Other than the need to import gold and oil, the heart of our trade deficit stems from imbalanced trade with Asian economies. Of these, the biggest is our trade deficit with China, at over $83 bn a year. Our industrial machine can’t compete with the Chinese one as they sell to us 6× what we sell to them.
Is this all a result of free trade? Not quite. What really exists are state-backed national manufacturing systems that compete for the best industries in the world economy. And that is where China, along with other East Asian nations, has had tremendous success.
Lest we forget, China’s manufacturing behemoth is built on the back of state-owned enterprises, subsidies, export discipline and preferential support to its own champions. And vast investment in logistic and energy infrastructure, which makes running factories cheap and easy. Best examples of such support are EVs, where China accounts for over 80% of the global non-hybrid EV production capacity, and solar module manufacturing, where it also controls about 80% of global production capacity.
Beijing poured over $29 bn into EV firms between 2009 and 2022. For the solar module industry, Chinese state banks extended over $43 bn worth of subsidised loans to various manufacturers, and provided financial incentives for consumption of these solar panels. Growth of China’s steel and shipbuilding industries lends the same story of government support and import resistance till the creation of massive production capacities.
The reason why such additional support works is simple. Manufacturing has increasing returns to scale — the more volume of cars produced, the less each car costs to make (and the cheaper it can be priced). When industries are at their ‘infant’ stage, they need that added support to reach scale to become globally competitive. Today, China’s behemoth capacities across sectors imbue it with spectacularly low per-unit costs. And make it almost impossible for other industrial systems, especially India’s, to catch up in the context of ‘free trade’.Freer the trade between two asymmetrical developed manufacturing systems, the more advantage will accrue to the system more developed in terms of scale, tech and knowhow. It’s why India, with its very low wages, has glaring deficits with almost all advanced manufacturing nations, whether China, South Korea or Japan. The past decade has seen a spate of approaches to push Indian manufacturing. India needs to learn from failures and successes:FTA fetish: India needs to eliminate most of FTAs, as they have led to increased deficits. FTAs with Asean and South Korea come to mind. Both have countries — Vietnam and South Korea — where bureaucracies play an intricate role in promoting manufacturing, in a manner simply unworkable in India. The result has been consistent deficits. Since the onset of IndiaSouth Korea FTA in 2010, South Korea has sold twice as much to India as the other way around.
Instead, India needs to secure FTA with economies where our trade relationship is likely to go the other way – more exports than imports. So, an FTA with an economy like Britain is a better idea.
Nimble with tariffs: We need to start instituting high selective tariffs for industries that need additional push to reach a critical scale. These industries can vary from time to time — tariff on laptop imports to promote assembly and manufacturing, for instance. India is a large market, and most foreign brands will switch to Indian manufacturing when faced with price escalation that importing laptops entails.
PLI, please: PLI schemes should be continued. When implemented well, it has led to success, the smartphone assembly industry being a case in point. GoI needs to double down with best practices copied across all ministries and departments.
Xport marks the spot: Direct merchandise export incentives, earlier curbed under WTO pressure, need to be back — they target precisely where Indian manufacturing flounders the most. Exporting selects for quality and acts as a profound disciplinary force as manufacturers compete with the best globally.
India should not buckle much under WTO pressure. WTO has consistently been unwilling to rein in unfair trade practices from various East Asian countries. With Donald Trump threatening blanket tariffs, WTO is likely to be rendered even more impotent.
