India can potentially reduce its trade deficit with China by $8.4 billion over fiscal 2021-22 that is equivalent to 17.3 per cent of the deficit with China and 0.3 per cent of India’s gross domestic product (GDP), according to Acuité Ratings and Research, which recently identified 40 sectors that have the potential to lower their import dependency on China. The sectors include chemicals, leather-based goods, handicrafts, automotive components, bicycles parts, agro-based items, drug formulations, cosmetics and consumer electronics, according to a press release from Acuité. This can be achieved by the rationalization of just a quarter of India’s imports from that country in select sectors where India has well established manufacturing capabilities, it said.

“With an import of $65.1 billion and export of $16.6 billion, India recorded a trade deficit of $48.5 billion with China in FY20. 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 remain high with direct contribution to over 30 per cent of India’s aggregate trade deficit,” says Suman Chowdhury, chief analytical officer with the company. “Over the past three decades, India’s exports to China grew at a CAGR [compounded annual growth rate] of 30 per cent but its imports expanded at 47 per cent, leading to lower capacity utilization 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,” he adds.

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. Clearly, this would 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 micro, small and medium enterprises, but is 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 chemical industry is a case in point. India is the world’s sixth largest chemical manufacturer and its annual chemical and polymer imports are in the vicinity of over $12 billion. India can potentially save nearly $3 billion import bill of such items even if some specialised chemicals are excluded, manufacturing capability of which are yet to develop in India.