Brief: India’s overall export to China over the last two months expands by 57% while imports contract by (-) 2%; China’s current capacity cut downs, lower inventories, identification of banking stress and resultant efficiencies has created a level playing field of sorts and is thus aiding Indian exports; Implementation of RCEP will decide the long term competitiveness of Indian exports

Impact: Positive

India’s overall export to China has expanded by 7.3% in FY17 (Apr-Feb) while on the other hand, import has contracted by (-) 2.3% during the same period. Overall, India’s exports have expanded by 2.3% and imports have contracted by (-) 3.6% in the given time-frame. Even though a decline in imports from China is much in line with the overall declines, expansion of exports is surprising. Moreover, exports to China in the last two months have expanded by 57%, whereas imports have contracted by just (-) 2%.

Since 53% of Indian imports from China comprise of electrical machinery and appliances (+7.2%), a consumption slowdown due to demonetization is understood to be a cause of import decline. Trebling of exports however is unforeseen as the Chinese are currently undertaking massive capacity cut downs. Indian export to its neighbor comprises mainly basic (now primary category) and intermediate (semi-finished) items and a rising demand for such items may symbolize recovery, which does not seem to be the case. SMERA believes that this anomaly may have been connected to rising Chinese dependence on cheaper Indian raw materials due to the obvious cost advantages despite the recent Rupee appreciation. In a bid to become more efficient, the industry may be looking for cheaper alternatives. Despite India’s vehement reservations against China led Regional Comprehensive Economic Partnership (RCEP), the neighbor does see an ease of doing business among regional partners in the near future. The tariffs structure, which is the primary bone of contention will decide upon the success of this partnership and continuation of India’s export performance.

Solid capacity expansions, efficiencies in certain Indian industrial sectors as well as the imposition of minimum support prices (MSP) is also seen as a reason for a fall in imports. Imports of steel and fertilizer that account for 9.5% have contracted by (-) 54% during the said period. Export of steel on the other hand has expanded by 106%. Similarly, while ores slag and ash have witnessed a record growth of 201.6%, export of electrical machinery and appliance has expanded by 20.7%. Resultantly, as of FY17 (April-Feb), India’s trade deficit with China declined to $46 billion from FY16’s $52.7 billion. We believe that the latest downgrades of China’s sovereign ratings will force additional capacity cut downs in critical sectors such as steel, cement and finished consumer items such as electronics – eventually bringing about a level playing field for Indian players. India’s negotiating stance on RCEP and One Belt, One Road (OBOR) schemes, will further decide the direction of this momentum.

Impact (Indian Players):

• Electronics (Positive)
• Ores & Other Basic Raw Materials (Positive)
• Steel (Positive)
• Cement based products (Positive)