Challenging China Commercially

 

 Audio Version Given Below

 

Swiss author, Friedrich Durrenmatt said, “Emotions have no place in business unless you do business with them”.

We all know about the Chinese aggression that has been on at the LAC for more than three months. Now, the tension seems to be reducing with slow disengagement of forces of both countries. But minor clashes keep on happening on and off. We need to find a way to stop this.

Both India and China are major economies, and in today’s time denting the economic interests of a country can be one way of challenging a country’s aggression without loss of human life in military action. Just banning products will be a knee- jerk reaction and will not solve the purpose. We need to consider other factors as well.

In this article, I will try to discuss the factors requiring consideration in challenging China commercially.

1)  Need for capital intensive industry: A country can progress economically only if its products compete in the world market. For that our products need to be of competitively good quality. This requires capital intensive investment in the industrial sector wherever possible. Only if we upgrade our technology, we will be able to do mass production and achieve economies of scale. Thus producing better quality of products cost-effectively.
China has become a global supply hub. It's only because it can do cost-effective production. I agree, making an industry capital intensive may lead to loss of jobs but this can be compensated by setting up more production units, thus generating employment. We need to remember, setting up a production unit provides employment both directly and indirectly.

2)  Indo-China Bilateral Trade:  As per data available on the website of the Ministry of Commerce, Govt. of India, bilateral trade with China for the year 2018-19 is USD 86 Billion out of which, imports were about USD 70 Billion and exports were only USD 16 Billion approximately. This shows China is one of our major import partners.
The USD 16 Billion exports to China is about 5% of our global exports. If we disengage trade ties with China, we may need to find new markets in other countries for this share. Looking at the post-pandemic global trade scenario, it will be a big challenge to fulfil this share immediately. This will, in turn, affect forex inflow to India.

3)  Supply dependant on China: As per the Ministry of Commerce website, more than 13% of global imports are from China. This shows that our supply chain is highly China dependant.
For example, 68% of our Active Pharmaceutical Ingredient (API) comes from China. We are making and also exporting drugs at a competitive price because we import API from China at a lower price.  This makes India the world’s largest generic drug manufacturer and also the largest vaccine producing country. We are the largest producer of HCQ (a drug recognised potentially useful to fight the current pandemic) in the world. It is possible because of the cost-effective API supply.
Similarly, we are a major producer of two-wheelers in the world. But we depend on China for about 25% of the supply of automotive parts.
Mobile phone manufacturers have set up assembly units in India. Samsung even exports some of the phones assembled in India to the Middle Eastern and European countries. But quite a major chunk of mobile phone parts come from China.
About 30% of each of machinery and fertilizer imports is from China.
With this, we can understand the extent of India’s reliance on China for its supplies. Though China is not so dependant on India for its exports.
As per December 2019 briefing on Export and Import on the website of the Chinese Ministry of Commerce, total Chinese exports amounted to approximately USD 2.5 Trillion in the year 2019.
We can note that out of this USD 2.5 trillion, only USD 70 Billion (as mentioned above) is China’s export to India. This is just 2.8% of China’s total exports (against 5% of our global exports as mentioned earlier).
So if China takes retaliatory measures to block our supply of Chinese products, the Indian economy and production will be affected more than that of China. We may not be able to export goods at a competitive price in the absence of Chinese imports in case of lack of suitable alternatives.

4)  Boycott of Chinese imports should be gradual: The boycott of Chinese products should not be sudden but done gradually. We need to keep in mind that our supply chain should not be hampered due to such boycott. Else, this is not just harmful to exports but also domestic consumption in the short run.
We need to slowly boycott those products which can be replaced by developing on our own or purchased from other sources effectively.

5)  Revoking ‘Most Favoured Nation’ (MFN) Status: India has given China an MFN status, due to which imports from China attract lower duties. This makes Chinese products cheaper in the Indian market and difficult for Indian products to compete. This should be revoked. If we revoke the MFN status, we can increase import duty on non-essential imports from China, making them competitive to Indian products. This will have two advantages. It will lead to an increase in revenue for government on such non-essential products and also encourage domestic producers.

6)  Control on non-essential Chinese imports: It is observed that sub-standard products enter India, mainly from China. Though sub-standard goods are not beneficial for India at all, import restrictions should be considered at least on non-essential products. Such products are low-priced because of sub-standard quality. This difference in price makes Indian products uncompetitive and hence harms the domestic industry.
It should be noted that not all exports from China are of sub-standard quality. Chinese exports also have good quality. The quality of products imported to a country depends on the demand from there. We need to be aware of this and reduce the demand for such low-quality products.

7)  Finding alternatives: Before we ban a particular product of any country, we need to understand whether we have an alternative to that product that we can produce or import from another country. Also, will that alternative match the existing product in terms of price and quality? The government may have to think, from where and at what price the raw material can be arranged alternatively. This becomes more important for essential products, like API for drugs. If API becomes costly, drugs will also be costly. They will become uncompetitive in the world market leading to a loss in exports. This will also cause an increase in drug prices for the domestic market which in turn will be harmful to people in India. So, apart from finding alternative international suppliers, the government should support the domestic players in developing better infrastructure.

8)  Focus on sectors where India is a major raw material producer: We are among the major producers of many raw materials in the world but lag in the production of finished products.
For example, we are the largest producer of cotton but in terms of clothing, a finished product, from cotton, we are behind China and even Bangladesh and Vietnam. These countries import cotton from India, manufacture clothing and in turn export it to India. We know that the finished product is of more value than the raw material. If we develop our textile sector, we can compete with China.

9)  Developing India as a global supply hub:  China is a global supply hub as I mentioned in the beginning. If we need to challenge China, we need to develop India as a global supply hub. Though this is a long-term initiative, we need to start working on the same. It’s high time now. Following steps can be taken:

a)  Improving infrastructure in terms of better roads and modes of transport for faster connectivity.

b)  Revise the academic curriculum so that students just don’t gain bookish knowledge but come out of college as industry-ready.

c)   Decrease electricity costs to decrease the overall cost of production to make the products competitive. In India, the commercial rate of electricity is very high and it is one of the inputs in many manufacturing processes.

d)  Improve ease of doing business so that more foreign and domestic companies are encouraged to set up production units in India. We need to ensure easy and faster grant of permissions and quicker resolution of business disputes.

Recent developments

Now that we have seen what considerations should be there to economically challenge China, we need to appreciate the efforts, the Government of India has already made in this regard:

a)  Banning mobile apps: On 29^th June 2020, the Government of India banned 59 mobile apps. It is interesting to note that mostly the banned apps belong to Chinese companies. This serves two purposes: Foremost being national security and data security. Secondly, we know that today, data has economic value. These apps possess users’ data and can use it for their economic benefit. With this ban, the app cannot get new users and hence new data.

b)   Cancellation of contracts: Contracts given to Chinese firms by few State Governments like Maharashtra, Uttarakhand, UP etc and Railways have either been cancelled or are being reviewed.

c)  New Automatic FDI Rules: In April 2020, the Government of India amended FDI policy to avoid an opportunistic takeover of Indian companies due to the pandemic situation. The entities of countries sharing a land border with India now require government approval for bringing-in FDI in non-prohibited sectors.

This policy was amended after China’s central bank increased its share to over 1% in HDFC. Since China shares a land border with India now any Chinese entity will require government approval for FDI. It should be noted that such restriction was already there specifically for Pakistan and Bangladesh.

However, around 10^th June 2020, the Chinese central bank has sold its share in HDFC. Though the percentage of sale is not known, its name is not there in HDFC’s list of Foreign Portfolio Investors of June 2020.

Contribution as an Indian

The efforts by Government and manufacturers will not be complete unless and until every Indian decides to protect the commercial interest of the country.

Further, as Government of India has instructed the e-commerce platforms to indicate the country of origin of listed products from 1^st August 2020, now it is in our hands to decide whether we want to purchase products manufactured in a particular country.

Similarly to get India in a better position in the mobile app market, we need to develop more Indian apps. Recently, Soulpage a Hyderabad (India) based technology startup won funding from Ministry of Electronics and Information Technology, GoI, to develop an Indian video-conferencing app. Like this we can also develop more Indian apps as an alternative to the apps that were banned due to security reasons.

Conclusion

From this discussion, we can understand that just banning Chinese products or imports is not the only solution. We need to strengthen our production & infrastructure also. In addition to the ban, we should take other steps simultaneously to challenge China effectively.

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