Exports to China: Govt bets on value added products to reduce trade deficit

Key labour intensive sectors such as electronics, pharmaceuticals to realign and boost exports

Raw materials like cotton, iron ore and copper, long a hallmark of Indian exports to neighbouring China has come under increasing scrutiny as both governments, as well as exporters, try to shift exports towards value-added products in a bid to cap growing trade deficit.

While Commerce and Industry Minister Nirmala Sitharaman had earlier said that exports' focus should shift from raw materials, her ministry has identified key sectors such as hardware, electronics, pharmaceuticals, textiles, auto components, to realign and boost exports.

A revised export basket to China has the potential to significantly boost export earnings and bridge the trade deficit which was a whopping $61 billion in 2015-16.

With a burgeoning middle class and rising labour prices, China is expected to relinquish its dominance over the labour intensive, low-end manufacturing space in the near future, which is being eyed by Indian industry.

"We are looking to harness our strengths in labour-intensive sectors where India enjoys a significant advantage over other developing nations", a commerce ministry official said under conditions of anonymity.

Currently, the top 5 export categories to China are all input products. These are used by China to manufacture costlier goods which it ships abroad, often back to India. In the last financial year, India's highest export earner was cotton with $1.68 billion worth of exports, followed by copper ($1.14 billion) and organic chemicals ($844.89 million).

These, along with other raw materials like iron and iron ores, constituted for more than 70 per cent of India's exports to China, Ajay Sahai, a member of the federation of Indian Exports Organizations said.

"However the trend is slowly changing. While now cotton is increasingly being imported from China and manufactured yarn exported back, the reverse was true 5-6 years back", he added.

Greater trade in the areas of hardware, electronics and renewable energy has the potential to greatly expand according to Sachin Chaturvedi, director general of trade policy think tank Research and Information System for Developing Countries said.

On the other hand, India imports products much higher up the value chain from China with electrical machinery topping the list at $19.75 billion, followed by organic chemicals at $6.06 billion and crucially, fertilisers at $3.26 billion.

It would also insulate exports from being at the mercy of high volatility in global commodity markets as had been evident last year when copper and iron shipments to China fell owing to historically low demand and a glut in supply.

"If the government had taken advantage of low commodity prices 2-3 years back, exports may have received a big boost," trade expert Biswajit Dhar said.

Incidentally, China has hinted at its willingness to welcome newer products as part of both governments efforts to reduce this. In India to showcase the Canton International Trade Fair — the largest in the world — to Indian exporters, Xu Bing, vice president of the China Foreign Trade Centre invited Indian manufacturers to seize the growing domestic market in China.

However, apart from economic compulsions, diplomatic ones are also a major reason behind the Chinese warming up to Indian goods in the sector they have dominated for decades, trade experts warned.

Also, inherent problems in manufacturing may also trip up the plan such as the slow pace in bolstering active pharmaceutical ingredients manufacturing to help the pharmaceutical sector. Issues in mobilising innovation, a non-conducive medium manufacturing base and hindrance on the part of exporters to conduct business with China may also act as hurdles.