MANOJ KEWALRAMANI
The past three years have witnessed the emergence of a new pattern in the India-China relationship. With tensions along the disputed boundary escalating, New Delhi has increasingly chosen to respond with actions in the economic domain.
For instance, even before the standoff began in Eastern Ladakh in April 2020, the Indian government made prior approval mandatory for investments from the countries sharing land borders with India. Following the Galwan Valley clash, decisions were taken to ban Chinese apps on national security grounds and exclude Chinese vendors from India’s 5G ecosystem, and there has also been an intensification of investigations into Chinese enterprises.
In addition, there has been a growing discussion across the policy ecosystem in India about the potential of Chinese economic coercion, particularly with regard to critical sectors, and an emphasis on the need to boost local manufacturing. The Indian government’s Production Linked Incentive (PLI) schemes across 14 sectors with the aim of creating national manufacturing champions, is part of this effort.
Proliferating Trade Links Between Both Nations
Despite this, India’s trade with China has continued to expand. Bilateral trade hit USD 115.83 billion in 2021-22 fiscal, with the trade deficit being USD 73.31 billion. 2022-23 fiscal is likely to see a continuation of this trend, with trade already at USD 69.04 in the first six months. The deficit so far in this fiscal is at USD 51.50. This has led to much consternation and criticism, and even some extreme calls for decoupling. A more nuanced debate, however, requires thinking through the following four points:
Firstly, it is now amply evident that we are living in a post-globalisation world. In this new era of segmented or impeded globalisation, notions of comparative advantage and free trade binding states in a relationship of mutual prosperity and peaceful co-existence are weakening.
Increasingly today, countries are tending to leverage economic interdependence for coercion and to achieve political objectives. That said, the three decades of economic globalisation which nurtured this interdependence, have also raised the cost of conflict while providing an alternate arena to express displeasure over political or security matters.
This is not necessarily a bad thing. Despite the power asymmetry between India and China, it is because India’s economic power has grown over the past three decades and its trade and investment relationship with China has expanded that it has been able to adopt punitive measures other than military action in response to the escalation of tensions on the boundary.
India’s Heavy Dependence on Chinese Imports To Meet Strategic Goals
In other words, the presence of a significant economic relationship is a necessary condition to be able to engage in economic coercion. Therefore, from a strategic perspective, complete economic decoupling is not going to improve India’s security or strategic environment vis-a-vis China. Secondly, the reply of the Ministry of Commerce in the Rajya Sabha earlier this month, does well to explain one part of the structural challenge that lies at the heart of the lop-sided trade relationship with China.
The government said that “most of the goods imported from China are capital goods, intermediate goods, and raw materials and are used for meeting the demand of fast expanding sectors like electronics, telecom, and power in India. The rise in import of electronic components, computer hardware, peripherals, telephone components, etc. can be attributed to transforming of India into a digitally empowered society and a knowledge economy.”
The uneven nature of the trade is because while we import capital and intermediary goods, India’s predominant exports to China are raw materials such as iron ore, cotton, copper, aluminum and diamonds, and natural gems. The website of the Indian Embassy in Beijing explains that over time, “these raw material-based commodities have been overshadowed by Chinese exports.”
In essence, trade with China is useful to achieve India’s strategic developmental objectives, but this trade is structurally imbalanced. Addressing this requires enhancing the competitiveness of Indian manufacturing, which in turn, also relies on imports from China.
Can PLI Schemes Address Indo-China Trade Imbalances?
Therefore, it is worth acknowledging that making this change is a long-term challenge and will likely lead to a greater imbalance in the short run. But while doing so, it is important to engage in dialogue with Beijing to address the market access impediments that limit Indian exports ranging from agricultural products, and pharmaceuticals to IT, services, entertainment goods, etc. Unfortunately, given the current state of the relationship, this is a stalled conversation.
Thirdly, the reply of the Ministry Of Commerce also pointed to the positive results of the PLI schemes. In particular, it touted the reduction of imports of mobile phone handsets and the increase in exports, saying that in this context, “PLI as an instrument has reduced India’s dependency on China.” It stated that achieving this has meant an increase in key components from China.
This is an inevitable outcome of a process through which Indian manufacturing will have to progress as it evolves the market and incentives for intermediate goods manufacturers. In such a situation, maintaining import tariffs on inputs while trying to incentivise production works at cross purposes.
A ‘Make in India’ Reboot Is Critical for Self-Sufficiency
As my colleague, Panay Kotasthane has argued, “The tariffs end up increasing input costs to such an extent that it negates the monetary benefits of PLI schemes. The result is that manufacturing in India remains as uncompetitive as it was earlier, despite the government providing significant financial incentives.”
Therefore, it is critical to think through the objectives that PLI schemes are supposed to meet. Is the goal to reduce strategic vulnerabilities through self-strengthening in critical sectors over time? Is it to expand Indian exports and its stake in the global value chains? Or is it to subsidise domestic manufacturing to create jobs and enhance domestic value addition? If the former is the case, then it is also important to reassess the sectors to which PLI schemes have been extended. Over-extension can lead to the schemes becoming an alternative to actual reform.
Finally, while there is broad recognition that India must address economic vulnerabilities in critical sectors, more granular thinking needs to take place to address the threats while minimising costs. For instance, within a particular sector such as ICT, high levels of imports need not imply vulnerabilities. There must be distinctions drawn between edge and core components. The consumer welfare prism should be applicable to the former, whereas the latter requires a national security prism. The same is also applicable to discussions regarding dependence on China for pharmaceutical APIs.
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