Minimising China’s presence in India needs a long-term strategy

Imports from China have risen by over 45 times since 2000 to each $70.3 billion in 2018-19.
Minimising China’s presence in India needs a long-term strategy
Minimising China’s presence in India needs a long-term strategy

On Wednesday, a group of individuals threw their Chinese-made television off the balcony, calling for a boycott of Chinese products. Trade unions called for a boycott of Chinese products. Social media was inundated with cries for the same.

The call for boycotting Chinese products has intensified in the past week after a face-off at the border with Chinese troops in Galwan Valley in Ladakh resulted in the death of 20 Indian army personnel on June 15. The boycott sentiment has been gathering steam over the past month, starting with the coronavirus originating from China, followed by geopolitical tensions between both the countries.

Apart from individuals making a choice to boycott products made in China, the government too, is making moves to reduce the dependence on China. 

There are also reports that intelligence agencies in India have red flagged about 52 China-linked mobile applications, including TikTok, UC browser, Xender and SHAREit, over concerns related to safety and privacy of users.

However, everything from smartphones, television sets at home, and children’s toys to fabric, raw materials used to make medicines and components that go into our vehicles — not to forget apps such as Tik Tok, Shein and Shareit — Chinese products are deeply integrated into the Indian market.

A look at data

China (along with Hong Kong) is India’s largest trade partner and Chinese imports accounted for nearly 14% of India’s total imports in FY20, while exports were only at 5%. This shows that India has a huge trade deficit with China.

According to data from Invest India, India-China trade increased by over 30 times from 2001 to $87.1 billion in 2018-19. Imports from China have risen by over 45 times since 2000 to reach $70.3 billion in 2018-19. There are around 800 Chinese companies in India.

The sector that is perhaps the most inundated with Chinese brands is India’s smartphone market. According to Counterpoint data, 81% of the smartphone shipments in Q1 2020 were from Chinese smartphone players. Brands such as Xiaomi, Vivo, Oppo, which make affordable smartphones, are among the most sold. Local smartphone makers occupy only 1% of the country’s smartphone market. Many of them such as Micromax, Lava and even Reliance’s LYF smartphones failed to make a mark in the Indian market.

Nearly 60% of televisions and home appliances sold in India are Chinese. While some may be assembled in India, India buys a large chunk of its electronic components from China.

In the pharmaceutical industry, India imports over 60% of its active pharmaceutical ingredients (APIs) from China. As per reports, this is worth $3.5 billion.

The auto industry too, is heavily dependent on Chinese imports with over 25% of auto components being imported from China.

And not just these, India also imports synthetic yarn and several accessories such as buttons, zippers, etc. ET reported in February that India doesn't have the domestic supply base to cater to a huge demand of these raw materials.

Some of the other sectors that depend heavily on Chinese imports include solar power, telecom equipment and steel, among others.

While alternative sources do exist in some of these sectors, it could end up increasing the cost for companies.

Apart from these, according to a report by foreign policy think tank Gateway House, 50% of the top app downloads on iOS and Android combined in India in 2018 included Chinese apps and apps with Chinese investments. This included Universal Control Browser (UC Browser), SHAREit, TikTok, Vigo Video, etc.

Several of India’s homegrown startups too, have raised capital from Chinese investors. According to Gateway, Chinese tech investors have put an estimated $4 billion into Indian startups. This includes the likes of Paytm, Bigbasket, Byjus’s, OYO, Swiggy, Delhivery, among others.  

“Such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded. TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the U.S. penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72%1 share, leaving Samsung and Apple behind,” Gateway said in a report.

To ban or not to ban

Banning trade with one single country is not possible due to World Trade Organization guidelines. In addition to that, the reason Chinese goods are such an intrinsic part of India’s manufacturing is that they come at low cost and are a cost efficient alternative, especially for small businesses.

Santosh Pai, a partner at Link Legal India Law Services, which offers legal advice for companies in India-China corridor says that India is going to face a very tough time recovering from the current economic crisis and any curbs on Chinese investment or trade with China is going to make this more difficult.

“There's no doubt that self-reliance is a useful goal but it's a long term one and has to be matched with a lot of action,” he says.

The choice to boycott any goods can be taken on an individual level, but it becomes more complex for companies and industries.

“The industry is the organization of the entire supply chain and is much more complicated than an individual product. It will take years because alternative sources for everything need to be found,” Pai adds.

Manoj Kewalramani, who heads the China Studies Programme at Takshashila Institution, a Bangalore-based think tank echoes Pai’s thoughts on individual choice but says that we need to look at the cost of such a boycott we inflate for ourselves.

“We need to look at if cheap high-quality goods from any vendor in the world help. Does it help Indians move up the value chain and boost consumption in India. Particularly if these goods are manufactured in India, it also creates jobs in India. If there are technology products like mobile phones, which, you know, which are cost-effective products, they allow Indians to get online, they allow for Digital India to progress,” Kewalramani says.

Therefore, while on an individual level, venting of the anger is understandable, Kewalramani says that we need to think through before this translates into policy. Governments have to take a far more holistic picture of what are the implications of boycotting one country are from a broader scheme of things.

The current situation provides an opportunity for the Indian government to have a deeper discussion about the economic relationship with China. “Our economic relationship with China should be located within the context of our broader strategic goal, i.e., transforming the lives of hundreds of millions of Indians and generating wealth, prosperity and consequent power. To that end, it is clear that we need to engage China, which is the world’s second largest economy in nominal GDP terms. However, we need to rethink the terms of that engagement from the following perspectives,” he adds.

Looking especially from the technology sector, Prachir Singh, senior research analyst at Counterpoint says consumer sentiment will play a part in having an impact on Chinese smartphone brands. But getting rid of an app and finding its alternative is comparatively easier than getting rid of a device from a consumer point of view, Prachir says.

Even though a large chunk of the smartphones sold by these companies are assembled in India, Prachir says that in the near term, India's smartphone manufacturing is dependent on China in terms of components sourcing.

“However, many components players have started setting up manufacturing units due to the government’s Make in India push. But, completely replacing the Chinese supply chain is a distant scenario,” he adds.

Pai points out here that it is also pertinent to understand why these companies came to India and began manufacturing here. “In 2014, when we started Make in India, we started something called a phased manufacturing program. In a bid to reduce the trade deficit between India and China, many investments such as Xiaomi, Vivo, Oppo and hundreds of their suppliers who came to India, were actually invited and encouraged to manufacture in India. This also led to job creation and local economies benefiting,” Pai adds.

Therefore, while calling for a boycott of Chinese products, he says that we need to look at what choice we are making because a complete blanket ban essentially means we will not consume anything. “Talking about the economy also, it’s just not sustainable. People have to open their cupboards and take a hard look around their houses and see what it is that they have that comes from China and then they realize that what are the choices available to decide not to buy or not to use all these products,” Pai adds.

For several industries such as pharmaceuticals and the auto industry, finding alternative sources at a time when the economy is on the brink of a recession is not only costly, but also time-consuming.

In a recent interaction with CNBC TV18, RC Bhargava, Chairman of Maruti Suzuki India said that its vendors independently depend on Chinese supply chains and that finding an alternate source is very difficult. Doing so may end up impacting consumers who will have to pay a higher price for vehicles.

Rajiv Bajaj, MD of Bajaj Auto also told the business daily that the company imports parts worth nearly Rs 1,000 crore from Chinese vendors and that these imports are competitive.

“The reason we source components from China is simply because China is more competitive. I do not mean that our Indian suppliers are dumb, they are not; we are handicapped. The issues of land, labour, logistics, legislation, and electricity – it is because of these unease of doing business that for components like these, which in our language are called non-proprietary components, we find that Chinese sources are more competitive,” he told CNBC TV18.

Need for a better strategy

Takshashila’s Kewalramani says that India’s future growth requires a focus on boosting consumption, and this requires people to have access to cheap yet quality consumer goods.

“It’s preferable, of course, if these are manufactured in India. Doing this will require domestic policy changes. But such an approach will help drive investment, create jobs and boost consumption. Whether this capital comes from Chinese investors or others is immaterial. We have needed this earlier and now more so with the pandemic’s impact on our economy,” he says.

From a procurement point of view, instead of a blanket ban or boycott, Pai says, a better strategy would be to strategically curb Chinese companies from participating in global tenders in India.

There is also a need to look at sectors where Chinese investment could create national security vulnerabilities and how we can tackle that.

Kewalramani says that for instance, investment which leads to a seat on companies’ boards or confers decision-making authority to Chinese players must be carefully scrutinised and perhaps disallowed. “Balancing these risks while not undercutting opportunities requires a rethink of the institutional architecture, norms and processes for investment screening,” he adds.

It also calls for better regulation within our country. If we are to protect India’s data and companies from Chinese companies and capital, doing so in the absence of a data protection law and an effective e-commerce policy becomes challenging.

Therefore, Kewalramani says, “from basic factor market reforms of land and labour to areas like data protection and ownership, liberalisation of the education sector and boosting R&D expenditure, we need strong policy frameworks that incentivise businesses while protecting the rights of individuals. These are the structural shackles that limit Indian competitiveness.”

This will not only reduce India’s dependence on China but will also help Indian companies step up and improve domestic production.

A long term view

From a long-term perspective, experts say that a key learning from the pandemic and the stand-off with China is that there shouldn’t be too much dependence on one source, or one market or country for any industry.

Kewalramani points out the dependence of the Indian pharmaceutical sector on Chinese APIs. Amid the pandemic, this has proven to be a matter of strategic concern. “It is, therefore, important for businesses and policymakers to begin thinking about diversification and resilience of supply chains, along with domestic capacity development. This is a strategic imperative. Translating this objective into policy will require the government to work with businesses,” he adds.

Pai also agrees that diversification would be a good national goal, even though it may prove to be a little expensive to do so.

However, he says that this has to go hand-in-hand with a strong focus on self-reliance.

“We have to encourage our Indian companies to step up. Indian companies manufacturing in India have to be competitive because otherwise the consumer will suffer if you're manufacturing something that costs much more than the cost of imported product from China. Diversification is definitely a worthy goal and it is realistic. But it requires a plan, both to attract companies from countries apart from China to India and encouraging domestic companies to step into the space vacated by Chinese companies,” Pai adds. 

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