Economic attack on China – Whom will it hurt more?

China has been muscling India for the past 2 decades on border disputes created by extending its claims arbitrarily on trade-related issues where it created a huge trade surplus using unethical means. India has been fighting for its land since the 1962’s and has nearly lost 38,000 sq km of land to China. It’s rather easy to promote self-reliant India and indigenisation with fancy labels like ‘Atmanirbhar Bharat’, but how feasible are these policies for yielding long-term growth?

Government’s recent economic actions against China

Ban on popular apps – On grounds of “prejudicial to sovereignty and integrity of India, the security of the state and public order”, the Indian government banned 59 Chinese apps including popular apps that commanded an 8-digit loyal customer base – TikTok, WeChat and Clash of Clans to name a few. More apps were banned later on. The Chinese parent company of TikTok – Bytedance, foresees a potential revenue loss of $6 billion, according to media reports. However, we estimate that this figure to be just a fraction of potential loss as these start-ups derive their valuation from their potential to scale. With 1.35 billion people now out of scope for scalability, the valuation, which was running into hundreds of billions USD, takes a severe hit. Furthermore, the immense damage will be from the Pandora box it opens. Several other countries, those bullied by the Chinese aggression, will now be inclined to resort to extreme policies to sideline China. Take for example, the US government actively in pursuit to ban TikTok.

Telecom – Similarly, efforts are being made by the government to bar Huawei from India’s 5G rollout. Even though no formal rule has been made, unofficially telecoms have been instructed to avoid further purchase of Chinese equipment for their 4G/3G. This would seem strategic, but we still depend on China to maintain and service the existing 4G/3G infrastructure. Additionally, cost escalation is inevitable if Chinese companies are banned, as there are only a handful of companies in this space outside China. However, Reliance has claimed to have developed an ‘Indian solution’ to pave the way forward for 5G, which is awaiting a clearer government policy and 5G spectrum. The telecom sector is scalable in India, if the adequate and necessary technology is available. With the world looking resolute against China and Huawei seeing a ban in many countries, we are hopeful that the world will find an equally cheap and reliable alternate source of these gears.

General import from China –India’s import from China was $68.4 billion in FY 2019-20. As against this, China has a total export of $2.5 trillion to the world. India only accounts for less than 3% of the total export of China. Given this meager figure, China need not worry much about the trade restrictions imposed by India.

The dumping efforts made possible through export subsidies which are in contravention to WTO regulations have had a vitiating effect on the Indian manufacturing sector. Anti-dumping duties on Chinese products is essential to curb the import of cheap goods, for the prosperity of the domestic manufacturing sector and sustained employment opportunities.

A slew of anti-dumping notifications have come from the government since the border dispute. Time taken to issue notification from the date of the start of investigation has come down to 234 days in 2019 – 2020 from 478 days in 2014-15. Even though we do not have official data, it appears, post border issue this year, the speed of completing the probe and imposing Anti-dumping Duty has increased significantly.

Besides tariffs, many non-tariff measures have been taken in line with India’s efforts towards a self-reliant country. These tough measures have produced palpable results. During Q1FY21, the trade deficit with China reduced to $5.8 billion against $13.1 billion in the same period last year, and the trade between these two nations slipped to $16.55 billion from $21.42 billion during the same period last year.

Even though the Chinese response has been rather feeble so far, they have a history of implementing heavy retaliatory trade measures. Following a collision near the disputed East China Sea Islands in 2010, China declared restrictions on the export of rare earth elements to Japan – a key ingredient for the electronics industry. These measures further included boycotting of Japanese brands and automobiles. Similarly, in retaliation to a dispute over an island in the South China Sea in 2012 with the Philippines, the Chinese restricted tourism and imports on bananas, costing the country millions of dollars in revenue.

More than 13% of India’s import is from China. India’s crucial sectors such as Pharma/API, Textile, automobile accessories, smartphones, telecom and solar depend heavily on imports from China. 80% of API for the pharmaceutical sector and 60% of electric and electronic equipment are sourced from China. Thus, developing hostility against China means India suffers more than the adversary.

Recently China increased the prices of key drug ingredients (but not APIs). This may put cost pressure on Indian pharma companies. More importantly, it makes Indian API companies less cost effective, thus hurting Government’s efforts of self-reliance in this strategic sector. Hence many experts take it as a retaliation from China.

Chinese investment in India – FDI from China will now be mandatorily scrutinized by the government. These measures announced will have a great impact on the Indian startup ecosystem. The total planned and current Chinese investments in India are estimated to be about $26 billion, according to the US think tank, Brookings. As per a February 2020 report by think tank Gateway House, China has investments in 18 of the 30 Unicorn companies in India – Zomato, Flipkart, Byju and Paytm to name a few. Furthermore, the jobs they have provided through manufacturing plants throughout India is also very significant. For instance, the electronics company Xiaomi employs nearly 50,000 people in India across various divisions, of which 30,000 are in manufacturing. Of these 30,000, 95% of workers are woman. Thus, in the short term, sidelining Chinese investments will impair the start-up and employment dynamics, especially in the emerging sectors where we lack the technical know-how.  

Conclusion – Rejecting China from the economic ecosystem has adverse effects on both countries. But the larger impact would be felt in our economy. In terms of infrastructure, ease of starting a business, and ease of access to capital, India lags. Ramping up tariffs and cutting off China rapidly is considered to be premature, which would inflict pain on key sectors – pharma and electronics. For substituting Chinese goods and to achieve successful long-term growth with ‘Atmanirbhar’ and ‘Make in India’ initiatives, India needs to improve its manufacturing and start-up ecosystem. With robust improvements in these fields, India can steadily transform into a self-reliant country.

If the government were to continue with the imposition of sanctions as we have recently seen, they need to work with equal aggression to ameliorate the start-up ecosystem. India has the potential to replace the scale of China as we have a big domestic market. Thus, with comprehensive planning and radical infrastructural improvements, India will be capable of tapping into this immense opportunity and exploiting the anti-China sentiments worldwide.

All in all, it will take a combined effort from all to make ‘Make in India’ a success.