Expanding the conflict from border to economy may cost India dearly

Summary

With a recent violent stand-off between the Indian Army and Chinese PLA in Ladakh's Galwan valley, the calls for boycotting Chinese products in India have caught pace. The Indian government allegedly took note of people's emotions and banned 59 Chinese apps on the charges of privacy breaches. Earlier, the Indian government has tweaked the FDI rules to avoid opportunistic takeovers/acquisitions of Indian companies by adding a mandatory approval route for investors of neighboring countries. China has been the largest trading partner of India for years now, and Chinese imports constituted 14% of India's total imports in FY2019-20. In addition to trade, it has started taking active participation in the Indian startup ecosystem and has the largest share (60%) in the Indian smartphone market. With all these odds, rather than giving knee-jerk reactions, India should aim at diffusing the on-going tension and try not to expand the conflict to the economic level.

The Dragon share of Trade

The bilateral trade between India and China had grown rapidly over the last two decades, from under USD 3 billion in 2000 to USD 41.8 billion in 2007-08, when China became India's largest trading partner replacing the United States. It continues to be India's one of the largest trading partners with a bilateral trade volume of USD 81.8 billion in 2019-20, which is close to 11% of India's total trade volume.

Though India-China trade has grown significantly, it is grossly imbalanced. India never had a chance to stand a surplus against China in trade. Of the total trade volume of USD 81.8 billion in 2019-20, China's imports were USD 65.3 billion, which means we buy more from China than we sell. Chinese imports constitute about 14% of India's total imports, whereas exports to China are 5% of India's total exports. This has led to the biggest single trade deficit we are running with any country which reached an all-time high of USD 63 billion in 2017-18.

Note: Here years represent fiscal years. For example, 2016 refers to the period Apr'2016-Mar'2017 and so on.

Moreover, China's exports to India account for a mere 3% of its total exports ( Source). This means India would not be able to impact China on a larger scale with its call for boycotting Chinese goods.

Imports of Chinese equipment and machinery soared over time, with China accounting for 42% of telecommunication equipment, 60% of semiconductor devices, 82% antibiotics, and 72% active pharmaceutical ingredients. At the same time, India's low volume of exports to China remained limited to raw materials such as low-grade ores, cotton, and chemicals.

India’s imports from China

Source: Ministry of Commerce and Industry, Department of commerce

India’s exports to China

Source: Ministry of Commerce and Industry, Department of commerce

Foreign Investment

Over the last two decades, India has received a cumulative Rs. 24,638.1 billion in FDI, with Mauritius, Singapore, Netherlands, Japan, and the United States being the top five investors, constituting over 70% of India's total FDI. The proportion of China's FDI in India during the same period constituted a mere Rs. 146.7 billion that is 0.6% of total FDI inflows. Over 80% of this inflow from China has happened in the last five years.

A paradigm shift in Chinese investment in India since 2015

Note: The years in the graph represent the Calendar year, for instance, the year 2009 represents the period Jan'09-Dec'09. The country-wise Foreign Direct Investment data for the year 2019 is upto September, 2019.

The top sectors that attracted the FDI equity inflow from china from April 2000 to September 2015 are the automobile industry (60%), metallurgical industry (14%), electrical equipment (4%), industrial machinery (4%) and power (3%). (Source)

Though the proportion of China’s current FDI in India is still negligible at 0.4%, the importance of Chinese investment in Indian startups has grown over the last few years. Chinese mobile companies have achieved remarkable growth in India, with companies like Xiaomi, Huawei, Vivo, Oppo occupying nearly 60% of the Indian mobile handset market. (Source)

The Indian Response

The Indian response to China has begun even before the border stand-off. Last month, the Indian government made a few changes in the FDI rules. Now, investors of the countries that share the Indian border will have to take government approval before raising any existing investment or making any fresh investment. This was mainly aimed at China for checking any vile attempt of opportunistic takeovers. After a week of the border clash, the Indian government has recently banned 59 Chinese apps on national security grounds. This comes on the backdrop of calls for a complete boycott of China.

Self-reliance movement against China

After May 12, 2020, the ideology of self-reliance (Atmanirbharta) put forth by Prime Minister Narendra Modi gathered more public attention amidst the on-going boycott battle. With the enormity of India’s economic dependence on China, and given that it will hurt India far more than it will hurt China, India should steer away from knee-jerk reactions. It is evident that India is not going to achieve self-reliance overnight. However, with constant policy support and a robust entrepreneurial ecosystem, it can make decent progress on this front.

Finding a workable solution

At this stage of the slowing economy, which further got aggravated by the COVID-19 pandemic, economic nationalism is not the final solution. It is necessary for India to work on diffusing the dispute as the stakes involved impact India's economic well-being.

Article written by-

Hema Kumari and Amit Parhi (Guest columnist)