Context: The outrage over the killing of Indian soldiers has led to calls for banning trade with China. However, India would stand to lose more than China if trade were to be banned.

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.
  • The Indian government has tried to respond to the border dispute with China by training its guns on trade. The idea resonating in Indian streets is that Indians should boycott Chinese goods and thus “teach China a lesson”.

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.

Turning a border or defence dispute into a trade one is an ill-advised move:

  • Trade deficits are not necessarily bad: Trade deficits/surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
  • For instance, if one looks at the top 25 countries with whom India trades, it has a trade surplus with the US, the UK and the Netherlands. But that doesn’t mean the Indian economy is stronger or better off than any of these three.
  • India has a trade deficit with the other 22 of them (including China) — regardless of their size and geographic location. This list includes France, Germany, Nigeria, South Africa, UAE, Qatar, Russia, South Korea, Japan, Vietnam, Indonesia among others.
  • A trade deficit with China only means that Indians buy more Chinese products than what Chinese from India. But per se that is not a bad thing.
  • Both sides are better off than what they would have been without trade: it shows that Indian consumers — who made these purchase decisions individually and voluntarily — are now better off than what they would have been had they bought either, say, a Japanese or French or even an Indian alternative.
  • Will hurt the Indian poor the most: the poorest consumers are the worst-hit in a trade ban of this kind because they are the most price-sensitive. For instance, if Chinese ACs were replaced by either costlier Japanese ACs or less efficient Indian ones, richer Indians may still survive this ban
    • Again, this hit would be proportionately more on the poorest retailers because of their relative inability to cope with the unexpected losses.
  • Will punish Indian producers and exporters: trading with China hurts many Indian producers. This is true, but it is also true that trading hurts only the less efficient Indian producers while helping the more efficient Indian producers and businesses.
    • several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods.
  • Trade deficit raises two issues:
    • One, does a country have the foreign exchange reserves to “buy” the imports.
    • Two, it also shows that India is not capable of producing for the needs of its own people in the most efficient manner.
  • Importance of trade:
    • It allows countries to specialise in what they can do most efficiently and export that good while importing whatever some other country does more efficiently.

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. 
  • to put in place policies and create the infrastructure that raises competitiveness, it should not “force” or even “nudge” people to move away from trade because doing so will undermine efficiency and come at the cost of the consumer’s benefits.

A blanket ban on Chinese imports will hurt Indian businesses at a time when they are already struggling to survive, apart from hitting India’s ability to produce finished goods.


Image Source: Indian Express