The US-China Trade War Presents Opportunities for India, If It's Willing to Grasp Them Though opportunities for India are aplenty, it remains to be seen whether it would be able to capitalize on the growing distress between the two major economies of the world

By Ashutosh Datar

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It has been just over a year since the current phase of the trade war between the United States of America and China began. And while tariffs on imports worth tens of billions of dollars have been imposed by both countries, the trade war so far has not spiralled out of control or spread to other countries in any meaningful way.

This is good news; if the trade war were to spread out to other countries, it would almost certainly have adversely impacted India. This is because a large part of India's imports are inelastic – mainly the petroleum products – while a large part of India's exports, such as engineering goods or software services, are relatively less so.

When it comes to the US, India runs a large trade surplus. Last year (the year ended March 2018) saw India export goods worth $20 billion more than it imported from the USA. This is in addition to the large surplus that India has with the US on services trade. Thus, the total trade surplus with the US exceeds US$50 billion annually.

India's Place in the Conflict

That said, a low-intensity trade-war between the US and China, which is what we are currently witnessing, is an opportunity for India. To better understand this, we should understand the context of India's trade scenario.

India has historically run large current account deficits, which makes the country vulnerable to sharp swings in global capital flows or risk environment. A large part of this is due to the imbalance in trade with China. China is India's largest trading partner when it comes to merchandise trade, but the relationship is highly skewed in China's favor.

India is a large net importer of goods from China. In the year ended March 2018, India imported goods worth more than $75 billion from China while exporting goods worth just US$13 billion, resulting in a trade deficit of more than $60 billion. The trade deficit with China accounts for more than a third of India's merchandise deficit and accounted for over 100 percent of India's current account deficit last year.

Indian government though its policy has tried to correct this imbalance through a combination of programs such as "Make in India' and higher tariffs to nudge companies to set up manufacturing facilities in the country. But India's trade deficit in general, and especially with China, has continued to increase. This is because of the entrenched supply chain ecosystem in China, which makes it difficult for a single producer to want to shift manufacturing out of the country unless the cost differential becomes very large.

It is in this context that the trade war between the US and China provides India with an opportunity, as several global businesses are looking to move part of their manufacturing out of China to mitigate risk. India, with its large domestic market, ought to present an attractive destination for global businesses who need to set up a manufacturing base.

Take electronic goods, for instance: India is a large domestic market with imports of over $50 billion annually and growing in double digits. And while many OEMs now assemble mobile phones in India, it is mostly low-value-added work that gets done here.

How India can Grasp the Opportunity

But for India to emerge as a credible alternative to China for companies willing to shift manufacturing away from China, a few things needed:

First off, the government needs to double down on ease of doing business because, historically, Indian bureaucracy has stifled business activity.

Secondly, whichever political party comes to power after the elections later this year, the broad thrust of economic policies ought to continue unchanged. This will reinforce the notion that there isn't much of a political risk associated with investing in India and thus businesses can look past political cycles.

Thirdly, India needs to continue making progress on hard infrastructure such as ports, roads, and railways.

Lastly, the government needs to convince investors that the recent protectionist measures, be it increase in tariffs or restrictions on operations of ecommerce companies, are more an aberration rather than a trend.

Ashutosh Datar

India Economist/Strategist & Insight Provider on Smartkarma

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