Sino-Indian Trade: Beyond Jingoism

India maintains an asymmetric relationship with China; jingoism will not help. We need a well crafted strategy to meet the challenge head on.  - K.K. Srivastava

India imports merchandise worth around 70 billion dollar from China annually, largely in sectors like consumers durables, auto components, pharma, and electricals. This comes to about 14 percent of our total imports. In calendar year (cy) imports stood at 84 billion dollar (18 percent of total). The odds are staked against India.

India’s Trade with China: Macro perspective ($ MN)

Over dependence on one country is fraught with danger. Besides, China is not exactly a friendly nation to India. Moreover, China uses trade as weapon to silence criticism- in political fields – quite often. It recently has blocked import of Australian beef after the latter called for a robust inquiry into the origins of the corona outbreak. China has tried to use access to its huge markets as leverage in its campaign to meet its political ends. It has used the tactic regularly in political disputes over the past decade. Last year Beijing blocked import of canola from Canada to force it to release a Huawei executive. It blocked imports of Philippine bananas in 2012 in dispute over territory in South China Sea. In 2010, it blocked imports of Norwegian salmon and cancelled trade talks after Liu Xiaobo got Noble peace prize. Back home, to take just one example, as China takes an aggressive posture against India in Ladakh, Chinese monopoly over rare earths may become a major cause of concern for India. China is the largest producer of rare earth materials, a group of 17 elements vital to consumers goods, aviation, clean-tech, healthcare, defense etc. China controls 40 percent of their global output. In 2019, China produced 132,000 metric tons of these elements whereas India produced only 3,000 tons. If China restricts/blocks exports to India then Indian technology, defense system, and many other activities are likely to Suffer.  

More recently, post Pandemic India Inc has realized the glaring need to reduce dependence on a single source for raw material and intermediates. Companies are fishing for alternative supply chains or going it alone. Many Indian companies have started planning to reduce exposure to Chinese imports and/or have started sourcing from local vendors. The localization at several Indian automakers has already reached upto 90 percent. Likewise efforts are on by the domestic consumer durables sector which is currently excessively dependent on China – 80 percent of air-conditioner compressor demand, 95 percent of motor requirement for wasting machines- to look elsewhere.

Indo-Chinese trade: Micro perspective (cy’19)

(Top 5 items)

Total imports from China: 86.2 billion dollar (18 percent total imports)

Total export to China: 29.5 billion dollar (9 percent of Indian exports)

Indeed, some analysts have become overambitious and are talking in terms of replacing China at world trade mart. According to Crisil, potentially, sectors that are highly dependent on imports from China can benefit Indian domestic manufacturers with import volumes reducing, such as ceramic, plastics, etc. Moreover, steel, paper, leather and textile readymade garments etc. have a window of opportunity to expand exports, as China’s own exports from these sectors are likely to decline. But the somber fact is the India does not have the scale or size to take material advantage of such opportunities. Actually, sectors like aluminum in India will indeed be unable to meet the void created by Chinese problems as these industries are either running at peak utilization or are facing capability issues. 

Only this month India has readopted the vision of self reliant India; this envisages domestic industry catering to global value chains. While it is laudable in theory, it is an unachievable sans deep reforms needed to make the economy competitive. Unless, India’s competitiveness improves, notwithstanding recently improving ease of doing business ranking at 68, we cannot become a crucial link in global supply chains. We need to begin by overhauling the land, labor, and liquidity markets. Longer term perspective needs to be taken by removing road blocks created by fossilized bureaucracy. Then, India needs to build/invest in human capital to move up the value chain. More specifically, to counterbalance the pressure from dragon, a systemic approach must be adopted.Unfortunately, the demand from Chinese products is inelastic; raising tariff barriers would not reduce demand, that will only raise input costs for Indian manufacturers. The solution, instead, lies in attacking the issue along many fronts. On one hand the structure of India’s trading relationship with China needs to charge, while on the other, domestic manufacturing of competitive kind needs a beast. Currently India is not in a position to use economic and trade measurers, not until it takes concrete stops in reducing critical dependence on China (such as in areas like active pharma ingredients, solar panels, rare earths, etc.). We need to narrow the asymmetry with China. For this a four step approach is suggested. First, we need to find out where lie our vulnerabilities vis-à-vis China. Second, then India should build self sufficiency and seek alternative sources of supply in these verticals/sectors. Third, it should actively promote-both through carrot and stick policy – make in India program. And, finally, we need to grow at 8-10 percent per annum to gain enough economic heft so as to bridge the economic gap between us and our biggest rival, China.

Dreaming without direction is a sure recipe for a precipitous fall into an abyss. Let us drive with our eyes open.

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