If engineering exports have dipped sharply, other major commodity exports from India to China have hardly been left untouched. Cotton accounted for a quarter of all Indian exports to China in 2013-14, and 60 per cent of all cotton exported goes to China. A recent report by CARE Ratings forecasts that Indian cotton exports to China will fall from 11 million bales in 2013-14, to 6-7 million bales in 2014-15. A major reason is a new cotton import policy introduced by the China, under which cotton import quotas have been slashed, to boost demand for domestic cotton.Imports above that quota are subject to a 40 per cent tariff. “China is the biggest consumer of the Indian cotton and with China cutting its imports, India may have to look for other markets,” says the report. More generally, as Biswajit Dhar, director general of Research and Information System for Developing Countries, a think tank, points out: “We are now a large market for China for cheap mass-produced goods.” And even as India has evolved into a destination for final goods, it is a major supplier of raw material to Chinese industry.Beyond commodity exports though, India has built somewhat of a niche for itself in certain areas of the manufactured goods markets. “We are most competitive in the Chinese market in the medium volume segment,” says Shah. This segment involves orders sized at a few thousand or tens of thousands per year.At volumes larger than this, Indian companies cannot compete with Chinese counterparts given the latter’s vastly better economies of scale and size. “But in the medium volume segment, which re-quires specialised machines, Indian firms are able to compete,” he says. With a Chinese slowdown though, the small and medium companies will be hardest hit.But as the OECD’s recent Economic Outlook points out, the indirect effects of a Chinese slowdown on the world economy could be as serious as the direct effects. A 2 percentage point decline in Chinese growth would lead to about a 0.3 per cent decline in global GDP per year.But add in the increased uncertainty caused by a slowdown in what is not just a workshop of the world but also increasingly a key market, and the decline would rise to 0.5 percentage points. “The full impact of the combined shocks would be relatively large in Japan as well as India and Russia,” the report says. A decline in Chinese growth by 2 percentage points for 2015 and 2016, estimates the OECD, would lead to a more than 0.50 per cent decline in annual GDP growth by 2016 in the Indian economy.But the indirect effects can have a positive as well. Prices of commodities from copper to iron ore have fallen in recent months, partly driven by the weak demand from China. “There are some gains from weak Chinese growth,” says DK Joshi, chief economist with ratings firm CRISIL. “A slowdown will lead to lower commodity prices.”From an economy-wide point of view, lower prices of key inputs such as copper and iron ore reduce costs for a range of industries.Indian firms dependent on commodity inputs, and selling largely in the domestic markets, could benefit. However Joshi adds: “On balance though, healthy Chinese growth is good for the world economy right now.”Going forward, Rupa Rege Nitsure, chief economist at the Bank of Baroda, points out: “Weak Chinese industrial growth offers an opportunity to Indian firms to take back export markets they had lost,” she says. “The weak Chinese growth opens the door for Indian companies,” she says.“So in that sense, it is a positive for us.” With Indian growth still stuttering, amidst a slowdown not just in China, but in other key markets, it will be the ability of Indian companies to seize the initiative that will be tested most.