The economic contours of the Sino- India conflict

A foray into the unknown and undiscovered — Saatwik Panigrahi

Indo-China dynamics of international trade

Economy in a historical context

The last fifty years on the twentieth century experienced a turn of events, which helped the conutnry to tranition from a communist economy to a The Chinese leaders adopted a ‘gradualist’ or ‘incremental’ approach. They believed that sequenced economic reforms, compatible with the ideologies of the communist party and political system of the country would lead to rewarding economics by preventing fierce public debates under the communist dictatorship. The controlled transition, with the onset of the reforms, helped China to increase its global standing exponentially with a simultaneous retention of successful state monopolies and adequate incentivization and provisions to ignite the creation of competing private enterprises.

There has been a revolutionary change in Indian Economy since the espousal of the Economic liberalization in 1991. The South Asian Economy has made enormous strides in climibing the ladders of economic growth, accompanied with a substantial rise in the GDP and imports, the sucess has been going hand-in-hand with several institutional failures. First, the vast majority of successes have been private-sector successes, whereas the vast majority of failures have been government run public sector failures, mainly in tertiary sector . Second, wherever markets have become competitive and globalized, the outcomes have been excellent. But many areas remain unreformed, a few areas have fallen prey to a host of inefficiencies, and are sliding down. Third, the weak quality of Indian institutions and mechanusms is increasingly a problem, and without reformed institutions, India will be unable to maintain high growth.

The current account of China has had surplus for a longer period of time, India’s current account lies in the deficit zone for most of the years since 1980, except during 2001–2003.

EXPLORING THE MAKE-IN-INDIA MOVEMENT

The Make in India movement in India begun in the year 2014, however, it can be seen in the graph that India’s Chinese imports have substantially increased even after that, and the imports have declined. This has given rise to enormous trade deficits for the country, making India heavily reliant on Chinese imports.

In 2014, the share of manufacturing in India’s Gross Domestic Product was 15%. In 2019, , it fell to 14%. ‘Make in India” has failed and it has been over five years since it was put into place. The self reliance index of the defense sector has remained stagnant at 0.3, and indigenization of this crtitically strategic sector has faced huge backlashes.

IS INDIA A VICTIM OF THE DEBT TRAP DIPLOMACY ?

India has not entered into any loan agreement directly with China. However, it has been the top borrower of Asian Infrastructure Investment Bank (AIIB), a multilateral bank wherein China is the largest shareholder (26.6% voting rights) and India the second (7.6% voting rights) among other countries. China’s vote share allows it veto power over decisions requiring super-majority. Loans provided to India could also pave the way for Chinese firms to enter and gain experience in the promising Indian infra market. Therfore, India might become a prey to the this predatory policy, and is vulnerable to this action upto certain degree.

Retaliatory Foreign Trade Policies

China is famous for it retaliatory efforts in terms of international trade, as seen in the case of USA and recently Australia, which highlights a potential threat of a trade war, and retaliatory FDI policies. As per a Brookings India report, the total amount of current and planned Chinese investment in India has crossed $26 billion (around Rs 1,98,000 crore)

What do adverse FDI policies mean for India ?

Under the make-in-India program, smartphone companies like Xiaomi ( it manufactures 95%o of its locally sold smartphones) have set up huge factories. In addition to these companies, several domestic shops, retailers, employment of people in ancillary industries are at stake, which could aggravate the already declining employment rates in India during the pandemic.Unicorn startups : These startups have a high market growth potential and have received enormous funding for expansion. Chinese tech investors have put an estimated $4 billion into Indian start-ups. Such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded. ( OYO, BYJU’S, OLA etc)

Chinese investements in India

In India, China’s tech giant companies and venture capital funds have become the primary vehicle for investments in the country — largely in tech start-ups. The single largest Chinese investment in India is the $1.1 billion acquisition of Gland Pharma by Fosunin 2018. This accounts for 17.7% of all Chinese FDI into India. Indian start-ups rely disproportionately on overseas venture capital (VC) funding — all start-ups worth over $1 billion are foreign-funded. Some like Flipkart and Paytm have been acquired outright. India still does not have a Sequoia or Google of its own. Althouth, the fundind of these startups has efficiently boosted their growth, India should be apprehensive about the investment-debt trap diplomacy, making Indian companies vulnerable to hostile chinese takeovers.

COMPARATIVE ADVANTAGE

China accounted for 11.8 per cent of India’s total imports. However, India’s total exports to the country was a mere 3 per cent. India’s major imports from the neighbour include engineering goods, electronics, pharmaceuticals and automobile components. At a total value of over $18 billion, electronic imports formed a quarter of the total imports in February. Nuclear reactors, machinery and parts comprised another major chunk of the imports at $12 billion.As it can be seen, Indian imports goods of strategic importance, and any deterrence in import of these goods before achieving of self sufficiency is a huge threat for Indian manufacturers relying on imports. India currently has a comparative disadvantage in producing these goods, therefore, it must carefully evaluate substitutes and alternatives before indulging in any adventurism.

It can be seen that India only accounts for 3% of China’s total exports, and any unfavorable trade policy would not have a devastating effect on the humongous Chinese export-driven and FDI penetrated economy.

OPPURTUNITIES FOR INDIA

The growing apprehension and dislike for Chinese manufactured products might encourage companies to relocate to India.Indian contract manufacturers said there is a surge in interest from brands to make products like televisions, air-conditioners, microwave ovens, shoes, speakers, ear phones, set-top boxes and apparel in the country as companies fear consumer backlash against ‘Made in China’ products and expects surge in import duties by the government as a retaliatory step against China due to the Galwan crisis. A report by FICCI revealed that 56 Chinese imported items could be replaced with local alternatives. Chinese companies like OnePlus and Realme are exploring options to shift their production to India

THREATS TO CHINA

Several large Chinese companies spanning handsets, electronic devices and internet firms are deeply invested in India’s consumer market. India’s emergence as the biggest overseas market for Chinese mobile phone companies is one of the most significant developments in China’s relations with India over the past five years. Thus, China stands to lose one of the most easily accessible markets. The quality of education in China is superior to India by several folds . It is more expensive to set up manufacturing in China because the cost of labour is higher, despite that, China’s share of manufacturing has not fallen in the five years that “Make in India” has been promoted.

WAY FORWARD

The government needs realize the importance of ‘gradualist’ approach on the process of self sufficiency rather than a “shock therapy”. A gradual move towards the process is the need of the hour, because government may have to boost its fiscal spending in industries of critical importance during the pandemic. Any additional fiscal burden could pose a huge threat on the economy. It should begin with a process of identifying alternatives, laying frameworks for SEZ to promote these industries gradually, offer adequate incentives to these producers. Although there is a strong negative sentiment towards Chinese products, any hindrance on cheap Chinese supply chains could paralyze the already distressed and strategic sectors. Data localisation, imposititon of stringent regulations to govern trans-border data flows. Government mechanisms for reviewing foreign investments involving the collection of sensitive personal data. Government mechanisms for preventing hostile takeovers of Indian companies by Chinese counterparts. India has given the world a glimpse of its desperation for foreign investments while simultaneously fearing foreign acquisition — contradictory though these two strands may be — in quite an unsubtle manner. Compared to China, which forced hundreds of western and Japanese firms to surrender technological knowhow and pass on management secrets to their Chinese partners in return for market access, India has done little by way of bargaining. This instituitonal failure in India should be reversed through ensuring a greater flow of information to Indian partners. It would be dangerous to overestimate the attractiveness of the Indian market for China, and assume that the FDI rule will force it to change its stance altogether, other Asian economies like Malaysia, Indonesia etc. have aslo historically served as important players in attracting FDI inflows.

Student at Kiit International School. Passionate about research in business, political science, current affairs and economics.