Anti-Chinese sentiment among the Indian masses has led to calls for boycotting Chinese products. This sentiment has been accompanied by various government steps to curb use and import of Chinese products, along with restraints on technology and finances from China. These steps suggest that the government thinks that non-military tools carry less risk. One such tool available is diplomacy. India must embark on a diplomatic offensive against China while replenishing its ties with countries across Asia and Africa through a well-designed technical aid programme which possibly still exists, but may need to be enhanced. Such techniques not only strengthen traditional links between India and these countries but also help contrast India’s ‘untied aid’ with that of countries such as China.
Both India and China have witnessed significant changes in their economic policies during the last two decades. Bilateral trade between India and China has grown four-fold in the past decade, but the trade has been tilted towards the Chinese, resulting in unfavourable balance of trade for India. In 2013, China became India’s biggest trading partner. Currently, China is now India’s 3rd top destination of exports after the USA and UAE, according to UNTCAD. Chinese exports to India were worth about $70 billion in 2018-2019, which accounted for mere 3% of China’s total exports but constituted 16% of India’s imports. Such imbalance is continuously widening every year, so much so that India now has a $63 billion trade deficit with China which constitutes more than 40% of India’s total trade deficit.
The growing disparity in trade with China could be attributed to two factors: a small and vulnerable box of commodities that India is exporting to China, and market barriers in China for most of India’s agricultural products and sectors in which India has a competitive edge, such as IT and pharmaceuticals. India’s exports have predominantly consisted of electric transformers, iron and copper ores, cotton, diamonds/ gems, vegetable fats and petroleum oils. Over the years these raw material-based commodities have been overshadowed by Chinese exports of machinery, telecom, organic chemicals and fertilisers.
Covid-19 opened another dimension of dependence: India’s imports from China have risen in the month of June and July 2020 by about 7.2% whereas the exports to China have contracted by 1.4% despite the demand slowdown due to Covid-19. The primary reason for increased import is the immediate need for medical supplies like masks, PPE kits and other emergency equipment. The influx of Chinese capital has been beneficial to both countries and to the broader relationship as well, emerging as a potential factor of stability. According to Invest India, there are more than 800 Chinese companies in India’s domestic market. Among these, there are almost 75 manufacturing facilities for consumer appliances, smartphones, construction equipment, etc. Fosun International limited, Oppo, Vivo are some of the largest Chinese brands and manufacturers in India. Two-third of Indian unicorn start-ups have had huge investment by Chinese tech investors, estimated to be $4 billion. These include Flipkart, Big Basket, Paytm, Ola and BYJU’s. China is also the largest trade partner of almost all the countries in South Asia and other developed and developing nations, while India has only a small share in the imports and exports to these countries.
To boycott China will hurt interests of millions of middle-class Indian citizens and their businesses. Experts from various sectors say that a calculated approach towards boycott of Chinese goods will not hurt China much. Indian sectors that are dependent on China include pharmaceuticals, electronic products, solar energy, and telecom. After the Digital India programme started in 2015, Chinese domination of imports of telecom and electronics has increased manifold. About 2/3rd of the total API requirement and about 75% of the APIs used in the formulations of NLEM (National List of Essential Medicines) are sourced from China. Owing to its dominance in APIs/ key starting material (KSMs) and Intermediates, the Chinese bulk pharmaceutical products also have competitive edge in our domestic sector market. In 2019-2020, more than 83% of mobile phones and 90% of TV sets imported in India were from China. Also, the National Solar Mission is dominated by imports from China. Almost 84% of the requirement of solar cells and modules is met through imports from China because of low pricing compared to domestic manufactures. The giant Chinese solar industry has been at its apogee for a decade now while India has failed to live up to its potential of emerging as a solar superpower since the Paris agreement.
Same is the case with chemicals and agro-chemicals and infrastructure. India imports high amounts of raw material from China, between 30%-50% depending on the product portfolio, and $1 billion rail projects have been won in joint ventures with Chinese players in the past three or four years. A key reason for Indian firms to enter into JVs with Chinese companies is technical expertise. Incrementally, more than $10 billion tenders are in the pipeline in metro rails in different states. With the government now emphasising “Atmanirbhar” or self-reliant India, it is time to recall what JM Keynes said: Knowledge and ideas are things which of their nature should be international. So, a shutting out of China is neither feasible for obtaining the desired results, nor is it possible to keep China out of our daily lives.
However, India’s growing dependence on imports from China has adversely affected Indian domestic industries. The 2018 July report of the Standing Committee on Commerce, titled “Impact of Chinese Goods on Indian Industries”, highlighted many issues but the most affected domestic businesses were MSMEs and the greatest impact of Chinese goods was on employment. The committee found that most industries adversely affected by import of Chinese goods were labour intensive, thus triggering large-scale unemployment. For example, the industry is facing challenges mainly on account of Chinese imports of polyester, blends and viscose. Cheap imports have resulted in 40% closure of power looms in Surat and Bhiwandi. The committee also noted that the GST of 18% on synthetic fibres had led to increase in import of similar fabrics from China. Further, India has FTAs with Least Developed Countries such as Bangladesh. China’s fabric is manufactured into garments in Bangladesh, and from there imported at cheap rates into India. The committee noted that poor quality Chinese products dominate the unorganised sector. This sector comprises MSMEs that produce more expensive but better-quality products. The stainless-steel industry is a case in point, where a number of MSMEs have had to close down, particularly manufacturers of stainless-steel grades of the 200 series due to Chinese import.
It is, thus, a time for rethink. India can increase tariffs for Most Favoured Nation (MFN) countries up to the WTO-bound rates. Effective tariffs in India are less than 10%, whereas WTO-bound rates are 40%. India can also invoke the national security clause in the WTO rules to impose specific duty on imports from China and could also restrict market access, which is something that does not attract much attention and is frequently used by some countries, including China. Moreover, the MFN clause doesn’t apply to all services, which means there would be a selective and gradual phasing out of Chinese imports.
Retaliatory action may have negative impact on our exports as well, but the loss in exports of India to China can be nullified by working out strategic trade partnerships with countries harbouring anti-China sentiments, like the US, Australia, parts of Europe, Japan, Taiwan, and others. This is the most opportune time to draw a roadmap for manufacturing of intermediate goods in India in the medium to long term. ‘Plug and play’ facility should be provided to investors on MSMEs so that they can kick-start production quickly.