India’s trade deficit with China has soared to a record $100 billion (£75 billion). This explosive growth has understandably alarmed policymakers and industry leaders. Despite a weaker currency, India’s exports to China have fallen below 2014 levels, highlighting a troubling trend in bilateral trade. Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI) think tank, calls the swelling deficit a “troubling tale.” He cautions that if this becomes a trend, it may lead to enduring changes for India’s economic environment.
Massive tariffs have only compounded the crisis for most Chinese exports. Instead, they encounter a crushing 145% tariff wall, uniquely raised during the Trump administration. India’s trade ministry recently decided to act, driven partly by the deteriorating trade environment. To oversee this new flood of low-cost Chinese goods, they’ve set up a special committee. The committee’s recommendations underscore an immediate need for India to review its current trade policies. First, it’s very important that we protect burgeoning domestic industries, especially from foreign state-owned competitors.
India’s quasi-judicial body is currently investigating imports across various sectors, with particular attention on viscose yarn—an essential material for the textile industry. China, the world’s largest producer of viscose yarn has already undercut imports. Together, they have increased competition by slashing prices by 15 rupees ($0.18, £0.13) per kilo, inundating Indian ports with lower-priced imports. This has created tremendous downward pressure on local manufacturers such as Thirunavkarsu, who operates a spinning mill in the south of India. He made headlines when he raised alarm about the threat that Chinese imports posed to their own industry.
“We can’t match these rates. Our raw material is not as cheap,” – Thirunavkarsu
In response, the Indian government has stepped in, using newly imposed 12% tax on various imports in recent months to stem the flow of underpriced Chinese steel shipments. The dependence on Chinese goods is still extraordinary. Even as border tensions between the two neighboring countries escalated after 2020, India’s imports from China continued to rise, indicating a complex interdependence that challenges India’s attempts to bolster domestic production.
Ajay Srivastava’s comments on the worsening trade deficit highlighted the need for action. He thinks that it is more than the economic numbers and serves as a structural warning. Industries, he noted the pace of India’s industrial growth is picking up fast, particularly via production-linked incentive (PLI) schemes. Rather than increasing our domestic capabilities, these initiatives are counterproductively increasing imports.
“This isn’t just a trade imbalance. It’s a structural warning. Our industrial growth, including through PLI schemes, is fuelling imports, not building domestic depth,” – Ajay Srivastava
These dynamics are having a huge impact on India’s textile sector. At least 50 small ring-spinning mills in southern India are said to be reducing operations due to the flood of cheap Chinese yarn. This issue opens up broader questions about the long-term viability of domestic industries and their competitiveness in the face of deep-seated established Chinese suppliers.
India’s domestic viscose yarn production can and does easily satisfy the domestic demand despite the challenges from Chinese imports. When durable supply gaps emerge, it is imports that come to the rescue. Now, cheaper inauthentic products from China have flooded the market, upsetting this balanced ecosystem. This change in circumstances has led to calls for much greater protective requirements.
While investigations into the evasion of unfair Chinese imports soared to unprecedented levels in 2024, industry stakeholders are still on high alert. The textile industry, as the second largest employer in India after agriculture, has become a litmus test for the Future of Work. With the government’s limited success in reducing reliance on Chinese goods and enhancing domestic production capabilities, it faces an uphill battle in navigating this intricate trade relationship.