Is it Time to Tame the Dragon?

Is it Time to Tame the Dragon?

From the Australian wildfire to the pandemic that we have been fighting for months, this year has given a lot of stumbling blocks that captured global attention. In the latest set of events, we have seen the two most populous nations of the world in a face-off over the border. The two Asian giants India and China have lost their soldiers in a clash over the Line of Actual Control (LAC) in Ladakh, thousands of feet above sea level. While the unfortunate event is a threat to both the nations’ relationship and dignity, there are also imminent threats to the economic conditions. It could further injure the already hit economies that are trying to recover from the damage caused by the COVID-19 outbreak and the lockdowns that followed.

Both India and China are historically and culturally rich countries. The neighbours share a border of 4000+ kilometres. After the deadly border fight of 1967, measures have been taken to develop rapprochement between China and our country. After 1975, there were no instances of even shots being fired. Vandalizing all the developments made in decades, feuds like these that happened in Galwan Valley have the ability to cause serious repercussions for highly interdependent economies like India and China. While India is a highly lucrative market to Chinese firms, Indian companies have been dependent on Chinese supplies for their operations. In this article, let us take a glance in the ways in which the Indo-China controversy could affect changes in the economy.

Overall Trade Scenario:

The interdependencies of trade are deep rooted for both the countries. Especially, India has been relying on Chinese firms in various markets from toys to drugs. In the early 2000s, there were years in which India had a trade surplus with China i.e., the value of exports from India to China was more than the value of imports from China. However, in the last decade, the world has seen the impressive rate at which the Chinese economy grew. Our local market was also visibly flooded with an increasing number of Chinese goods. Eventually, India has witnessed an increasing trade deficit over years. 

The table and the chart below give a fair idea of our imports and exports in the last 10-year period (Source: Indian Embassy, Beijing).

                                           

We must also pay attention to another aspect in the trade equation with China. In the latest fiscal year, India’s export to China included a total of 3284 product categories. A majority of the exports include mineral oils, mineral fuels, organic chemicals, ores, slag and ash, and other industry products. In the same year, China has exported a whopping 6809 product categories to India. A major portion of Indian imports from China comprises electronics, pharmaceuticals, engineering goods and automobile components. Out of these categories, the import of electronics alone constitutes for $ 18 Billion. Nuclear reactors, machinery and parts are imported at a value of $12 Billion. Our inclination towards Chinese products can be understood from the fact that the value of top 6 products from China is higher than the value of top 50 items exported from India to China.

In India’s basket of top 50 items imported from China, they are our largest foreign supplier in 44 of those. Also, in the top 50 items exported from here to China, they are the largest foreign market in 31 of those 50. Our trade linkages with China does not stop with finished goods. We have a deep-rooted relationship with China for raw materials, ingredients and intermediaries products as well. In a lot of APIs (Active Pharmaceutical Ingredients), which is a key component for drug manufacturing, our dependence on China is as high as 99%. Their share of Indian imports of plastic dolls is 93%, integrated circuits is 97%, etc.

Chinese Investments in India:

Gateway House has conducted research over the last year to study the Chinese investments in India. The research has shown striking results. Out of 18 in 30 Unicorn start-ups (more than $1 Billion valuation) of India had a Chinese investor (data as of March 2020). The study also found that the Chinese tech investors have invested up to $4 Billion in our start-ups. This shows how strongly China is embedded in our technology ecosystem.

Led by Chinese giants like Tencent, Alibaba and Bytedance, several tech companies of China have funded over 92 Indian start-ups (including the likes of Byju’s, Oyo, Paytm and Ola). These start-ups are involved in e-commerce, fintech, social media, aggregation services, logistics, etc. A company like Paytm (funded by Ant Financials - Alibaba) has become one of the leading players in the payment industry by leveraging the superior fintech experience of Alibaba. Ola was funded by Didi, while Delhivery raised funds from Fosun International. Tencent has their investments in Swiggy and Dream11. The above facts indicate how salient is the contribution of China in terms of FDI in India.

Sectoral Impact

Pharma Industry:

One of the key learnings from the COVID-19 outbreak is our pharmaceutical firms’ reliance on raw materials from China. China has been the major supplier of Key Starting Materials (KSMs) and Active Pharmaceutical Ingredients (APIs) for the majority of the drugs produced in India. As we have seen earlier, for some of the drugs (like penicillin manufacture) China has been the major supplier of chemicals and ingredients. Consequently, the government had announced an allocation of $1.3 Billion in order to incentivize local production of APIs. However, we can not ignore the fact that our pharma industry might take a huge blow in the short and medium term if the Indo-China trade relations continue to grow bitter.

Automobile Industry:

According to experts, if there are 2 sectors that would be majorly hit because of the India-China standoff, they would definitely be pharma and the automobile industry. The country’s largest car manufacturer, Maruti Suzuki India Ltd.’s Chairman R.C. Bhargava has said in an interview "We don't import because we like to, but because we have no choice."

Data from Auto Component Manufacturers Association of India (ACMA) reveals that over 25% ($4.2 Billion) of India’s auto part imports, including engine and transmission parts are from China. Manufacturing locally or importing from other countries is not as cheap. It is quite obvious that imposing curbs on imports from China without a cheaper alternative would affect the local businesses drastically. The price advantage and the lack of technological competence of local manufacturers in various segments including BS VI components have been the sole reasons behind imports from China.

"Post the lockdowns, our value chains (including automotive) have been severely disrupted and are in disarray. We are gradually piecing them together. Any further disruptions would only be detrimental to the interest of industry and the economy," Mr Vinnie Mehta, Director General of ACMA said.
 

Consumer Durables:

Around 45% of our consumer durables are imported from China. During the lockdown, this industry had been considered to be in a danger zone as the supply chain was disrupted. There were also instances where leading manufacturers of consumer durables like Godrej were considering price revision as a result of an affected import scenario from China. Despite growing pollution levels, China had set up numerous chemical factories across the country in the last 20 years. This was a major reason for the rise of Chinese chemical industry and the economy as a whole. The consumer durables industry has grown in tandem with the chemical manufacture, mainly due to the excessive production of varieties of plastic. Just like the auto industry, local production of consumer durables are not as cheap as Chinese imports.

Technology and Telecom:

The growth of Chinese technology firms in the last 5 years is commendable. Alibaba operated ‘UC Browser’ is a very popular browser in terms of page views. The Chinese app TikTok already overtook YouTube with more than 200 million followers. For some of the Chinese tech companies, India is their largest market. Xiaomi, Lenovo and Haier see a huge chunk of their revenue coming from India. The smartphone market in India is led by brands like Xiaomi and Oppo (market share of 72%) side lining other brands. The brands like Apple and Google do not even possess 1% of the market share. The Korean manufacturer, Samsung, is the only company which has some market share to claim other than Chinese firms.  The routers of Huawei are very popular and widely used. Huawei and ZTE were initially sought after for building a 5G network in India. 

Latest Outcomes

As a recent incident, the Government of India banned 59 Chinese mobile applications including Tiktok, Wechat & other popular applications stating the applications as a threat to the security & sovereignty of the country and its citizens.  Also, India has said a big ‘No’ to the Chinese 5G. The US had already banned companies like Huawei and ZTE from building 5G infrastructure for their country, citing national security. As these companies are presumed to have close ties with the Chinese government, USA suspected these companies could access sensitive data and might misuse them. However, the Indian government had allowed Huawei to take part in the 5G network trials. But the scenario has changed after the clash between army personnel at the border where 20 Indian soldiers were martyred. The government has announced that BSNL and MTNL would stop using Chinese equipment for upgrading to 5G. The private telecom operators are also reportedly asked to stop depending on Chinese telecom gear. 

According to Automotive Component Manufacturers Association, the auto industry has begun to de-risk itself following the pandemic that stunned the supply chains. The industry has started to look inwards and is working on deep localization. The feud between China and India at the border would further hasten the process of localization. 

There are also downsides to Indian industries. Tata Motors owner Jaguar Land Rover was witnessing rise in the sales in China, as their economy began opening up. It was a major development for Tata Motors which was struggling due to losses. This might be affected due to the growing tension at the border. 

Way forward: Boycott China?

It is fairly evident from the given scenario that China has a strategic role in India’s development not only in the established industries but also by way of investments in our start-up ecosystem. Hence, completely boycotting China, with being Aatmanirbhar’ (self-reliant) would surely have deep short term repercussions on the domestic economy. Preferably, ways must be considered to boost local manufacture which could compete against Chinese firms in both quality and cost. India’s expenditure on R&D is way lower than other global superpowers, making us lack innovation. So, schemes to encourage R&D must be executed. Apart from localization, steps ought to be taken to diversify the import basket as well.

An abrupt action of boycotting might not only hurt the Chinese firms, but also the Indian distributors associated with those brands and the Indians employed in those companies locally. Rather, a detailed blueprint must be laid and followed in the process of dissociating ourselves from Chinese products and becoming self-reliant. Instead of rhetorically avoiding the imported goods, local manufacture must be adequately incentivized.

All-in-all, we may not be ready to tame the dragon just yet, but there may not be a better time to start preparing than NOW!

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