Walking into a toy store in India, you may not only pick out a new favorite toy for your child, but you may also get a glimpse of how the country is striving to establish more favorable economic relations with its powerful neighbor China.
Six years ago, in order to promote local manufacturing and prevent substandard toys from entering the market, India increased the tariff on imported toys from 20% to 60%, and eventually to 70%.
Retailers strongly objected at the time, claiming that local Indian companies simply could not compete with foreign-made products. However, a combination of higher tariffs and enforcement of quality control standards ultimately worked.
India's toy imports fell by two-thirds from nearly US$300 million (£227 million) in 2020 to US$100 million this year; exports during the same period rose from about US$129 million to US$200 million. More importantly, India has significantly reduced its dependence on China. China once accounted for 70% of India's local toy market.
The toy industry is a rare success story as India attempts to rebalance its increasingly imbalanced trade relationship with its larger neighbor. In addition, most of India's efforts have not yielded results, and some experts have described the current trade relationship between the two countries as one of the most asymmetrical relationships in the world.
After the conflict in the Galwan Valley in 2020, the diplomatic relations between the two countries reached a low point. New Delhi announced a series of anti-dumping tariff measures and banned Chinese applications such as TikTok. However, India's trade deficit with China continued to expand, rising sharply from US$44 billion in 2020 to a staggering US$112 billion this year.
Kevin Zongzhe Li, a researcher at the China Analysis Center at the Asia Society Policy Institute in Washington, told the BBC: "Even as the political, security and investment relations between the two countries have reached their lowest point, India's economic dependence on China continues to deepen."
What is even more worrying is that during this period, India's exports to China remained below pre-epidemic levels, but imports doubled.
Ajay Srivastava of the Delhi-based Global Trade Research Initiative said: "China currently supplies more than 30% of India's industrial imports, and India relies on China for more than 100 key products. And the imbalance is getting worse."
Srivastava said that if imports continue to grow at the current rate, the bilateral trade deficit may increase to US$134 billion, giving Beijing greater influence over Indian industry.
In September, during the BRICS summit in Delhi, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping pledged to address their "structural trade imbalances and supply chain issues" as relations between the two Asian giants further thawed.
But experts told the BBC that Chinese imports have penetrated so deeply into India's industrial economy that it will be a very difficult task for New Delhi to do this.
The main reason is that India is no longer dependent on China for final products for national consumption, but more and more materials used to produce industrial products.
Indeed, India has reduced its reliance on imports of manufactured goods such as smartphones and solar equipment, and now more than a quarter of the world's iPhones are produced in India.
"However, the production model is still mainly assembly and highly dependent on imported components, especially from China," Srivastava said.
The same is true for industrial machinery, battery raw materials, chemicals, solar cells and manufacturing equipment.
Data from the Observer Research Foundation, an Indian think tank, shows that motors and electronic products alone account for 36% of India’s imports, followed by machinery and mechanical equipment, accounting for 21.7%; organic chemicals and plastics also account for a considerable proportion.
"Once these supplies are disrupted, it's not just consumption that's affected, but production itself will be disrupted," said Soumya Bhowmik, a researcher at the Center for New Economic Diplomacy at the Observer Research Foundation.
He believes this reflects India's difficulty in replacing Chinese inputs with local production.
In addition to increasing reliance on China for production inputs and raw materials, several macroeconomic trends are also driving Chinese goods to India.
China has huge excess capacity in industries such as steel, solar panels and electric vehicles, but its slowing domestic economy cannot absorb all the output.
As a result, manufacturers are increasingly turning to overseas markets to sell their products at low prices. China's trade surplus is expected to exceed $1 trillion ($1 trillion) for the second consecutive year.
Srivastava said that a considerable amount of goods are flowing into India, partly because India is rapidly expanding manufacturing in many sectors of the economy, but also because of "tariffs and other restrictions imposed by Western markets."
On the other hand, the difficulty for Indian companies to enter the Chinese market remains a major challenge.
Li Zongzhe said: "Indian products face various tariff and non-tariff obstacles in China, making it difficult to expand the scale of exports."
"If the two countries continue to normalize relations but do not seriously promote the opening of their markets to each other, India may face a situation: political relations improve, but the level of economic dependence remains unchanged."
Srivastava said the solution to reducing avoidable imports in the long term while improving export performance is to strengthen manufacturing.
However, this will require industry-specific policies for individual industries and improvements in economic fundamentals, including access to affordable power and credit, more efficient logistics, and a stable regulatory regime, areas in which India currently falls short.
India has also recently relaxed foreign direct investment rules, potentially opening the door for Chinese companies looking to increase investment in India. But he added that these investments also require careful review.
"If the investment is only to expand the distribution network or use Chinese components to assemble products in India, it may increase imports and further deepen dependence. Therefore, priority should be given to technology transfer, increasing local value-added, producing components in India, and exporting from India during approval."
We used artificial intelligence to help translate this article, which is originally in English. Before publication, BBC reporters checked the translated content.
