India is doing all it can do to replace China as its biggest trading partner and also reduce its growing trade deficit with the Chinese. And at top of everything, it is negotiating a better trade relationship with the US that is likely to help diversify supply chains away from China.
US surpasses China as India’s top trading partner
The US has surpassed China as largest trading partner of India. As per the Commerce Ministry, Indo-US bilateral trade jumped to 119.42 billion in 2021-22 as against $80.51 billion in 2020-21. On the other hand, India’s trade with China stood at $115.42 billion.
China and the US have been India’s top trading partners for several years now. However, the Modi government has been insistent on strengthening its trade ties with the US while decoupling India from the Chinese economy.
Choosing the US over China
India has several reasons to choose the US over China. The US is one of the few countries with which India has a trade surplus. In 2021-22 too, India had a healthy surplus of $32.8 billion with the US.
On the other hand, China tries to benefit from its trading relationship with India. For several years, India has been expressing concern over inflating trade deficit with China. However, Beijing simply won’t balance trade ties because of its intense rivalry with New Delhi. The trade deficit rose to $72.91 billion in 2021-22 from $44 billion in 2020-21.
Trading with the US helps strengthen India’s export sector and shore up foreign exchange reserves, whereas trading with China is tantamount to making your enemy richer.
The road ahead
It is expected that the Indo-US trade ties will continue to get strengthened in the near future. Federation of Indian Export Organisations (FIEO) Vice-President Khalid Khan affirmed that India is emerging as a reliable trading partner as global firms try to reduce dependence on China and diversify their business by tapping into economies like India.
Khan elaborated, “In the coming years, the bilateral trade between India and the US will continue to grow. India has joined a US-led initiative to set up an Indo-Pacific Economic Framework (IPEF) and this move would help boost economic ties further.”
The IPEF brings together the US, India and 11 other like-minded Indo-Pacific countries to set up an institutional framework for economic cooperation. The framework is centered on four pillars- connected economy; resilient economy; clean economy and fair economy.
Going ahead, this framework is expected to drive trade amongst like-minded Indo-Pacific nations to the exclusion of China.
The way forward
The trading data of 2021-22 makes one thing clear- both India and the US want to trade more. India wants more trade with the US because it strengthens India’s export industry and ramps up its foreign exchange reserves. On the other hand, the US prefers trading with India because it wants to reduce dependence on China.
The US understands that it can afford to maintain a huge trade deficit with India because India is a strategic and trading partner for the US. However, the US cannot afford to be lenient with its ballooning trade deficit with China because China is Washington’s biggest rival.
But achieving this mutual goal demands diversification on India’s part. Rakesh Mohan Joshi, Director of the Indian Institute of Plantation Management (IIPM), Bangalore, said, “Major export items from India to the US include petroleum polished diamonds, pharmaceutical products, jewellery, light oils and petroleum, frozen shrimp, and the like, whereas major imports from the US include petroleum, rough diamonds, liquefied natural gas, gold, coal, waste and scrap, almonds and so on.”
Now, India cannot aim to become China’s substitute for the US unless it starts exporting industrial goods and processed products. On its part, the US will be ready for closer integration with India in order to diversify supply chains away from China.
New Delhi can collaborate with Washington, D.C. to replace Chinese goods and work on technological know-how with American experts. This way the US will be able to effectively end its vulnerabilities on China and India too will be able to minimise its trade ties with China and expand its relationship with the US.
At the same time, India must keep expanding its manufacturing base if it wants to match up to China’s huge export sector. The road ahead is long but India has started in the right direction by strengthening its trade ties with the United States.