US surpasses China to become India’s biggest trading partner

In the last couple of years, the trade equations for India had suddenly changed. From the US being India’s largest trading partner for some time, the mantle had shifted to China.

However, FY22 saw the tables turning and the US once again emerged as India’s largest trading partner, albeit by a small margin. But why is this issue of who is the largest trading partner so important for India? There are a couple of reasons.

The reason the Commerce Ministry and the government were uncomfortable with China becoming India’s biggest trading partner had to do with export import equations. India runs a huge trade deficit with China while it runs a big trade surplus with the US.

China trade expansion was never going to be favourable. Secondly, with the constant tensions at the border the government was not comfortable having China as the biggest trading partner.

Let us look at some of the numbers for trade with India. For FY22, the Commerce Ministry reported that total Indo-US trade stood at $119.42 billion. That is 48.3% growth in Indo-US trade over FY21, showing recovery from the COVID lows as well as strengthening trade relations with the US.

For FY22, India’s exports to the US stood at $76.11 billion while imports were $43.31 billion, resulting in a trade surplus of $32.80 billion with the US.
 

However, the trade situation with China was diametrically opposite in FY22. Total Indo-China trade for FY22 stood at $115.42 billion and this has also grown at 33.6% YoY over FY21. However, it is the mix that is more important.

Indian exports to China stood at $21.25 billion in FY22 while imports from China stood at $94.16 billion. This resulted in a trade deficit of $72.91 billion for FY22 and that could be a source of concern.

The good news is that both New Delhi and Washington are very closely engaging with one another on improving trade relations.

However, it remains to be seen how the future trade negotiations between India and the US are impacted by the recent developments during the Russia Ukraine war.

During the war, India had explicitly sided with China despite the heavy sanctions imposed on Russia by the US and other Western countries. That could be an issue.

Some of the key items that India exports to the US include petroleum polished diamonds, pharmaceutical products and ingredients, jewellery, frozen shrimp etc. Some of the key imports from the US include crude oil, rough diamonds, liquified natural gas or LNG, gold, coal, almonds etc. The big concern for India is that out of its total trade deficit of $200 billion, China alone accounts for 36% of the overall trade deficit.

However, India also had some other key trading partners in FY22. UAE, which was India’s largest trading partner till FY2013, is still the third largest trading partner with total bilateral trade of $73 billion.

Among the other major trading partners include Saudi Arabia at $42.85 billion, Iraq and $34.33 billion and Singapore at $30 billion. While UAE, Saudi Arabia and Iraq is predominantly oil trade, Singapore is more of entrepot channel trade.