India – China Trade Deficit: Strategies to balance the Trade
M.Sc. in International Management – IMM Fast Track 2017-18
by Krishna Prasad TALLA
Supervised by Prof. Dr. Jeffrey-Edmund Curry
Writing this thesis has been captivating and extraordinarily rewarding. I would like to thank everyone who has supported me in many ways:
I express my innermost and honest gratitude to my supervisor, Professor Jeffrey Edmond Curry who ploughed through preliminary versions of my content, making essential recommendations and posing challenging questions. His expertise, understanding, guidance, affectionate attitude, encouragement and healthy criticism added significantly to my experience. Without his persistent notion, it might have not been feasible to complete this research.
I thank Audencia Business School and all of the teaching and non-teaching staff for their support and supervision and the Library for providing essential information regarding the research and my academic studies.
I thank my parents, friends and well-wishers for their co-operation and support which assisted me in the completion of this work.
I sincerely thank the industry experts for giving me their valuable attention and suggestion.
Finally, I thank my classmates, for making my learning experience exciting and stimulating.
India and China, the world’s two most populous and nuclear-armed nations, have a long and chequered history dating back thousands of years, but Since 2014, China has developed as India’s greatest trading accomplice and a nation with which India has an extensive trade shortfall. The purpose of this research is to find the strategic solutions to overcome the trade deficit. The research was conducted based on the inputs from the deep study of the past and the current scenario. To answer these questions and strategies required a qualitative approach including convenience sampling method and snowball sampling method was employed in this research. The data was collected through semi-structured interviews with ten Indian participants who are experts related to the subject field.
The findings showed some strategies the Indian Government can employ such as establishing a peaceful relation with China, implementation of FTA, association with ASEAN states and participation and open up for RCEP to balance the trade deficit with China.
Table of Contents
LIST OF FIGURES 5
RESEARCH QUESTION 8
I . LITERATURE REVIEW 9
A. HISTORY 9
B. LOOK EAST POLICY 10
C. INDO CHINA TRADE 11
D. US-CHINA: WHAT INDIA CAN LEARN 13
E. PROSPECTS FOR PEACE 14
F. STRATEGIES 14
G. OBSERVATIONS 15
II. PRESENTATION OF THE SUBJECT 17
III. METHODOLOGY 20
A. RESEARCH DESIGN 20
B. METHOD 20
C. SAMPLING APPROACH 20
D. DATA COLLECTION 20
E. DATA ANALYSIS 22
IV. PRESENTATION OF RESULTS 23
V. DISCUSSION ON FINDINGS 29
A. CHINA AS A RIVAL 29
B. REASONS FOR TRADE IMBALANCE 30
C. SPECIFIC STRATEGIES TO BALANCE TRADE 31
D. ACHIEVING GOAL THROUGH PEACE 32
E. FREE TRADE AGREEMENT 32
F. BOYCOTTING CHINESE PRODUCTS 33
G. INDIA – ASEAN TIES 34
H. US-CHINA TRADE WAR : IMPACT ON INDIA 35
I. INDIA AND THE RCEP 36
VI. CONCLUSION 37
VIII. BIBLIOGRAPHY 41
IX. APPENDIX 46
E-MAIL REQUEST FOR INTERVIEW APPOINTMENT 46
List of Figures
Figure 1: Top 10 Imports and Exports of India -China
Figure 2 : China Exports to India (in USD)
Figure 3 : China Imports from India (in USD)
Figure 4: Trade Deficit between India and China
Figure 5: Military Standoff between India and China – 2017
Figure 6: Key Non-Tariff barriers imposed by China
Figure 7: Number of FDA approved Pharma manufacturing plants by country
Figure 8: India-China defense leaders during joint military exercise.
Figure 9: India-China Commerce Ministers on talks to reset trade ties.
Figure 10: Few Indians campaigning the “Boycott of Chinese Products”
Figure 11: India-ASEAN Trade
Figure 12: India’s Trade opportunity amidst US-China Trade war.
This thesis is the concluding part my MSc. in International Management (IMM) 2017-2018 Fast Track at Audencia Business School. It focused on studying the economic interdependence of India and China and to find out the strategies to balance the trade deficit between India and China. This work has been carried out under the guidance of Professor Jeffery Edmond Curry and from the inputs of industry experts related to the subject of study.
India and China, the world’s two most populous and nuclear-armed nations, have a long and chequered history dating back thousands of years, but Since 2014, China has developed as India’s greatest trading accomplice and a nation with which India has an extensive trade shortfall.
The research was conducted based on the inputs from the deep study of the past and the current scenario. To answer these questions and strategies required a qualitative approach including convenience sampling method and snowball sampling method was employed in this research. The data was collected through semi-structured interviews with ten Indian participants.
The research process have led to the following recommendations:
The Republic of India must take measures to reset the bitter-ties with the participation of diplomatic, military and economic policymakers. Showing patriotism in the name of banning Chinese goods does not have any impact and moreover, can damage the relation with China. India should create Special Economic Zones(SEZ) and assist the sectors of Integrated Circuit(IC), Electrical and Heavy machinery fabricating companies and encourage them to invest and make in India and as these class of items have a major share in imports from China. India should have talks with the Government of PRC at the diplomatic level to open up the IT and Pharmaceutical sectors as there is huge scope for India’s pharmaceuticals products in China. India should plan to potentially fill the needs of China which are affected by the US-China Trade war and must negotiate with China to gain access to the new commodity markets in which it has no entry. A Free Trade Agreement between China and India can help to remove trade obstacles and facilitate more commerce. India must maintain and develop its economic relations and also constitute a strong security architecture for the region with ASEAN partnership to stand as an eligible competitor against China.
China and India have had a turbulent relationship at the state level, while key diplomatic relations between the two are laden with difficulties, pressures and misgivings that numerous eyewitnesses accept are bound to worsen in the not so distant future (Jain ; Shufen, 2011).Today, both try to assume a worldwide part by recovering the power they had for a long time before they went into decline after the advent of the industrial revolution; however, both obviously see the other as a geopolitical adversary (Reymund, 2017).
In 1820, China and India alone made up about half of the world’s economy, while Asia, on the whole, represented 60 percent of the worldwide GDP. Enlightened self-interest dictates that China and India ought to enhance their relationship and this would give them more prominent clout in global foundations and in arrangements with the setup forces, for example, the US and the EU, as both two nations are correlative forces (Reymund, 2017).
India and China have had profound social ties, amid the Cold War time frame, the two states sought a foreign policy of non-involvement with each other (Singh, 2012).Against the scenery of uncertain fringes and political pressure, it is essential to consider what this implies for their future prospects in both the monetary and politico-key domains (Ollapally, 2014). It will, however, require a significantly more purposeful push to cross over any barrier in socio-cultural understanding that exists between the two nations (Jain & Shufen, 2011).
Raghuramapatruni (2013) states that it is inevitable that the respective exchange between the two countries will be among the most imperative monetary connections on the globe.
China is currently India’s biggest trading partner while India is likewise one of China’s major trade partners. This ascent in trade mirrors an upgraded monetary commitment between the two nations and an eminent part of the developing exchange, notwithstanding, is its expanding irregularity (Palit and Nawani, 2009). While creating fiscal ties have warmed relations between them, there remains a key nonattendance of appreciation regarding each country of the basic social and societal benchmarks that portray interchange models that affect each country’s impression of its own national interest (Jain ; Shufen, 2011). The balance of trade isn’t just to support China yet in addition showing an expanding pattern over time (Palit and Nawani, 2009). Understanding the measurements of the clear irregularity or disparity amongst monetary and vital relations in the India-China relationship is necessary (Ollapally, 2014).
This leads to the question that this thesis will specifically address:
What are the strategies that India must employ to overcome the current state of trade deficit and to balance the trade imbalance with China ?
I . Literature Review
Both China and India are incredibly ancient nations and civilizations with a long history; they are something other than countries; together they include almost two-fifths of mankind (Reymund, 2017). Though they speak to extraordinarily unique societies and contending models of advancement, they additionally took after comparable verifiable directions in present day times, liberating themselves from colonial powers and rising as autonomous countries around a similar time (Reymund, 2017).
These two Asian giants had a centuries-old traditional friendship, however, due to numerous historical, political and economic reasons, relations between China and India were basically left at a standstill in the past few decades (Reymund, 2017). The popular imagination among the public in India was fuelled from the 1962 Indo-Sino war; they caused a mark in the national mind of India, that sneaks awkwardly out of sight even today (Jain and Shufen, 2011).
India and China reopened exchange in 1978, which had stopped after the 1962 war, and marked a Most Favoured Nation Agreement in 1984 (Ollapally, 2014). Exchange, in any case, did not take off until some other time, but rather when it did, it was stunning, with China surpassing the United States as India’s biggest trade partner in products (Ollapally, 2014).
China and India have many essential likenesses, each covers a vast geographic region and has an extensive population, has a large agricultural segment and is changing from a conventional to modern day society. As emerging nations encountering fast financial advancement, both are confronting the test of keeping up supportable, adjusted and composed improvement and the strenuous errand of offering the advantage of monetary development to grassroots groups. From 1976 to the present, the striking component of reciprocal conciliatory transactions has been the shroud of classification and mystery kept up by the administrations and key moderators on the two sides (Jain and Shufen, 2011).
An assortment of systems and courses of action were built up to encourage worldwide financial commitment since 1991 when India propelled its new monetary arrangement patching up to a great extent of inclination setup since independence (Ollapally, 2014).
Under different names, for example, the Joint Working Group (JWG), Confidence Building Measures (CBMs) and High-Level Meetings of Special Representatives and other actions, there has been a noteworthy trade of sayings and declarations of kinship, peace, and collaboration. However, these have been simply words and a facade for the absence of important advancements on substantive issues (Jain and Shufen, 2011).
On the topic of ties amongst China and Pakistan, which is recognized as a noteworthy wellspring of doubt, the predominant view tends to be that Pakistan is not any more a noteworthy distraction for China, there was little fear that China would truly chance relations with India over Pakistan (Ollapally, 2014). In a changing multipolar global power condition, Beijing could see India’s monetary and military ascent as drawing out apparent American dominion in Asia (Jain and Shufen, 2011).
As developing business sector nations encountering quick monetary improvement, both are confronting the test of keeping up reasonable, adjusted and facilitated advancement and the challenging errand of imparting the advantage of financial development to grassroots groups (Jain and Shufen, 2011).
B. Look East Policy
Among the greater part of India’s policy advancements since the finish of the Cold War, its “Look East” approach by and large rates among the best. (Ollapally, 2014). It was the finish of the Cold War that truly took East Asia back to the cutting edge of India’s outside approach horizons and furthermore, the states in South and Southeast Asia likewise stays excited about a more active Indian role in the zone (Pant, 2013).
The burst in China-ASEAN (Association of Southeast Asian Nations) ties over the most recent two years has additionally furnished India with a key opening in the locale to underline its qualifications as a capable local partner driving it to rise as a genuine player in the Asian strategic scene as smaller states in East Asia connect with it for trade, strategy and, possibly, as a key balancer (Pant, 2013). India relentlessly has utilized its Look East arrangement since the mid-1990s to re-enter Asia through multilateralism and key reciprocal connections, for example, those with Singapore, Malaysia, South Korea, Japan and China (Ollapally, 2014).
Neither India nor the states in East Asia have the motivation to characterize their relationship contrary to China, yet they are absolutely inspired by utilizing their binds with different states to pick up profits by China and get a similarity of uniformity with their connections (Pant, 2013).
Events as of late have underlined China’s forceful position against adversaries and U.S. partners in Asia, alongside its political and financial ascent, Beijing has begun attempting to manage the limits of worthy conduct to its neighbours, accordingly, provincial states have just started reassessing their systems, and an anti-China balancing coalition is developing (Pant, 2013).
India’s legislature is endeavouring to form a powerful strategy reaction to the ascent of China during a period of local and worldwide turbulence, in spite of the fact that it is vague if there is a bigger key structure moulding India’s China arrangement, India’s approach toward China is experiencing a change, the full outcomes of which might be obvious a couple of years down the line (Pant, 2013).
C. Indo China Trade
India-China exchange has a checked lop-sidedness with India bringing in threefold the amount of as it exports to China, nonetheless, the exchange between the economies has been developing quickly amid the most recent decade (Raghuramapatruni, 2013). One huge finding of the investigation is that China has dependably been the most essential wellspring of imports for India and furthermore a major source for Indian exports, at the end of the day, Chinese items have been making advances to the Indian market at a significantly speedier pace than in any of its other export goals (Raghuramapatruni, 2013).
The incorporation directions of the two nations in world exchange feature two divergent paths – while China is a noteworthy maker and provider for rest of the world including India, the latter’s part in worldwide exchange has been mostly as a consumer (Palit and Nawani, 2009).
India’s principal exports to China are overwhelmed by resource-based and work intensive items; Mineral items (for instance, metals, slag and cinder, salt and sulphur, and mineral powers and oil) are evident exports and metals include the greater part of India’s exports to China (Palit and Nawani, 2009). India’s shortfall with China was near a record $30 billion out of 2013, While a blend of variables, for example, bans iron mining in India, combined with the global slowdown, added to this result, the yearning objective of achieving $100 billion in exchange amongst India and China is trickier than any time in recent memory (Ollapally, 2014). However, amid this same day and age, China’s exchange with rest of Asia, and in addition with its significant western exchanging accomplices, picked up, while exchange with India stayed in a droop (Ollapally, 2014).
Aside from the exchange and investment fields, the potential for more genuine resource rivalry amongst China and India is an approaching risk, the two nations should depend on new energy sources, which could make pressures and even reason conflict between them (Ollapally, 2014). The key inquiry in regard to India-China relations is whether China is seen as a risk or open door for India, supported by the very charged history of India and China, Indian open talk is frequently dominated by hard Nationalists, who begin from a start of doubting China no matter how you look at it—in financial matters and political issues (Ollapally, 2014). Nonetheless, behind the belligerent open and media talk, there is a significantly more nuanced view on India’s relations with China (Ollapally, 2014).
China’s exchange shortfalls with most significant ASEAN economies, combined with a high rate of machinery and gear in ASEAN exports to China, show China’s dependence on ASEAN as a proficient source of intermediate and semi-processed apparatus imports, these imports have empowered a few portions of Chinese industries to move to generally higher closures of value chains (Palit and Nawani, 2009). In this sense, ASEAN trades have encouraged China’s assembling progress, while India’s have not, this discloses why Indian exports to China have not been ascending as quick as those from Southeast Asia (Palit and Nawani, 2009). While the great business feeling toward China appears to have stayed predictable, even with the rise of the trade imbalances and political relations, strategy observers and politicians have indicated greater weakness to nationalistic and realistic thoughts, from 2008 onwards when the deficits became more articulated, parliamentary debates, for instance, uncovered rising worries that went past just economics (Ollapally, 2014).
In spite of the fact that the shortfall turned into a questionable issue from 2008 onwards, it is safe to state that under Congress control and even under the previous government Bhartiya Janata Party (BJP), the way to deal with this was generally shared and represented by the possibility that it is smarter to engage than confront. The Patriots might want to see India achieve more balance in the trade by getting the Indian government to accomplish more to help Indian organizations. Indian manufacturers and customary organizations, alongside areas of the strategic group, contend that the Indian government needs to push for a “level playing field”, and note that while Indian power hardware makers are working under “unreasonable” conditions versus Chinese organizations, the Indian government is giving obligation free access to the Indian market to Chinese power gear makers (Ollapally, 2014).
Many industrial leaders appear to trust that if the doubts between the two nations are reduced at the political level, financial issues could be managed and are sure that there are many “win-win” open doors for India and China (Ollapally, 2014).
D. US-China: What India can learn
For a long time, the U.S. exchange shortfall has been expanding with China, however substantial, with most other trading partners too (Mann, 2005). Regardless of developing financial relations and common reliance, China and the US respective debate have turned out to be increasingly intensive (Li et al., 2018).
China condemns the US of their trade limitations on high-innovation items, their treatment for medicines of China’s market economy status, and fair exchange sanctions on China (Li, He, and Lin, 2018). Major areas of concern communicated by the US incorporate extensive quantities of exchange overflow, moderately insufficient record of upholding protected innovation rights (IPR), unfair advancement strategies, and blended record on executing WTO commitments, although expanding business question, the China-US monetary relations are sure and grow quick all in all (Li et al., 2018).
China’s striking back measures to the US will profit China, however, hurt the US, in the interim, negative impacts of trade war to China will be emphatically related with import tariff rates (Li et al., 2018).
The US under trade wars will pick up on welfare, GDP, and non-manufacturing creation, yet hurt manufacturing work and trade and in the event that China does not take striking back measures, the US will pick up on manufacturing creation, however, will lose if China take countering measures; the same as China, exchange impacts are more grounded than generation and business impacts, and generation impacts are more grounded than welfare impacts (Li et al., 2018).
As the import duty rates increase, exchange war impacts to the US will increment in the first place yet diminish later. On the off chance that Mexico includes in the exchange war with the US, demonstrate that each of the three-trade war included nations will be harmed on welfare, GDP, manufacturing employment and trade .Trade impacts are more grounded than generation and work impacts, and creation impacts are more grounded than welfare impacts, relatively, duty wars will hurt Mexico the most, hurt China the second most, and hurt the US the minimum, contrasted and the impacts when Mexico isn’t in the trade war, negative consequences for China are about the same, yet negative impacts on the US are to a great extent expanded. All in all, an exchange war with the US will hurt China, yet can’t hurt China profoundly, the negative effects are affordable (Li et al., 2018).
E. Prospects for Peace
Given the quickly developing Sino-Indian monetary relationship, it might be tempting to conclude that financial elements may constrain the likelihood of a conflict amongst China and India (Ganguly and Pardesi, 2012). India has watched China’s marvelous development in monetary and military circles with both envy and alert (Reymund, 2017).
Since the Sino-Indian contention is assailed with these issues – a progressing regional question, a competition for power and impact in Asia, developing abilities, and geographic contiguity – their quickly developing monetary reliance will most likely be unable to balance wellsprings of potential clash (Ganguly and Pardesi, 2012).
On the off chance that there is one single exercise that New Delhi’s security investigators have drawn from the 1962 war, it would be this: power and quality are the main tickets to the club of superpowers (Reymund, 2017).
Therefore, it isn’t totally clear if financial relationship will essentially advance peace, in such manner, it ought to be noticed that the high volume of exchange between the United States and China (or amongst China and Japan) has not really relieved the possibilities of contention between these states (Ganguly and Pardesi, 2012).
In a long-run association, evidence for the legitimacy of Marshall-Lerner condition and the J-curve impact isn’t seen for Indo-China exchange, in this way devaluation of currency is by all accounts an unsuccessful endeavor to revise trade adjust with China (Panda and Reddy, 2016). Kim (2014), recommends that a multilateral change ought to be made as the trade shortfall does not come from China alone.
Jain and Shufen (2011), trust that relations amongst China and India could plausibly extend rapidly through trades in light of education and students exchange, tourism, sports, social and film celebrations.
Sun, Ma, and Xu (2018), propose building up a feasible vision of manufacturing innovations, to require a participation of energy reforms and to look for integral exchange collaboration in manufacturing and engineering areas.
Dutt and Panwar (2014) state that to ensure practical long-haul relations exchange and venture with a more extensive base and thereof broadening of trade basket is essential.
India and China can have technology exchange in the territory of software and hardware, where India can pick up the points of interest offered by China in the region of hardware; also, China can get software advantage from India, it is vital that the two countries should uncover their prerequisites with the goal that it might be appreciated by the partner (Dutt and Panwar, 2014).
An expanding market access for the common trade between the two countries and state level treatment for investment by every one of the countries can be dealt with as the start of monetary co-activity among the two nations (Dutt and Panwar, 2014). Palit and Nawani (2009), exhorted that, rather than concentrating on less aggressive fragments, for example, plastic, hardware and mechanical apparatuses, and electrical gear, consideration must be given to territories where trades have a more prominent possibility of market entrance on focused grounds.
Ganguly and Pardesi (2012), propose a system that India is probably going to seek that will likely include intermittent and minor concessions to the PRC, a developing arrangement with Japan, the erratic extension of maritime collaboration with the United States, and the gradual extension of its own military abilities. It might additionally include the quest for a more deliberate security discourse with the conditions of Southeast Asia who share India’s concern about China’s long-haul expectations.
Setting aside political and vital contrasts and pressures, India could absolutely take a sign from China in territories, for example, easing of poverty, where China has had some achievement. Similarly, China may pick up a considerable measure from the experience of India in the micromanagement of data innovation organizations and the fruitful outsourcing of such administrations (Jain and Shufen, 2011).
China is the world’s most populous country, with India ready to overwhelm it by 2050 as indicated by most projections and these two countries house over a fifth of mankind and speak to two of the biggest markets and most quickly developing economies on the planet (Jain and Shufen, 2011).
On the off chance that the trade deficit is impermanent, there is no reason for concern, and the exchange deficiency isn’t an indication of a frail or solid economy, notwithstanding, if an exchange shortfall is extensive and endures, such exchange deficiencies may show an essential disequilibrium in the nation’s bookkeeping balance (Kim, 2014).
“The Granger causality model” demonstrates that trade shortage prompts fiscal deficit and the outcomes infer that financial deficiency and macroeconomic elements have a cointegrating association with the trade deficit and ought to be given genuine consideration in the endeavor to diminish trade deficiency and a financial shortfall of India later on (Rajasekar and Deo, 2016).
Ollapally (2014), states that apart from just the level of financial movement or strategic communication that India has with China, the key lies in how elites in India see, translate and offer importance to these variables
Pant (2013), states “Great power politics in the region have only just begun”. China is too enormous and too intense to be in any way disregarded by its neighbors. However, China’s neighbors are presently trying to extend their key space by contacting other local and worldwide forces Pant (2013).
Reducing the present unevenness in India-China exchange would require Indian exports getting more prominent access in the Chinese market and the relative aggressiveness of Indian exports is a basic determinant of such access (Palit and Nawani, 2009). The empirical confirmation setups India’s distinct aggressiveness in the Chinese market versus major Southeast Asian nations in just select item classes. However, relative aggressiveness in these classifications ought not to prompt the all-encompassing conclusion that India is more focused than Southeast Asia crosswise over resource and labor intensified sectors (Palit and Nawani, 2009).
From an Indian point of view, there is presumably significant legitimacy in seeking a respective trade agreement with China, such a structure won’t just upgrade exchange but at the same time is probably going to do as such in an adjusted way (Palit and Nawani, 2009).
Chinese imports into India are not going to diminish since both Indian makers and buyers’ advantage from such imports. If an exchange needs to develop in an adjusted manner, at that point alongside the ascent in Chinese imports, India’s exports to China should likewise expand (Palit and Nawani, 2009).
An India-China trade agreement can invalidate the risk to Indian exports emerging from facilitating plans of action that advantage India’s competitor exports (Palit and Nawani, 2009).
II. Presentation of the Subject
Both the Republic of India and China started opening up within the International market terribly late. They were inward wanting economies within the beginning. However, once they realized the pattern of growth and development within the developed countries and also the nature of advantage those countries were obtaining out of a trade, they conjointly set to start out trade relations with a lot of countries. the character of each the economies modified from an inward-looking economy to an outward-looking. China had the lead during this gap up, as a result of that they had realized this truth a few years ahead of India. Once they started having trade with the remainder of the world, neighbors of China took it as a challenge for them and began thinking during this phase. When India also opened its economy to the world and attracted a great deal of foreign cash into the country and trade volume of India started increasing (Ayyub,2012).
Figure 1: Top 10 Imports and Exports of India -China
Currency: US Dollar
Source: Trade Map, International Trade Centre, www.intracen.org/marketanalysis
It has been tested through empirical observation that bilateral trade has given a bonus to each of the nations and still there’s tons of potential in both the countries to extend their bilateral trade. this can be as a result of there are several agri and milk food products that either China at the moment imports from different countries or the demand that can increase as real per capita incomes and buying power of the Chinese individuals will increase or they appear for a lot of selection and higher quality consumption. In sectors like software, another time Indians learn Chinese and in pharmaceuticals, etc. wherever India had a competitive edge, the potential for a rise in exports from India is massive. There are few commodities that are made in India simply to be exported to China and there are some products in China also that are made to be sold in India only. so that they have specific demand and provide relation for every alternative. If a detailed study is done on an outsized scale, they will notice a couple of more products of focused demand (Ayyub,2012).
Figure 2 : China Exports to India (in USD) Source : UN Comtrade
Figure 3 : China Imports from India (in USD) Source : UN Comtrade
The most vital observation made here is that the trade between India and China is not of the nature that it is increasing as a result of the world trade is increasing; instead, there are some commodities that are being traded by India and China for each other only as a result of their demand in each other’s country. And therefore, the volume of trade of these commodities is increasing as a result of the demand for them is increasing in the other country, not due to the rise in the world trade volume. If those commodities don’t seem to be traded with one another, they’re going to realize that it is difficult to sell it anywhere else in the international market. (Ayyub,2012).
Figure 4: Trade Deficit between India and China, Source: Ministry of Commerce, India.
Data from Indian Ministry of Commerce shows that China has a share about 39% of India’s trade deficit in 2017-18. India’s total trade with China accounts to $89.6 billion in 2017-18, with Chinese export close to $76.27 billion. China has an ever-rising trade surplus scenario with most of the countries, including India.
In the current scenario, Chinese traders find the Indian market more open and liberal, and hence their products are flooding into the Indian market. Conversely, Indian traders are facing challenges to get into the Chinese market.
A. Research Design
In this thesis qualitative methods are used as the goal of this thesis is to understand the trade deficit from the Indian perspective and to support the strategies to balance the trade. Generally, this method is used for understanding views and perceptions. It offers an image to different problems and helps in developing concepts for potential quantitative research. The qualitative approach helps to discover new thoughts and individual views which helps to look deeper into the problems. In this method various kinds of unstructured or semi-structured formats are used for data collection such as group discussions, individual interviews and questionnaires.
Interviewing is a standard way of collecting data in qualitative research to direct the participant in responding to a specific research question. A semi-structured interview was employed for this research which enabled me to get dependable, comparable data and to adjust to every participant under the assistance of thesis supervisor. Another advantage of a semi-structured interview is that it enables an engagement between the interviewer and participants so that informants can feel free to express their views (Cohen and Crabtree, 2006).
C. Sampling Approach
Despite the selection bias and high level of sampling error, convenience sampling simplifies sampling process, saves time and budget (Saunders, Lewis and Thornhill, 2012), and it’s proved to be more suitable for this research compared with other sampling methods. Moreover, snowball sampling method will be additionally used toward the end of the interview by asking participants as to whether they could give the details of other individuals that they know who could share their experience and give proposals.
D. Data Collection
The qualitative interview data was generated with ten Indian participants who are professionals working as Manager level employees, Businessmen and Trade Experts.
Each interview lasted about 15 to 20 minutes, where the participants were given a brief summary of the research objective and interviewed based on a questionnaire which comprised of nine questions mentioned below
S. No Questions
As China gains an increasing range of influence in the world economy, many Indians, including high-ranking officials, see China as a potential rival or even a threat to India. What is your view on this?
The trade deficit between India and China has nearly tripled to $63 billion in 2017-18 from $23 billion during 2008-09. What are the main factors you consider which are responsible for this large-scale trade eficiency between India and China?
What steps and strategies can India take up to curb this trade imbalance?
What role does building up mutual trust and solving border issues (Peace Prospects) play an important role in politics and economics?
What effect will an FTA (Free Trade Agreement) and/or a PTA (Preferential Trade Agreement) have on the situation?
What effect would a tariff increase on Chinese products have on the situation?
How can India utilise its ties with ASEAN countries to improve its edge over its competitors ?
What effect would the Sino-US Trade war have on Sino-Indo trade in the long run?
Many countries that are negotiating the terms of the RCEP (Regional Comprehensive Economic Partnership) want India to open its market for 92% of traded goods, while India is only ready to offer market access for up to a maximum of 85% of items. How will this affect the bilateral relations?
The interviews were conducted in two ways: Face to Face and telephonic interviews according to the convenience of the participants
E. Data Analysis
Thematic analysis was employed to analyse the information collected from interviews. All the information were coded based on transcripts. A qualitative data analysis software system – MAXQDA 2018 was also used in support to organize and manage the data and facilitate data analysis process.
IV. Presentation of Results
The tables below show the summary of comments of the respondents during a qualitative interview regarding the strategies India can employ to balance the trade imbalance with China.
A. China as a rival
India has given shelter to Dalai Lama much to the worry of China.
China has been helping Pakistan by supplying arms and other defence material much to the apprehension of India.
South China Sea dispute.
China claims that Arunachal Pradesh is its territory and thus the tension arises.
India and China failed to resolve their border dispute.
Beijing openly blocked India’s move to add Mansoor Azhar ,leader of the Pakistan based terror group and a mastermind of attacks on India, to the UN’s proscribed terrorist list.
China’s ‘VETO’ of India’s wish to join the Nuclear Suppliers Group( NSG).
Historical reason : India and China had one major war in 1961 and one minor one in 1967.
B. Factors responsible for Trade Imbalance
Increase in global prices of commodities, and rupee depreciation has raised the import cost.
India can do nothing about their import, as the production of some items is far less than the quantity required.
One major class of imports from China is high-tech machinery and equipment, which create productive capacity in India, and are highly demanded.
China restricts exports from India into its market and prompts use of domestically produced inputs.
China’s undervalued exchange rate, making its exports cheaper and imports costlier.
Violation of China’s commitment to WTO.
China implements non-tariff trade barriers to control access to its local market.
Short-term disruptions created by the implementation of GST and demonetization.
India’s weak manufacturing sector, which arises from restrictive labor, land and tax laws, infrastructure and inadequate power supplies.
C. Strategies to overcome the trade imbalance
Keep business houses and politics separate from each other for the stable business environment.
Create SEZs (Special Economic Zones) sector-wise in different parts of the country.
Incentivize and give sops to electronics and Integrated Circuit fabricating companies and encourage them to invest in India.
To have political trade understanding with China and shift focus from raw materials to value- added products.
India should pressure on China to open up the IT and Pharmaceutical sectors as there is huge scope for India’s pharmaceuticals products in China.
To increase the export of Indian goods, there should be greater emphasis on investments and trade in services and knowledge-based sectors.
Connectivity and infrastructure development are important to transform India into a manufacturing hub. Transport linkages are areas that require focused attention.
Indian exporters should be encouraged to participate in trade fairs in China, to showcase Indian products.
Should focus and give importance to “Make in India” program.
India should build a strong manufacturing base and promote the export of value-added products and services.
D. Role of developing peace between the two countries
Maintaining peace with China at the borders is very essential to have smooth bilateral ties.
Strengthening People to People contact can bring the two nations closer.
It can lead to everlasting friendship, mutual co-operation and development.
Exchange of culture through festivals, Movies etc., can strengthen mutual trust.
To hold defense talks and expand military ties which eventually leads to maintain border peace.
E. Free Trade Agreement (FTA)
FTA can help to remove trade barriers and facilitate trade between the two countries.
Along with FTA, India and China should work on the friendly educational exchange.
FTA encourages business productivity and innovation.
FTA improves the technology transfer between India and China.
FTA allows the Chinese firms to access local Indian businesses and train, improve their expertise in the related field.
FTA ultimately reduces the import tariff in both countries.
F. Tariff increment on Chinese Products
Antidumping measures are employed to implement fair trade and provide a level-playing field to the local industry and are not a measure to restrict imports or cause an unjustified increase in cost.
Banning Chinese product might be a solution but not an effective one in the long run.
Instead of banning or imposing duties, it is advisable to look for an alternative market.
Anti-dumping measures have become completely ineffective for example in the case of Steel.
G. India – ASEAN ties to counter China
Many Southeast Asian countries which have territorial disputes with China are looking forward to India’s engagement in the region.
ASEAN’s importance for India can be best seen in the context of the rapid rise of China in Southeast Asia and beyond.
This platform can be a unique opportunity for India to pitch itself as a balancing force against China over the issues.
India should actively engage with ASEAN nations on major projects that will connect them with Northeast Asia.
India should focus on increasing the maritime connectivity with ASEAN countries.
India should focus on developing naval strength in partnership with ASEAN members to avoid backlash from China regarding South China Sea disputes.
H. China-US Trade war effect on China-India trade
India can potentially fill the needs of China as well as other countries and thereby expanding its exports.
India also could find some changing dynamics in its economy and government must sketch a strategy to double the exports.
I. Regional Comprehensive Economic Partnership – India
India must look at RCEP from a much broader and long-term perspective.
India needs to be extra careful as it would mean opening up the market to China.
India should use this trade deficit as a bargaining opportunity to maximise its access for exports to China’s markets.
For India, the Regional Comprehensive Economic Partnership is an opportunity to achieve its goal of associating with the East Asian economies and this facilitates access to markets from Japan to Australia.
V. Discussion of findings
A. China as a Rival
The comments from the respondents show that still there is still a view of China as a threat to India. The land disputes between India and China are evolving day by day, but they fail to resolve for ages. Apart from Historical reasons, even the present scenario justifies this. China has been using Pakistan against India to showcase its power and domination. China though claims its friendliness with India, they continuously create hurdles for India on the World platforms by not allowing India into Nuclear Suppliers Group and also influencing neighbour countries.
Figure 5: Military Standoff between India and China in 2017 at Doklam
Source : DNA India
This rivalry has a great impact on the bilateral trade relations and a reason for mistrust between the two countries.
B. Reasons for Trade Imbalance
India’s unsteady manufacturing sector, which arises from restrictive labour, land and tax laws, infrastructure and inadequate power supplies lead to the production of some items far less than the quantity required and this has made the import has been mandatory.
China seemed a better option for the Indian prices because of the low cost and the major classes of imports from China are high-end machinery equipment ,electronics and organic chemicals which create productive capacity in India, and are highly demanded.
China undervalues its exchange rate, making its exports cheaper and imports costlier ,adding to this , Indian rupee depreciation, implementation of GST(Goods and Service Tax) and demonetization have added fuel to the fire.
Violating WTO rules, China imposes non-tariff barriers and restricts exports from India into its market.
Figure 6: Key Non-Tariff barriers imposed by China
Source : RIS, Export Councils, Compiled by The Financial Times
C. Specific strategies to balance trade
The results show that politics must not interfere with the matters of trade and business and the government must support and take measures to curb this imbalance. The governments initiative “Make in India”, must be taken seriously and build a strong manufacturing base and promote the export of value-added products and services rather than focussing only on raw material.
The government must give support to IC, Electronics and Heavy machinery fabricating companies and encourage them to invest and make in India and create Special Economic Zones for these sectors as these class of items have a major share in imports from China.
The respondents also urged for the improvement transport linkages such as Ports, road and railways to have more access to neighbouring countries. India should have talks with China at the diplomatic level to open up the IT and Pharmaceutical sectors as there is huge scope for India’s pharmaceuticals products in China.
Accounting for 10 % of the world pharmaceutical business in terms of volume, India has become the “pharmacy of the globe.” Even in China, there are frequent cases of smuggling and selling Indian-made medication, and therefore the huge underground market for Indian medication could be a sign of the large demand for cost-effective treatments for cancer and other diseases in China.
Figure 7: Number of FDA approved Pharma manufacturing plants by country
Source: Pharma Boardroom
D. Achieving goal through Peace
The participants agreed that the role of peace between the two countries can be a stepping stone for the balance of trade as it leads to everlasting bond, trust and mutual co-operation and development.
Figure 8: India-China defense leaders during joint military exercise in 2015.
Source: Indian Defense News
This can be achieved in the first phase by having defence talks between the two countries to maintain border peace and cultural exchange through student exchange programs.
E. Free Trade Agreement
FTA has been an important topic during the interview as a majority of the respondents have agreed on the positive outcome of the agreement.
Figure 9: India-China Commerce Ministers on talks to reset trade ties in 2017
Source : The Hindu
FTA helps to remove trade barriers and facilitate trade between the two countries and encourages business productivity ,innovation and technology transfer
FTA allows the Chinese business firms to access local Indian businesses and train, improve their expertise in the related field and therefore can improve the overall standards of the products.
F. Boycotting Chinese Products
The participants mentioned that antidumping measures are employed to implement fair trade and provide a level-playing field to the local industry and are not a measure to restrict imports or cause an unjustified increase in cost.
So, if Indians were to boycott Chinese products as some ultra-nationalists have been suggesting which was discussed in the literature review it will not make much difference to the world’s second largest economy, but it will hurt India. China’s exports to India account for about 2 per cent of its total exports. So even if Indians boycott all the goods imported from China, it will not make an impact on China.
Figure 10: Few Indians campaigning the “Boycott of Chinese Products” in 2017
Source : India Times News
India’s pharma sector has a dependence on Chinese imports such as organic chemicals used in medicine manufacturing. Anti-dumping measures have become completely ineffective for example in the case of Steel imports. And also Chinese companies operating in India employ huge numbers and would be laid off in a trade war.
Instead of banning or imposing heavy duties or boycotting, it is advisable to look for an alternative and affordable market.
G. India – ASEAN ties
The participants showed favour towards the “Look East Policy” as discussed in the literature review which now has been renamed by PM Modi as “Act East” policy to improves its security and economic ties.
ASEAN’s importance for India can be best seen in the context of the rapid rise of China in Asia and this platform can be a unique opportunity for India to pitch itself as a balancing force to China over the issues of trade and border conflict.
Figure 11: India-ASEAN Trade
Source: Indian Finance Ministry, Compiled by Business Inquirer
The comments show that India should focus not only trade and also on increasing the maritime connectivity and developing naval strength in partnership with ASEAN members to stand as an eligible competitor against China.
H. US-China Trade War : Impact on India
The participants agreed that there will be some changing dynamics in India’s economy and government carefully involve in planning a strategy to utilise the best of it.
It was analysed that a minimum of one hundred products where India can replace US exports to China by making use of Sino-US trade war.
Fresh grapes, Flue-cured tobacco, Cotton linens ,Lubricants and some chemicals are a number of lines where the US exports to China and India too has been exporting these products to China. India can potentially fill the needs of China as well as other countries which are affected by US sanctions and thereby expanding its exports and much more this can help to build up mutual trust between China and India.
Figure 12: India’s Trade opportunity amidst the US-China Trade war.
Source: DGCIS, Government Analysis, Compiled by The Economic Times
Oranges, Almonds, Walnuts and Corn are some products that India exports to the rest of the globe except China, and therefore the US exports to the country are in above $10 million. India, at the moment, doesn’t have access to trade these items in the Chinese market. This is the right time for India to negotiate with China and gain access to trade these products.
I. India and the RCEP
The participants have suggested that India must look at RCEP from a much broader and long-term perspective. During the coming RCEP negotiations, India should appeal for the institution of a mechanism for settling access-related problems and a dispute settlement framework.
India must remain within the RCEP, a group of sixteen nations negotiating a trade agreement. Indian industry is aware of the potential adverse impact of preferential Chinese imports. But this is the only chance of securing a rules-based framework with China and should use this trade deficit as a bargaining opportunity to maximise its access for exports to China’s markets.
For India, the Regional Comprehensive Economic Partnership is an opportunity to achieve its goal of associating with the East Asian economies and also access to markets from Japan to Australia.
Figure 13: Members of Regional Comprehensive Economic Partnership (RCEP)
China is presently the world’s most populous nation, with India poised to overtake it by 2050 according to most projections and these two nations house over a fifth of humanity and represent two of the largest markets and most rapidly growing economies on the planet (Shirish Jain and Yan Shufen ,2011).If the trade deficit is temporary, there is no cause for concern, and the trade deficit is not a sign of a weak or strong economy, however, if a trade deficit is large and persists, such trade deficits may indicate a fundamental imbalance in the country’s accounting balance (Myeong Hwan Kim,2014).
China is big and powerful to be ignored by the regional countries, the regional Asian countries are now seeking to expand their strategic alliance by reaching out to other regional powers. Neither India nor the regional countries in East Asia have the desire to define their relationship against China. But they are certainly interested in improving their ties with other countries to gain benefits from China (Harsh V. Pant, 2013).
Chinese imports into India are not going to come done since both Indian consumers and producers benefit from such imports. If a bilateral trade has to balance, India’s exports to China must also rise along with the rise in Chinese imports (Amitendu Palit and Shounkie Nawani,2009).
To balance the trade deficit it is required that Indian exports should obtain more access to the Chinese market. Relative competitiveness of Indian products that are exported is an important factor of such access.India’s distinct competitiveness in the Chinese market on comparison with major ASEAN countries is in only select products and however, this competitiveness in these sectors should not lead to the overconfident conclusion that India is more competitive than ASEAN countries across labour-intensive and resource sectors (Amitendu Palit and Shounkie Nawani,2009).
India can gain a noticeable advantage in pursuing a bilateral trade agreement with China, such a regulation will not only improve bilateral trade but is also likely to achieve in a balanced manner(Amitendu Palit and Shounkie Nawani,2009).
India-China rivalry has a great impact on the bilateral trade relations and a reason for mistrust between the two countries. The Indian Government must take measures to reset the bitter-ties with the participation of diplomatic, military and economic policymakers so it can be a stepping stone to restore bond, trust and induce mutual co-operation and development. This can be achieved through frequent diplomatic and joint military exercises, cultural exchange and lifting up the restrictions on tourism and educational exchange.
Imposing a ban on Chinese goods is not possible due to WTO laws and for the sake of argument if it is assumed that if India will stop trading with China, then a question arises from where India will start sourcing its huge requirements. India exports raw materials to China which generates relatively low revenue while India imports heavy machinery equipment, electronic components etc., from China and this is the fundamental cause for the trade imbalance.
Infrastructure equipment, for example, which are used in power generation are imported from China will cost more if bought from US or EU. Thus, if we stop importing from China then the cost of power generation will increase. Similarly, the IT and Tele-Communication industry is dependent on hardware equipment imported from China. Therefore, showing patriotism in the name of banning Chinese goods does not have any impact and moreover, can damage the relation with China.
India’s unsteady manufacturing sector, which arises from restrictive labour, land and tax laws, infrastructure and inadequate power supplies lead to the production of some items far less than the quantity required and this has made the import has been mandatory. Chinese traders find the Indian market more open and liberal, and hence their goods are flooding in the local market. On the other hand, Indian traders are facing challenges to access the Chinese market as China imposes non-tariff barriers and restricts exports from India into its market. China undervalues its exchange rate, making its exports cheaper and imports costlier ,adding to this, Indian rupee fall, implementation of GST(Goods and Service Tax) and demonetization have added fuel to the fire.
At present, Chinese companies, which are offering advantages in terms of cost, are preferred over local manufacturers in India. Simple estimations on the trade show that China is winning the battle of trade not just with India but also with the United States. The trade battle between China and America means Chinese exporters will now target the Indian local market to balance for any dip in export to America.
The governments initiative “Make in India”, must be taken seriously and build a strong manufacturing base and promote the export of value-added products and services rather than focussing only on raw material provide assistance and support to Integrated Circuit(IC), Electrical and Heavy machinery fabricating companies and encourage them to invest and make in India and create Special Economic Zones for these sectors as these class of items have a major share in imports from China.
Accounting for 10 % of the world pharmaceutical business in volume, Republic of India has become the pharmacy of the world. Indian pharma industry has the potential to compete with the Chinese producers. However, prevailing strict regulatory and time taking approval process in China complicates the market penetration. India should have talks with China at the diplomatic level to open up the IT and Pharmaceutical sectors as there is huge scope for India’s pharmaceuticals products in China.
India should plan to potentially fill the needs of China as well as other countries which are affected by US-China Trade war and thereby expanding its exports and moreover this can help to build up mutual trust between China and India. There are few lines of products in which India has no access to the Chinese market but exports to the rest of the world. India must negotiate with China to gain access to these markets. Data from Directorate General of Commercial Intelligence and Statistics,India,2018 shows that Corn is of special interest as India exported nearly $143.6 million worth of Corn to the world in 2017-18 and China has imported $600 million worth of this commodity during this period.
There are many trade barriers between China and India and a free trade agreement between them can help remove trade obstacles and facilitate more commerce between the two countries and encourages business productivity ,innovation and technology transfer allows the Chinese firms to access local Indian businesses and enhance their expertise in the related field and therefore can improve the overall standards of the products.
Economic Co-operation was the factor which was responsible for Indian -ASEAN ties. At the time around 1990-1991, China was not as powerful and influential as today. But the ASEAN part did anticipate China’s rise early on and since then China was also opening up its market to the world. There was also a realisation among major ASEAN countries that India could serve as an alternative to a China. This ia an opportunity for India to pitch itself as an alternative force to China over the issues of trade and border conflict. India must stay with the Regional Comprehensive Economic Partnership (RCEP), which comprises a group of six nations along with ASEAN countries negotiating a trade agreement. Indian industry is aware of the impact of Chinese imports. Therefore, this is the only chance of securing a strict regulation based agreement with China and use this trade deficit as a bargaining opportunity to maximise its access for exports to China’s markets. Therefore, India must maintain and develop its economic relations and also constitute a security architecture for the region with ASEAN partnership to stand as an eligible competitor against China.
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E-mail request for interview an appointment
I am Krishna Prasad TALLA, pursuing Masters in International Management from Audencia Business School, France, majoring in Strategy and Management. As part of my master’s program, I am conducting a research to find out the strategies to improve the trade imbalance between China and India.
A brief information on my research:
China and India have had a regularly turbulent relationship at the state level, key and diplomatic relations between the two are laden with difficulties, pressures and misgivings that numerous eyewitnesses accept are bound to proceed with the not so distant (Jain & Shufen, 2011).China is currently India’s biggest trading accomplice while India is likewise one of China’s major trade partner, this ascent in trade mirrors an upgraded monetary commitment between the two nations and an eminent part of the developing exchange, notwithstanding, is its expanding irregularity (Palit and Nawani, 2009).
Understanding the measurements of the clear irregularity or disparity amongst monetary and vital relations in the India-China relationship is necessary (Ollapally, 2014).Raghuramapatruni (2013) states that it is inevitable that the respective exchange between the two countries will be among the most imperative monetary connections on the globe.
Therefore, I request you to give your valuable time to discuss this topic and to support my research.
Krishna Prasad TALLA
MSc. In International Management (Pursuing), B. Tech
Audencia Business School, France.