03 Jul 2020 20:51 IST

The China syndrome

Deteriorating ties with China have put Indian industry in a bind; but decoupling may not be the answer

If the raging pandemic was not enough to wreck economies and pile up misery across the world, for India the border stand-off with China has added another pain point. With the tragic loss of 20 Indian Army men and an undisclosed number of Chinese casualties, India’s summer of discontent seems to be never-ending.

The China standoff has led to a clamour to boycott Chinese products, with some celebrities leading the way. There is also a growing call for relying less on Chinese imports and bolstering local industry. One of the first things the Modi government did was to ban 59 Chinese mobile apps including the hugely popular and influential TikTok.

This was perhaps the easier part. The harder part would be to curb imports in the ‘real’ sector. Whether it is auto components, textiles, pharmaceuticals, consumer electronics or a host of other sectors, Indian industry’s reliance on Chinese inputs is massive. India’s much storied success as a global player in generic drugs has a massive Chinese component to it, as much of the APIs for the India generic drug industry comes from that country.

The famous textile cluster of Tirupur in Tamil Nadu is also heavily reliant on China for the supply of buttons, zippers and other inputs that go into garment manufacturing.

Consignment pile-up hits industry

With the Indian authorities insisting on 100 per cent physical checks in ports for Chinese goods, consignments have been piling up over the last few weeks, adding to industry’s woes. According to media reports, industry players have lobbied with the government to revert to the old rules of clearing consignments so that their production cycles, already under stress due to the lockdown, are not hit further. Union Minister Nitin Gadkari is also in favour of speedy clearing of consignments.

Even on the infrastructure front, especially the power sector, China is a major supplier of power equipment. India’s push towards renewable energy also relies on China, as it is one of the leading producers of solar panels in the world.

In the last few years the Indian market has been flooded with Chinese goods, especially consumer electronics and toys.

In the mobile phone market, the dominance of Chinese manufacturers is absolute. Brands such as Xiaomi, Redmi, Vivo and others are way ahead, with Indian brands such as Micromax falling by the wayside. Indian brands have been simply unable to match Chinese products on the price front. Vivo is also the sponsor of the hugely popular and successful Indian Premier League.

In the white goods segment too, China’s Haier is making inroads, though for the time being Korean brands such as Samsung and LG are holding strong.

Growing trade deficit

India’s trade deficit with China has ballooned, from $37.8 billion in 2014, to $63 billion in 2017-18.

This has been a sticking point between the two countries and, to be fair to the Modi government, it has been raising this issue consistently with China in bilateral talks. But efforts to reduce the trade deficit have so far yielded little success, with China refusing to budge. India’s endeavour to make China open up its market to Indian imports, especially in pharmaceuticals, IT services and farm products, in which Indian players have a comparative advantage, has led nowhere with China refusing to play ball.

But according to latest data, in 2019-20, Chinese imports fell 7 per cent and the trade deficit has come down to $48 billion. This trend is likely to continue in the pandemic-hit 2020-21 and maybe beyond.

Decoupling may not be the solution

Even before the border stand-off, the Modi government tweaked rules to make it difficult for Chinese firms to acquire Indian companies reeling under the impact of the pandemic. Given how severely the world’s supply-chains have been hit by the pandemic, which originated in China, global majors have been thinking of moving their production bases out of that country, if not completely at least to disperse them to a more diversified geographies. The Japanese government even offered incentives to Japanese firms to relocate their production hubs from China back to Japan.

India has also been actively trying to project itself to global majors looking to relocate their production units, as a viable alternative to China. The government has been talking about putting in place a ‘plug-and-play’ model with the objective of facilitating global players to set up base in India. Several State governments too have got into the act, with Tamil Chief Minister Edappadi Palaniswami even writing to the CEO of five MNCs – Fossil Group, Nike, Adidas, Mattel Inc and Kate Spade – showcasing Tamil Nadu as an attractive destination to set up manufacturing plants.

But ‘decoupling’ completely from China is not going to be easy; nor may it even be desirable in the long run. The world economy is now deeply inter-linked and, though the pandemic has laid bare the risks of relying on China, shunning it entirely is not an option. After the jingoistic rhetoric settles down, India will have to take a long, hard look at its industrial structure and trade policies, and chart out a more pragmatic course.