China's share in India's Imports: An analysis with focus on Intermediates and Capital Goods

India's trade dependence on China has been a subject of intense discussion, often focusing on the value of imports and the balance of trade that is heavily tilted against India. We imported around 101.7 Billion USD worth of goods from China during FY23-24 and exported just 16.7 Billion USD worth of goods to China. This makes China the largest trading partner, and raises some critical questions. 

The questions that come to mind are:

1.   Why do we import so much from China?

2.   What do we import from China? Can we avoid these imports? Are there items in our imports for which we are critically dependent on China?

3.   What can we do to decrease imports from China in the medium to long run? What measures are others taking? Would such measures impact us and how?

Before we attempt to answer these, we need to analyze what we import from China. Let's dive into it. I have used the Broad Economic Categories (BEC) classification as it gives more meaningful analysis of data for our purpose. I have added a footnote to explain the reasoning and methodology at the end. It also explains the meaning of hybrid categories such as Consumer/Intermediate. 

Based on BEC categories, the imports from China for the last four financial years including FY24 are as follows: 

Table on imports from China as per BEC classification

For easier visual comparison, here's the pyplot (reproduction code at my github repo here): 

Fig: Visual comparison of imports from China as per BEC classification

Quick Observations:

• Total imports from China constitute 15% of India’s total imports during FY23-24. The total imports of India stood at 675.44 billion USD.
• Intermediate and capital goods form the major share of imports from China into India.
• Consumer goods imports are falling, both in absolute terms and as a proportion of total imports.
• Capital goods imports are falling as a share of the total but are rising slightly in absolute terms.
• Imports of intermediate goods are on the rise, both in absolute terms and as a proportion of the total imports.

We are now reasonably placed to answer the first question: why do we import so much from China? We are not alone. Most other leading economies are critically dependent on China for a lot of imports. The table below shows the figures (CY2022) for leading Chinese trade partners, from China’s point of view.

Table: Chinese trade with partners. Source: Wikipedia

We are in good company here. The US, EU, UK, ASEAN and many others are sailing with us in terms of large imports from China and a steep trade deficit. However, if we notice the ratio of exports to imports, we are the worst sufferers when compared to any other trade partners of China, except the Dutch. The story remains the same even in the calendar year 2023. In short, we import so much from China, as does the rest of the world. Blame it on cheap exports from China, their productivity, their scale, state subsidies or whatever. We are not doing anything unique by importing so much from the Chinese - just that we don't have as cordial a relation otherwise and that's a matter of concern geopolitically. 

Now we move on to the second question: what do we import from China? Can we avoid these imports? Are there items of imports for which we are critically dependent on China? Let's start with the intermediate goods. 

The top intermediate goods, by value, that were imported into India during FY23-24 are: 

 

Table: Top intermediate goods imports into India

Intermediate goods are inputs for final goods and may therefore be critical for the manufacturing and exporting industries. For example the top imports we see under HS 851779 code are actually parts of mobile/smartphones that are used in making assembled mobile phones in India. While India climbs up the ladder of mobile phone manufacturing through the PLI scheme and other policy measures, these imports are critical for the industry for now. To give another example, HS294110(Penicillin) and 294190(Rifampicin etc.) are API/bulk drugs (antibiotics) which are further used by the industry to create dosages in the form of injections, capsules and so on which are also exported from India. These too are critical inputs. India is working on creating a stronger API/bulk drug manufacturing ecosystem through the PLI scheme and both the mentioned HS codes are covered under Serial number 1 and 10 of the approved list of bulk drugs under the scheme. 

Concern worthy in the list are photovoltaic solar cells under two different HS codes that constitute over 3.9 billion USD of imports. The imports of these were less than 1.5 billion USD during last financial year. This is a surge that needs to be analyzed. We shall discuss about this item later in the article. 

The intermediate goods shown in the stacked plot earlier also included hybrid categories. In the hybrid category of Intermediate/Consumer (goods that are usually intermediates, but may also be consumer goods at times), the following items are top imports during FY23-24: 

Table: Intermediate/Consumer category imports

Under the hybrid category of Intermediate/Capital, we have the following: 

Table: Intermediate/capital category imports

All these intermediates are important for one industry or another, and cannot be wished off till we develop domestic capabilities in these. There are not many alternatives to China in many of these items and this answers the second part of our question about avoiding these imports from China.

Now, there may be items on this list where China has total domination making it the critical supplier for India. These should be of our interest - and a starting point of analysis if we have to create an alternative to China. Among the main intermediates, the items that has over 80% imports from China are as follows: 

Table: China dominated imports of Intermediate goods

I have already covered the first two items you see in the critical imports list by value above, and explained how we are building resilience there. A significant number of other items in the list are already being acted upon by the government under one or the other support schemes for manufacturing. If we continue on this path, India should be able to bridge the gap in next few years. 

Moving over to the capital goods, which are the second biggest category of imports, the top imports by value are as follows: 

Table: capital goods category top imports from China

Most of the above are machinery and parts, and electrical applicances used in factories to produce goods. Some of the imports under hybrid category of capital goods (Capital/Intermediate and Capital/Consumer) are: 

The biggest imports under capital goods are the portable digital data processing machines weighing less than 10 kgs (laptops/notebooks). These fall under capital/consumer hybrid category depending on the use. India has taken initiative to address this import item and to build domestic manufacturing capacity in this important area. 

Among the capital goods category, some important ones that have high import dependence on China (>80% imports from China alone) are as follows: 

Table: Critical focus capital goods

Most of these items are imported in magnitude which shouldn't concern an economy of the size of India in the short run. 

This brings us to the Consumer goods, the smallest part that constitutes the imports from China into India.  The top import items in this category, by value, are as follows: 

Table: Top consumer goods category imports from China

The top two items are Smartphones and headphones/speakers. These are pure consumer electronics. Some others such as insecticides are important from public health point of view such as in pest control. Most items (sunglasses, washing machine parts, vacuum flasks, gym equipment) are of values that again may not concern a country of size of India in the short run. The sum of all such items add up to a small number, totaling under 5% of the imports from China into India. However, there are certain items that are disproportionately imported from China which we will see later below. 

Moving over to hybrids in this category (consumer/intermediate and consumer/capital goods), we can see the leading items of imports below: 

Under the consumer good hybrids, it may be noticed that most of the items in the table appear to have intermediate or capital good type use. For example, the computer monitors under the consumer/capital goods category are used by individuals at home as well as by the IT firms in their offices. 

Among these consumer goods, items of concern are those where China has a stranglehold in terms of volume (>80% share) and which are pure consumer goods. A list is given below: 

Table: Items under consumer goods category where china dominates

The above list is an indication of how far China has moved ahead in terms of becoming a manufacturing powerhouse at scale for consumer goods - most of these items reach a dump yard within few years of import - and there's no alternate source that can supply us these goods at similar scale and low cost.  This is a point to think - a generational effort was spent by Chinese to reach here and they used all the tricks, fair and foul.

Let's now attempt the first part of the third question - What can we do to decrease imports from China in the medium to long run? 

Let's have a quick look at those imports where we see a surge when compared against last financial year.

Table: Items whose imports have surged over the last year

Most of the surge is noticed in items that are intermediates or capital goods. This may be due to supply chains moving into India - and may be good for the economy. For example, liquid crystals, memories, amplifiers etc. are parts that go into electronic goods manufacturing, which are typically manufactured in a global value chain. Other items among above, while not value chain products, may be important for certain other industries to scale up through capital investments, or as intermediate inputs for making further export products. Seen in this sense, there's not much of a case to meddle into the surge, unless an industry complains about injury due to the surge or dumping by the Chinese at below-market price. 

However, among the list, the solar cell and modules are of concern. This item appeared in top list of intermediate products too and is surging. However, this item didn’t appear in the list of critical items in which China’s share is over 80%. Direct imports of these items from China stands around 60%. This is because Chinese firms are also  routing these items into India from partner FTA countries such as Vietnam, Malaysia and Singapore. The basic customs duties for imports through FTA partner countries is zero against 40% for direct imports from China. The fact that China manages to still send around 60% of our total imports of these items directly, without FTA, is a testament to the pricing advantage they enjoy in the international market. 

I have mentioned the domestic support steps being taken by the Government regarding some of the imports of intermediate and capital goods, especially through various manufacturing support schemes. In many of the consumer and intermediate goods, the government has introduced quality standards that should be met for imports to be allowed into the country. Quality standards ensure that India doesn’t become a dump yard for cheap substandard goods. India has also not given a free run to e-commerce exporters from China (e.g. Temu, Wish etc.) to dump goods in India the way they do it in US/EU. Many of these measures also go hand in hand with the production-linked incentive scheme of the government to boost domestic manufacturing - e.g. the special focus on toys manufacturing sector. While US has an entire list under Section 301 of their Tariff Act, dedicated to heckling Chinese imports coming into the US, India doesn't maintain such a blanket list approach against any country. The anti-dumping duties imposed by India against certain goods/countries are after completion of the investigations as outlined by the WTO rules. This area needs more focus to ensure timely tackling of surging imports that are transient in nature. 

This brings us to the second part of the last question - What measures are others taking against China? Would such measures impact us?

Chinese exports are bothering many countries, including US and EU who are taking measures in their own way in recent days. US President Biden has imposed new tariffs under Section 301 goods and EU has initiated anti-dumping investigation against China for Electric Vehicles. It is rumoured that EU is fast-tracking the investigations and might impose a duty of around 25% as early as July this year. China has decided to retaliate against both with its own investigations. This would be an interesting space to watch out. 

Chinese over-supply would be playing out throughout this year. The over-supply is a side effect of China trying to prop up the economy through manufacturing support while their real-estate sector struggles. As the domestic economy has limits on how much of excess goods it can absorb, exports and dumping the goods abroad becomes imperative for Chinese manufacturers. This has worked well for the Chinese in the past, but this time the world may not be ready to absorb the supply shock from China that hurts the domestic manufacturing of partner countries. However, in an interconnected world, taking unilateral tariff measures is like squeezing a balloon where a squeeze here appears as a bubble somewhere else. We need to analyze in this light if Biden tariffs lead to oversupply in our country and take pre-emptive measures if required. 

Chinese have suffered the highest number of legal trade remedy measures against them by the partner countries over the last decade. Rightly so, given their penchant to bend/buckle the rules of international trade. I have dealt it in detail here. These remedial measures are available whenever there's foul play detected. For now, the cause for concern is limited given that India has prepared well in recent years. 

Footnote

HS Vs BEC classification and methodology used for analysis: 

Trade data is reported using the Harmonized System (HS), a standardized numerical method of classifying traded products. At the 6-digit level, this classification system is harmonized globally, allowing for consistent reporting and comparison of international trade data. However, the HS6 classification does not provide detailed insights into the economic importance or criticality of imports for a specific economy.

To better understand the economic impact of imports, particularly their end use, it is more effective to use the Broad Economic Categories (BEC) classification. The BEC system categorizes goods based on their main economic function, such as intermediate goods, capital goods, and consumer goods or hybrids of these categories. This classification helps in assessing the role of imports in production processes, investment, and consumption. 

Luckily, there are correspondence tables available that map HS6 codes to BEC categories. These tables enable analysts to translate trade data from the HS system to the BEC system (with generous help from VLOOKUP in excel), thereby facilitating a more meaningful analysis of import data from an economic perspective. This approach allows for a clearer understanding of how different types of imports contribute to various sectors of the economy, such as manufacturing, infrastructure development, and consumer markets.

BEC methodology recognizes that some goods may serve multiple purposes, leading to hybrid categories. While primary classifications under BEC are clear, the hybrids are tricky. For example, Bananas if imported into the country can be counted as consumer good (if I eat them), or they may also be classified as intermediate goods (if I use them to make banana walnut cake in my baking factory), so they are classified as consumer/intermediate. Similarly, professional-grade kitchen appliances used in both commercial kitchens and households are classified as capital/consumer. Depending on which use weighs more, an item can be Consumer/Capital good (more used as capital goods but sometimes consumer too) or Capital/Consumer good (mostly consumer good, but can be capital good too) and so on. 

You can find the raw data used in this post at this link. 

The cleaned-up data with HS6 and BEC codes in MS excel format can be looked up at my github page here. 

(This blog was also published in slightly altered form as an article in Swarajya magazine at this link: https://swarajyamag.com/world/chinese-imports-into-india-analysing-strategic-measures-to-enhance-self-reliance)