Opinion P Chidambaram writes: Between Scylla and Charybdis

U.S.      China  World

Exports           86.51 bn          14.25 bn          437.42 bn

Imports           45.3 bn            113.45 bn        720.24 bn

surplus/
deficit          + 41.21 bn       – 99.20 bn       – 282.82 bn

India, therefore, faces two diametrically opposite challenges when dealing with the two largest economies of the world.

With the United States, we have a surplus in the trade account. Our major exports to the U.S. are gems and jewellery, pharmaceuticals, engineering goods, electronic goods and some agricultural products. Except quality pharmaceuticals at competitive prices, other items are goods that the U.S. can do without or import from other countries. But each item of export is the source of livelihood for thousands of men and women in India. The surplus in the trade account is threatened by Mr Trump’s intention to impose tariffs. While there is a ‘pause’, and pharmaceuticals are temporarily exempt, the tariff sword hangs over India’s head. If tariffs are imposed, it will gravely affect exporters, jobs, the foreign exchange earnings and the current account balance. It is in India’s interest to negotiate with the U.S. and avoid stiff tariffs.

The U.S. will also not gain by halting Indian goods, and Mr Trump knows that. He will find a way to allow the imports, but will exact a price. He will insist on India buying more from the U.S. and ‘balancing’ trade. My guess is he will insist on India buying more military equipment and aircraft — both of which are high priced. India may import its other needs such as iron & steel, organic chemicals, plastics, mineral fuels, and oil & petroleum products from other countries of the world but may, prudently, choose American goods. The big question is how much more can India afford to spend on high-cost American military equipment and aircraft (and now nuclear reactors)? Mr Modi has tolerated American provocations and excesses without protest, and may be forced to conclude a deal with Mr Trump.

…And The Other Side

With China, India has the opposite problem. India has a huge and mounting deficit in the merchandise trade account: it is a humongous USD 100 billion dollars. Indian industry has become very China-dependent for electrical and electronic equipment, machinery, organic chemicals, plastics, and iron and steel because prices of Chinese goods are lower (sometimes amounting to ‘dumping’). India has few alternative sources at matching prices and delivery-time. Until India expands and upgrades its domestic manufacturing sector — the share is stuck at 13-14 per cent of GDP — India will remain China-dependent.

India’s exports to China are mainly consumer goods, mineral- and petroleum-based fuels, marine foods, cotton yarn and some agricultural products. Apparently, there are few value-added goods that India can export to China that China cannot produce domestically or source from other countries. India’s plight is the result of the Modi government’s neglect of the manufacturing sector. China has expressed its willingness to import more goods from India but whether India can take advantage of the offer is debatable.

The trade deficit with China exacerbates India’s current account deficit and is a ticking bomb. The surplus with the United States has, to an extent, compensated the deficit with China. If the trade surplus with the U.S. vanished thanks to Mr Trump’s tariffs and the trade deficit with China grew larger, it will worsen the situation for India.

Whither Quad?

There is a game-spoiler: QUAD, or the Quadrilateral Security Dialogue. The strategic priorities of the U.S., Japan and Australia are significantly different from the strategic priorities of India. The United States would like QUAD to become a bulwark against China’s expansionism. India would like to restrict QUAD to maritime safety, digital connectivity, emerging technologies, etc. and is wary of turning QUAD into an anti-China group. Moreover, China has warned the world that any country concluding a deal with the U.S. that is inimical to China’s interests will pay a price. India must maintain a balance between the United States (which is the major source of capital and technology) and China (which is the major source of intermediate and capital goods). Besides, China is a hostile neighbour occupying Indian territory. So far, India’s participation in QUAD has been calibrated and pragmatic but there is the danger of right-wing influencers (in India and the U.S.) pushing India into a confrontation with China.

There is another interesting factor: President Trump will be gone on January 20, 2029 but President Xi can stay in office as long as he likes and is in control. Mr Trump is brash and blunt, Mr Xi is subtle and crafty. Mr Trump’s misadventure has called out Mr Modi’s misguided protectionist policies. Mr Modi must beat a retreat. He will be well-advised to be more open, consultative, and avoid treating Opposition parties as enemies.