Trade with neighbours: the India-China deficit and India-Pakistan trade

Detail

1. Key terms

• Exports: goods India sells to another country. Imports: goods India buys from another country.
• Trade balance = Exports − Imports.
• If the result is positive, India has a trade surplus (it sells more than it buys).

• If the result is negative, India has a trade deficit (it buys more than it sells).

• Bilateral trade deficit: the deficit with one partner country, such as China. It is different from India's overall deficit with the whole world.

• Merchandise trade: trade in physical goods only. It does not include services such as IT.
• CAGR (compound annual growth rate): the average growth per year, counting growth on top of earlier growth (compounding).
• Formula: CAGR = (End value ÷ Start value)^(1/n) − 1, where n = number of years.
• Worked example (India's exports to China, 2004-05 to 2024-25, n = 20):
  • 1,20,617 ÷ 25,232 ≈ 4.78, so exports grew about 4.8 times.
  • 4.78^(1/20) ≈ 1.081
  • 1.081 − 1 = 0.081, so the CAGR is 8.1%.
• A negative CAGR means the value shrank each year on average. Imports from Pakistan: (4 ÷ 427)^(1/20) − 1 ≈ −20.8%.

2. NCERT's trade table (Rs crore)

Partner	Exports 2004-05	Exports 2024-25	Export CAGR (%)	Imports 2004-05	Imports 2024-25	Import CAGR (%)
Pakistan	2,341	4,720	3.6	427	4	−20.8
China	25,232	1,20,617	8.1	31,892	9,59,666	18.5

• Main point: imports from China grew more than twice as fast as exports to China (18.5% against 8.1% a year). So the gap kept getting wider every year.
• Pakistan: exports kept growing slowly, but imports almost stopped.

3. Worked exercise: exports as a % of imports

• Formula: Export-import ratio = (Exports ÷ Imports) × 100. Below 100% means a deficit. Above 100% means a surplus.

Partner	2004-05	2024-25
China	25,232 ÷ 31,892 ≈ 79%	1,20,617 ÷ 9,59,666 ≈ 13%
Pakistan	2,341 ÷ 427 ≈ 548% (surplus)	4,720 ÷ 4: a very large surplus, because imports have almost stopped

• How to read this:
• In 2004-05, India's exports paid for about 4/5 of what it bought from China.

• In 2024-25, they paid for only about 1/8.

• Deficit with China (imports − exports):

• 2004-05: 31,892 − 25,232 = about Rs 6,660 crore.
• 2024-25: 9,59,666 − 1,20,617 = about Rs 8,39,049 crore (≈ Rs 8.39 lakh crore), which is about US$99 bn (NCERT figure; verify current).

• In 20 years, the deficit grew about 126 times.

• Surplus with Pakistan (2024-25): 4,720 − 4 = Rs 4,716 crore.

• The national picture:
• India's total merchandise imports were US$720.24 bn in FY 2024-25, up from US$678.21 bn in FY 2023-24 [2].
• India's merchandise trade deficit with the whole world was US$282.83 bn in FY 2024-25, up from US$241.14 bn [2].

• So the China deficit (≈ US$99 bn) is roughly one-third of India's total goods deficit.

• The trend continues: among India's top import sources, imports from China grew 11.25% in April-September 2025 compared with April-September 2024 [3].

4. What India imports from China

• Electronics and components: mobile phone parts, chips, printed circuit boards.
• Machinery: capital goods for factories and power plants.
• APIs (active pharmaceutical ingredients): the chemical raw material that goes into medicines. India is a big maker of generic medicines, but it depends heavily on Chinese APIs.
• Solar modules and cells, and lithium-ion batteries (used in electric vehicles and energy storage).
• Chemicals.
• Note: most of these are intermediate goods (inputs that go into making other products), not finished consumer goods.

5. Why the China gap has widened

• Cost: China makes goods at a huge scale, so each unit costs less. Its goods are cheap.
• Structure (input dependence):
• Indian factories need Chinese parts and inputs.
• So when India's exports to the world grow, its imports from China also grow.

• Many "Indian" exports therefore carry Chinese content (Chinese parts inside them).

• Weak exports:

• India sells China mostly raw materials and ores (iron ore, cotton and similar goods). These are low-value goods.
• China buys few Indian manufactured goods.
• Result: India sells low-value goods to China and buys high-value goods from it.

6. India's responses to "dumping" and input dependence

• Dumping: selling goods abroad below the price at home, or below the cost of making them. NCERT's examples are toys, electronics and batteries.

• Why it hurts: cheap imports undercut Indian firms. Local firms lose sales or shut down. Later, the exporter can raise prices.

• Anti-dumping duty:

• This is an extra customs duty that brings the dumped price back up to a fair level.
• It is allowed under WTO rules if dumping causes injury to the home industry.

• India has put these duties on many Chinese products.

• BIS Quality Control Orders (QCOs):

• The Bureau of Indian Standards (BIS) sets compulsory standards for certain products (for example, toys).
• Goods that fail these standards cannot be sold in India.

• This blocks cheap, low-quality imports.

• Press Note 3 (2020):

• FDI (foreign direct investment, meaning foreigners buying a lasting stake in Indian firms) from countries sharing a land border with India needs government approval.
• China is the main target.

• Verify whether any easing has happened since.

• Opting out of RCEP (2019):

• RCEP (Regional Comprehensive Economic Partnership) is an Asia-Pacific free trade pact that includes China.

• India stayed out, partly because it feared a flood of Chinese imports.

• PLI schemes and "China+1":

• PLI (Production Linked Incentive) schemes give firms cash rewards for making more goods in India.
• "China+1" means global companies keep China but add a second country for production. India wants to be that second country.
• See globalisation-mnc and international-trade-policy.

7. India-Pakistan trade: the numbers

• Exports rose from Rs 2,341 crore to Rs 4,720 crore between 2004-05 and 2024-25 (CAGR 3.6%).
• Imports collapsed from Rs 427 crore to Rs 4 crore (CAGR −20.8%).

8. Why India-Pakistan trade collapsed: timeline

• MFN (most-favoured-nation) status: a WTO principle. A country must give a partner tariffs no worse than those it gives any other partner.
• February 2019 (after Pulwama):
• India withdrew MFN status from Pakistan.

• India put a 200% customs duty on Pakistani goods. This made them too costly to import.

• August 2019: Pakistan suspended bilateral trade after India changed Article 370 (Jammu and Kashmir's special status).

• April 2025 (after Pahalgam): Pakistan suspended all trade with India, including trade through third countries.
• 2 May 2025: India's full import ban
• The DGFT (Directorate General of Foreign Trade, Ministry of Commerce and Industry) issued Notification No. 06/2025-26 [4].
• It banned the import of all goods originating in or exported from Pakistan [4].
• The ban applies directly or through any other route [4].
• It added a new Para 2.20A to the Foreign Trade Policy (FTP) 2023. This bans the "direct or indirect import or transit" of such goods "until further orders", in the interest of national security and public policy [4].
• Before this, such goods paid the 200% customs duty [4].

• The Attari-Wagah route was also closed (NCERT; verify current).

• Enforcement:

• Under "Operation Deep Manifest", the DRI (Directorate of Revenue Intelligence) seized 39 containers (about 1,115 metric tonnes, worth about Rs 9 crore) of Pakistan-origin goods [5].
• These goods were being routed through third countries [5].

9. The regional picture: South Asia trades very little within itself

• SAFTA (South Asian Free Trade Area): a free trade agreement among the SAARC countries to cut tariffs within the region [6]. It is underused.
• Intra-regional trade is low:
• South Asia trades very little within itself. This trade is only about 5% of its total trade with the world, the lowest of any world region [7].

• Intra-regional imports are about 3% of the region's total imports. Intra-regional exports are about 6-7% of its total exports [7].

• Unused potential:

• Trade within South Asia is only one-third of its potential [7].

• It could triple, from US$23 bn to US$67 bn, if trade barriers were removed (World Bank, 2018) [7][8].

• Barriers to trade [7]:

• High tariffs: South Asia's average tariff is more than double the world average.
• More protection against neighbours: countries protect themselves more against imports from within the region than from the rest of the world.
• Sensitive lists: more than one-third of intra-regional trade is on sensitive lists. These are goods kept out of SAFTA's tariff cuts.

• Poor transport and paperwork: weak transport links, and unclear non-tariff measures (rules, permits and checks other than tariffs), make regional trade costly.

• Informal trade: India-Pakistan goods often move through third countries such as the UAE. This informal trade is larger than official trade. It raises costs, and the government earns no customs revenue on it.

10. NCERT debate: free trade with China and with Pakistan

• For free trade with China:
• Cheaper inputs lower costs for Indian firms and consumers.

• It gives access to the supply chains that feed India's own exports.

• Against free trade with China:

• Indian industry and MSMEs (micro, small and medium enterprises) get hollowed out, meaning they shut down or shrink into mere traders.

• India becomes strategically dependent on China for APIs, solar goods and electronics. This is a risk in a conflict or a supply shock.

• For free trade with Pakistan:

• The two countries are close, so transport is cheap (for example, the Wagah land route).

• It would support regional integration, and South Asia's trade could triple [8].

• The limit with Pakistan: security and politics override economics.

Prelims Hooks

• CAGR = (End ÷ Start)^(1/n) − 1. A negative CAGR means the value fell on average each year. Imports from Pakistan: −20.8% (2004-05 to 2024-25).
• Deficit with China: about Rs 6,660 crore (2004-05) grew to about Rs 8.39 lakh crore / ≈US$99 bn (2024-25). Exports covered about 79% of imports, then only about 13%.
• India's total merchandise trade deficit: US$282.83 bn in FY 2024-25. Merchandise imports were US$720.24 bn [2].
• Dumping = selling abroad below the home price or below cost. The remedy is an anti-dumping duty, which is WTO-compatible.
• Press Note 3 (2020): FDI from countries sharing a land border with India must go through the government approval route.
• India opted out of RCEP in 2019.
• MFN withdrawal + 200% duty on Pakistan came in February 2019. The full import ban came through DGFT Notification 06/2025-26 (2 May 2025), which inserted Para 2.20A into FTP 2023 [4].
• Trap: the May 2025 ban covers indirect imports and transit too, not just direct trade [4].
• Intra-South Asian trade: about 5% of the region's total trade, the lowest of any region. It could triple from US$23 bn to US$67 bn [7].
• SAFTA sensitive lists cover more than one-third of intra-regional trade [7].

Mains Points

• The China deficit is structural, not just about cost.
• India imports intermediate inputs (APIs, electronic parts, solar cells), so every rise in Indian exports pulls in more Chinese imports.
• Tariffs alone cannot fix this. India needs to build its own input base through PLI, QCOs and China+1 strategies.

• The trade-off: higher input costs in the short run, in exchange for strategic autonomy.

• Trade defence vs. competitiveness.

• Anti-dumping duties, QCOs, Press Note 3 and staying out of RCEP protect MSMEs.
• But they can raise costs for firms that use these goods, and weaken India's place in global value chains.

• A good answer weighs both sides (GS-III: industrial policy, effects of liberalisation).

• Security above economics with Pakistan.

• Trade fell step by step: MFN withdrawn and 200% duty (2019), then Pakistan's suspension (2019), then a total ban (May 2025) [4].
• This shows trade policy being used as a tool of national security.

• The cost: lost gains from proximity, and trade pushed through the UAE and other third countries (GS-II: India and its neighbours).

• South Asia is one of the least integrated regions in the world (about 5% intra-regional trade) [7].

• High tariffs, sensitive lists and poor logistics block SAFTA [7].
• Sub-regional groups (BBIN, BIMSTEC) that leave out Pakistan are a practical alternative for India's neighbourhood-first trade policy.