Indian trade did well in 2022. Exports in 2022 grew by almost 10% and imports by 17%. India’s trade in manufactured goods is higher than prior to the pandemic. Growth in the Indian economy between now and 2027 is predicted to be in the order of 6-7% per year at least through to 2027, compared to 4-5% in China.
India vs China
India overtook China as the world’s most populous country in early 2023 and is now how to 1.4 billion people. China’s population is expected to decline – partly due to the long-term effects of its one child policy. Between 2020 and 2030 India’s working age population is predicted to increase by 114 million while China’s declines by about 40 million.
Of course, population does not equal economic output. At the beginning of the 1990s, both India and China were roughly on par in terms of size of the economy and income per capita. Since then, however, China has significantly outgrown India. Today the Chinese economy is almost six times the size of India’s and per-capita income (at purchasing power parity) is around two and a half times as high. Much of China’s growth until the mid 2000s was driven by exports of manufactured goods, but after that the domestic economy took over as the main engine of growth.
India is also often viewed as a service focused and China as an economy more focused on manufacturing. The Chinese share of manufacturing as a percentage of Gross Domestic Product (GDP) does in fact sit at about 27%, compared to 14% for India. However, both India and China are similar in that services account for about fifty percent of economic output.
In terms of the importance of trade for the overall economy, India and China are very similar. In both cases, merchandise trade accounts for about 30% of GDP, which is also roughly on par with the world average. The value of merchandise trade to GDP in China peaked at around 64% of GDP in 2006 and has been declining since then. In India, the merchandise trade share of GDP peaked in 2012 at about 40%. India does have a higher share of services trade as a percentage of economic output than China – 12% compared to 4%. That makes sense given the role of India as an outsourcing location for various services industries including software, research, among others.
Figures 1 and 2 provide a historical and forecast comparison of Indian and Chinese population, output, income per capita.
Investment
Strong levels of investment and openness are important for paving the way for future trade growth.
Total investment as a percentage of GDP is higher in China than in India – about 40-44% vs 30-34%. Both countries, however, record higher levels of investment than large developed economies such as the US, Japan, or Germany. The investment share of GDP has stayed consistent over the past decade.
Foreign direct investment as a percentage of GDP into India has remained steady while inflows into China have declined. Both countries now generate net inflows equivalent to about 1.5% – 2.0% of GDP. Incidentally, this is also similar to the level seen in the USA. In monetary terms this equates to about $40 – $44 billion per year into India about $300 – $330b into China.
While China has lost attractiveness as a destination for foreign investment, India’s current foreign direct investment policy allows up to 100% foreign ownership even in a number of sectors that have traditionally placed limitations on foreign investors. This includes air transport and logistics services.
We also note that the prevalence of large private corporations in India and large state owned as well as private corporations in China, both countries are a source of foreign direct investment in their own right. Currently, China has a larger share of net outflows relative to GDP than India. However, this is likely to change as many economies become more restrictive with regard to Chinese investment. Overseas investments by large Indian conglomerates like Reliance Industries, Tata, Aditya Birla, Adani and Jindal also benefit trade flows to and from India.
Indian Trade Performance and Outlook
After dropping in 2020, both Indian export and imports of manufactured goods and perishables recovered in 2021 and continued to grow strongly in 2022. Exports grew almost 10% and imports 17%. We note that both exports and imports saw a drop in volumes and value in the second half of 2022.
In our analysis of Indian trade flows we focused on products that have relevance for both airfreight and container shipping.
- Specifically, we have excluded mining, energy related and bulk agricultural products such as coal, petroleum products, grains, iron ore and steel, among others. These products account for virtually all of the weight and about 60% of the value of Indian trade.
- We have also excluded ultra high value products such as diamonds or precious metals. Diamonds and precious metals accounted for about 10% of the value of Indian trade in 2022,
- Lastly, we have omitted trade in aircraft and ships. These types of products tend to skew analysis of regular trade flows as they generate large high value transactions.
This leaves us with about $190b a year in exports and $170b in imports. While import and export flows are similar overall, the value per kg of imports is higher than for exports and there are strong imbalances on a market level. Trade is imbalanced on a country level with imports from Eastern Asia significantly higher than exports. Trade with Europe is more balanced. To other regions such as North America or the Gulf exports are greater than imports.
- Two thirds of the value of imports are from Eastern Asia, with China being the largest single source. Europe and the US are also important sources of imports.
- About half of export value is destined for the US and Europe, and remainder to a broad mix of countries in the Middle East, South Asia, North and Southeast Asia and Africa.
On the import side, the main commodity groups in terms of value are industrial equipment and parts, mobile phones and communication equipment, semiconductors and parts, computers and automotive traffic. On the export side, industrial equipment and parts, apparel and footwear, automotive products, pharmaceuticals, textile raw materials, jewellery and household goods make up two thirds of export value.
In a sign of increased potential for manufacturing exports import industrial equipment, parts and supplies have been performing well.
We expect exports in a number of sectors including industrial equipment and parts, automotive, pharmaceuticals and some high-tech sectors to do well. Apparel and footwear and household goods less so.
On the import side we expect industrial equipment and parts, semiconductors and equipment and automotive sectors to continue to show growth.
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