India’s trade deficit with China a big worry, says Emkay’s Arora

India’s ballooning trade deficit with China is a big worry made worse by the rupee’s relatively strong performance in the region and slowing global demand for local exports, said Madhavi Arora, a lead economist at Emkay Global Financial Services Ltd. 

China accounts for nearly 40% of India’s total trade deficit, and with developed countries discussing the possibility of a global recession in 2023, India’s exports may slow too. This is the “bigger worry” and something “that Modi has to take care of as we go ahead,” Arora said in an interview on Thursday with Bloomberg Television’s Haslinda Amin and David Ingles.

India’s bilateral trade with China rose by a third in the fiscal year that ended in March, even as Prime Minister Narendra Modi imposed curbs on business with China after the deadliest fighting in decades erupted on their disputed Himalayan border.

Arora said the rupee may outperform emerging markets peers next year, but that may not be good from a trade perspective. Exports were an important lever for India’s growth in the past year and a slowdown there strips the economy of any “sustainable or secular economic agent.”

The Reserve Bank of India may ease up on rate policy hikes, she said, but it will still have to remain tough on stubbornly high inflation. Arora said the central bank’s policy rate, at 6.25% now, might stay below 6.5% for at least a year. That’s because it’s tough to know whether the US Federal Reserve will stay the course of maintaining a very high terminal rate of 5% to 5.25%.