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Will India limit China’s access to its market? Assessing the impacts

  • Category
    Economy
  • Published
    25th Jun, 2020

India is now mulling economic measures, including limiting China’s access to its vast market, following the significant escalation of the border conflict with China after 20 Indian soldiers were martyred in a brutal clash with Chinese soldiers on June 15.

Context

India is now mulling economic measures, including limiting China’s access to its vast market, following the significant escalation of the border conflict with China after 20 Indian soldiers were martyred in a brutal clash with Chinese soldiers on June 15.

Background

  • As border tensions between India and China flared up with the deadliest clash in more than four decades, leaving at least 20 Indian soldiers dead, there have been calls for boycotting goods imported from the neighbouring nation.
  • Following the incident, Indian armed forces went into a state of high alert to deal with any threat to national security.
  • The army has strengthened its posture across the length of the Line of Actual Control (LAC) where reinforcements have been sent, the Indian Air Force is keeping its contingency plans ready and the navy is also on an operational alert in the Indian Ocean region where scores of warships are ready for any task.
  • The forces are doing their work efficiently, but on the economic front, the demands are on sudden rise that Chinese products should be banned in India.

Analysis

What is happening at the economic front?

  • Ministry of Finance and Ministry of Commerce: Both ministries of finance and commerce are already taking action against the influx of Chinese goods that is injuring domestic industry.
    • Imports of more than 100 goods are under various stages of anti-dumping action.
  • Anti-dumping duties: India could extend anti-dumping duties and safeguards on more than two dozen Chinese goods this year that range from calculators and USB drives to steel, solar cells and Vitamin E amid concern that a flood of imports would kill domestic manufacturers who will lose duty protection soon against such products.
    • Anti-dumping duties on these products were imposed five years ago and are expiring this year.
  • Indian traders: Traders are also against China. The Confederation of All India Traders (CAIT), a powerful lobby of 70 million local traders, has decided to step up its nationwide movement against the boycott of Chinese goods.
    • CAIT has released a list of over 450 commodities that can be sourced locally: fast moving consumer goods, toys, textiles, builder hardware, footwear, apparel, kitchenware, luggage, hand bags, cosmetics, gift items, electrical and electronics.

Imports from China

  • China is Asia’s largest economy and the world’s second-biggest with a GDP of about $13.6 trillion. India is No. 3 in Asia at $2.7 trillion. .
  • From supplying industrial components and raw materials to investments in India’s startups and technology firms, China is India’s biggest trading partner after the U.S.
  • China accounts for about 14 per cent of India's imports and is a major supplier for sectors like cell phones, telecom, power, plastic toys and critical pharma ingredients.
  • Chinese exports to India comprise smartphones, electrical appliances, power plant inputs, fertilisers, auto components, finished steel products, capital goods like power plants, telecom equipment, metro rail coaches, iron and steel products, pharmaceutical ingredients, chemicals and plastics and engineering goods, among other things, according to the Ministry of Commerce.
  • India’s imports from China jumped 45 times since 2000 to reach over $70 billion in 2018-19.

Chinese Investments in India

  • Foreign direct investments from China come to metallurgical industries, renewable energy (solar panels), electrical equipment, automotive and chemicals.
  • There are roughly 800 Chinese companies in the domestic market.
  • They have roughly 75 manufacturing facilities for smartphones, consumer appliances, construction equipment, power gear, automobiles, optical fibre, and chemicals.

Will trade-deficit make China weaker?

  • Trade deficits surpluses are just accounting exercises and having a trade deficit against a country doesn’t make the domestic economy weaker or worse off.
  • For instance, the top 25 countries with whom India trades, it has a trade surplus with the US, the UK and the Netherlands. But that does not mean the Indian economy is stronger or better off than any of these three.
  • Similarly, it has a trade deficit with the other 22 of them (including China) — regardless of their size and geographic location.
    • This list includes France, Germany, Nigeria, South Africa, UAE, Qatar, Russia, South Korea, Japan, Vietnam, Indonesia among others.
  • Yet, a trade deficit doesn’t necessarily mean that the Indian economy is worse off than South Africa’s.
  • A trade deficit with China only means that Indians buy more Chinese products than what Chinese from India. But per se that is not a bad thing.

Who will suffer the most?

  • Poorest consumer: More often than not, the poorest consumers are the worst-hit in a trade ban of this kind because they are the most price-sensitive.
    • For instance, if Chinese ACs were replaced by either costlier Japanese ACs or less efficient Indian ones, richer Indians may still survive this ban — by buying the costlier option — but a number of poor, who could have otherwise afforded an AC, would either have to forgo buying one because it is now too costly (say a Japanese or European firm) or suffer (as a consumer) by buying a less efficient Indian one.

Is India equally important for China?

  • On one hand, China accounts for about 14 per cent of India's imports, India accounts for over 5 percent of China’s imports in financial year 2019-20.
  • Meaning, India runs a huge trade deficit with China, the biggest exporter to India.
  • While the absolute value of imports from our neighbour may have fallen, their share in the overall pie rose from 13.68% in the previous fiscal.
  • India is the seventh largest export destination for Chinese products.
  • India is as dependent on China in its telecom sector as the defence sector is dependent on Russia. In particular, Huawei and ZTE have a monopoly over the back end of mobile networks, while Chinese brands dominate the cellphone instrument market.
  • Chinese internet offerings generate vast amounts of meta data from India that go to feed its relentless drive to secure a comfortable lead over the US in Artificial Intelligence. 
  • If China too decides to abruptly ban all trade and forbid all private investment via any route into India, it would lead to-
    • India would survive, but at a huge cost to common Indians while depriving many Indian businesses (the start-ups with billion-dollar valuations) of Chinese funding.
    • In the short to medium term, it would be both difficult and costly to replace Chinese products.
    • India will only increase its total trade deficit.
    • If on the other hand, only Indian products are used, that too would cost the country more — albeit just internally.

Conclusion

Amid Indo-Chinese tensions, the clamour for boycotting Chinese products, is unrealistic and is completely not in the economic interest of the country.  Rather the call should be to develop our own domestic industry.

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