Context: The border clashes with China and the COVID-19 pandemic have reignited questions about India’s dependence on Chinese manufacturing. 

More on news:

  • India’s imports from China in 2019-2020 reached $65 billion, out of $81 billion two-way trade.
  • On the other hand, It has been more than five years since India launched the Make in India initiative.

Assessment of Make In India with respect to India China trade:

  • Make in India initiative was a good opportunity for India to get the manufacturing sector back on track.
  • India has not  taken advantage of what it had actually planned.
  • In the past five years, dependency on China has actually gone up.
    • And, of course, certain key intermediates such as active pharmaceutical ingredients. 
  • India’s dependence on imports is getting to be localised, in the sense that there is not a wide diversification of countries from which India is sourcing its imports. 
    • For example: if we look at critical medical supplies which India has been importing for frontline healthcare workers in the COVID-19 battle, most of these come from China. 
  • China is one of the top sources but on the other hand, there isn’t a very widely diversified source of countries from which India can actually import these.
  • It’s going to be a difficult choice for India to get out of this dependence and search for alternative partners.

What are some of the concentrations and key sectors where the dependency is acute?

  • Firstly, regarding capital goods, Indian manufacturing is dependent on supplies from China.
    • This includes a wide variety of machineries, including electrical machinery, semiconductor driven machinery and fertilisers etc.
  • Value consumer goods to a very large extent have flooded the Indian market.
  • Humidifiers, which are being used in the COVID-19 battle and  medical masks, are imported from china.

We need to look at the whole situation very clearly and probably prioritise in terms of what are the areas where India can relatively more easily move back away from the dependency it has on China, and what are the areas where it will take much longer. 

How different is the global environment — and global value chains — from 30 years ago when China was opening up?

  • Global value chains are in fact becoming more local. Countries are depending more on their own economies rather than on global markets. This is an impact of the great recession of 2008. 
  • It was a global market-driven industrialisation strategy, an export-driven strategy, but that is not going to be a reality anymore. 
  • China’s biggest value comes as a final stage assembler. That’s where China’s proficiency in value chains happens. Also, along with being an exporter of assembled final products, China has also over the years become a major consumer for final products.
  • China continues to remain a major source of the final demand market.

What should be India’s policy priorities to attract the industries moving out of China?

  • There’s always been a huge gulf between FDI inflows into China and into India.
  • The Make in India strategy talked about FDI into manufacturing, but as per the data and service sector have been preferred by the foreign investors.
  • The problem of skill set: Foreign investors get into the sectors where there are acknowledged skills, for instance in IT.
  • The second issue is infrastructure: It’s not just about having a good policy, but we need to have the infrastructure in place so that the foreign investor can make profits. For example, outdated ports.
  • If we look at the kind of FDI that India has been getting over the last three to four years, and the big ticket FDI, whether it is Walmart’s acquisition of a large stake in Flipkart, or that of Facebook in Reliance Jio, all of these are essentially intending to acquire existing assets. 
    • None of these are in the nature of building a boat from scratch in terms of the typical greenfield investment, which is capable of creating substantial jobs and other additional capacities within the economy. 
  • Other economies like Vietnam, Malaysia, Thailand, Cambodia or Bangladesh do not have that kind of a market, which India has. But what they have is the ability to provide access to other markets in a far more effective fashion.for example, Vietnam concluded a free trade agreement with the European Union.
  • One other factor which is often overlooked, there is a cultural commonness in business practices across region that you can find in China, Japan, Korea, and large parts of South-East Asia.
  • Unemployment rate has actually gone up: the direct implication of this increase in unemployment rate is that the domestic market has shrunk. There's less demand in the domestic market.

Is there a contradiction between India aspiring to become a linchpin in global supply chains while being wary about trading agreements?

  • There have been issues with the functioning of the WTO and that is why many countries have moved on to pursue regional agreements and bilateral agreements.
  • India has gone more protectionist, and the average tariffs have actually gone up.for example, opting out of RCEP.

Way ahead:

  • Strategy of increasing the manufacturing sector, allowing the sector to absorb more labour, especially from agriculture, and so easing the burden of agriculture, and then having a more resilient manufacturing sector, and reducing the dependence on countries like China.
  • Create our own market  to have enough demand on the ground.