“In the space of a decade, China & India have emerged as dramatic, dynamic competitors.”
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Peter Mandelson
India has, for several centuries now, had a very complicated relationship with the other Asian behemoth China. Our economic ties with China, our second biggest trading partner after the US, are in troubled waters these days over the escalation in tensions in the Galwan valley that unfortunately saw lives lost on both sides. Although contentious at the best of times, Indo-Chinese relations have largely drawn from the joint economic benefits enjoyed on both sides. The recent escalation at the border has also increased trade tensions with a ban being called for on all Chinese products, a worrying factor for Indian businesses.
The government recently banned 59 Chinese apps from being operational in India, a first move to showcase intent without sacrificing large on economics. Also, Chinese goods are being delayed at Indian ports, with plans of imposing higher tariffs on Chinese goods amid stricter quality controls.
Despite this largely symbolic grand-standing by the government, the ground realities that we must now face is that a ban on electronic & capital goods from China could hurt our economy quite swiftly, especially when a robust architecture is not put in place to fix our own internal economic emergency. Even before we entered the post-COVID era, India was already reeling from a disastrous slowdown & growth falling to 3.1%. The lockdown, though well-intentioned, has further battered those numbers to even worse levels. In the short term, we must look to bolstering our economy & increase demand so as to power the country financially. In a more long-term view, with infrastructure in place to challenge Chinese products with indigenous products at a similar price point, additional tariffs can be levied to steer businesses to home grown options.
Government revenues are already low due to insufficiencies in GST & the cut in corporate income tax. COVID has also caused further strain on the resources available with the government. Demand, the other contributing factor to the economy, too has fallen off the grid. Global trade tensions have caused exports to fall as well, which is a worry for any country used to enormous export revenues.
Moving back to the current economic impasse, China still remains our biggest source of imports, standing at USD 70 billion in 2019. The largest chunks of India’s imports from China include mobile phone components, computer equipment, semiconductor chips, pharmaceutical APIs, industrial machinery & textiles. These imports have now brought our bilateral trade deficit with China to about $50 billion, higher than any other trading partner.
Which brings us to our exports to China. A ban on Chinese goods could affect export of goods worth USD 20 billion to them as an immediate consequence. This would further affect our already skewed balance of trade numbers. Plus, China is a top three trading partner for Indian exports. With India’s goal of increasing exports to $1 trillion by 2025, it might not be realistic without including China.
A newer angle to this bilateral relationship is investment. With our exports largely remaining flat over the years, _______ has virtually mandated manufacturers to move to cheaper Chinese imports, eroding Indian manufacturing & employment. After gaining such a strong presence in the Indian manufacturing sector through export of their goods, China’s eye is now on the one major Indian sector not largely reliant on them, the IT sector. With little to no requirement for Chinese imports, the only method of penetration would have to be investments. India is in line to reach internet penetration of over 1 billion people, making it one of the biggest & fastest growing connected economies in the world. To this end, Chinese investors have, directly or indirectly, quickly racked up investments in 18 out of India’s top 30 Unicorns. Chinese tech companies have funded over 90 Indian start-ups this far.
At this point in time, India needs to start with rejuvenating the economy while withstanding the onslaught of the pandemic in the country. The government must then look at cleaning up the toxic assets in our financial markets & banking sector to reduce hindrances to the economy.
Regarding China, we must ensure actions taken are not knee-jerk in nature but rather based on sound policy decisions. India can look to apply trade tariffs on non-essential Chinese imports where prices for Indian alternatives are on par. The government is in talks to review Free Trade Agreements to help even out the balance in trade. And in the longer term, the government must review policies on labour, land, cheaper credit to further incentivise domestic manufacturers through subsidies & similar schemes to eventually become self-reliant as well as globally competitive. Regarding our sense of patriotic duty over the border dispute, remember that India is an immense economic opportunity for China. Not one that they would endanger for some land.
