India Can Ill Afford China Trade Boycott

Modi is urging self-reliance, but is India ready to limit economic ties with its regional rival?

By: Henry Burrows and Yigal Chazan

Following their Himalayan border confrontation last month, India looks to be shaping up for an economic battle with China, which it might regret given its reliance on Chinese goods and investment.

Since the fatal June 16 clash along the disputed frontier, which left 20 Indian troops dead, there have been loud public demands in India for economic retaliation and growing indications that New Delhi may be heading towards a trade boycott of China, though its scale and duration remain unclear.

Customs officials have been holding up clearance of Chinese goods, hampering manufacturers dependent on just-in-time deliveries. Nearly 60 of China’s biggest apps have been banned, with the government apparently considering whether to allow Huawei to take part in India’s 5G network rollout.

Some 50 Chinese investment proposals are reportedly being reviewed by officials under new screening rules predating the border clash, and Chinese companies have been ruled out of participation in road building projects and investing in micro-, small- and medium-sized businesses.

At the same time, the Indian authorities are reportedly considering higher tariffs and non-tariff measures for scores of Chinese imports in an apparent attempt to keep out goods that can be produced domestically. They are also said to be consulting with Indian companies on trade restrictions for hundreds of non-essential products.

India’s Prime Minister Narendra Modi has meanwhile reiterated his desire for his country to be more self-reliant, an aspiration articulated in May when launching a stimulus package for an economy so badly hit by the coronavirus that a full-year contraction might result, the first in more than four decades.

China is India’s second-largest trading partner after the US, yet New Delhi has been concerned over the asymmetric nature of its economic ties with Beijing. Its trade deficit with China ran to US$49 billion last year. In November, India pulled out of the Regional Comprehensive Economic Partnership, a free trade pact including China and 14 other countries, worried that it would lead to a wave of cheap Chinese imports, undermining local producers.

Yet the signs are that a sustained economic boycott of China could backfire, especially if Beijing chooses to retaliate, raising costs for domestic businesses and consumers. Indian trade representatives have warned that the country is not ready to undertake large-scale import-substitution, particularly for high value-added products. They say these would take time and effort to replace.

Chinese parts and goods are used in a range of Indian sectors, particularly in the pharmaceutical and motor industries. Moreover, Brookings India estimates that China’s existing and planned investments in the country come to about US$26 billion. A significant proportion of the funds have been channeled into start-ups in the high-tech sector, with India last year becoming the principal destination for Chinese foreign investment in IT and electronics.

New government screening of foreign investment from neighboring countries was introduced in April to guard against “opportunistic takeovers” during the pandemic, a move widely seen as aimed at curbing Chinese investors. Indeed, China, the biggest regional investor, has called the rules “discriminatory.”

Finding new sources of investment and essential goods may be challenging. And in the short- and medium-term, there is not much hope of Indian manufacturing filling the gap left by sweeping restrictions on Chinese imports. Despite Modi’s lofty rhetoric about turning the country into a production hub when he came to power in 2014, he has struggled to turn words into deeds.

The premier had aimed to boost’s manufacturing’s share of GDP to 25 percent by 2022, but it has been hovering around 15 percent. His “Make in India” campaign, a central theme of his first term in office, has largely failed to get off the ground, notwithstanding efforts to create a more conducive investment environment.

Modi has improved the ease of doing business, reduced corporate tax rates from 30 to 22 percent and is pressing ahead with privatizations, yet on other fronts such as his indifferent anti-corruption efforts and slow response to the troubled banking sector, he has not inspired investor confidence. Nor will they have been encouraged by the country’s inadequate infrastructure and low productivity. Indeed, Foreign direct investment in manufacturing in recent years has been lower than it was before Modi came to power.

In a renewed bid to draw investors, Modi plans to reform restrictive land acquisition and labor laws to make India more competitive but any form of trade boycott will raise questions among domestic manufacturers about the feasibility of importing vital parts from China and access to Chinese markets should Beijing take retaliatory action. US manufacturers based in India are said to have already raised concerns about the customs clearance holdups.

This should worry Modi, especially as he has been hoping to entice manufacturers based in China to relocate at least some of their production to India as they consider their options following the massive supply chain disruption caused by the pandemic.

The trade war with the US persuaded some to shift output to Asia, though up to now the likes of Vietnam, Thailand, and Taiwan have been the most favored destinations. For India to compete with these countries, it will have to do much more to improve its investment environment.

Yet even if there is a willingness to do so, the process will take time and could be thrown off course by the domestic economic problems that may arise should India seek to wean itself off its dependence on China too soon or too quickly.

Henry Burrows is a senior associate and Yigal Chazan head of content at Alaco, a London-based business intelligence consultancy.


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