Indian Fury at Chinese Attack Cuts into Commerce

Delhi increasingly wary of doing business with Beijing

By: Neeta Lal

The Indian government is rethinking big-ticket commercial deals worth billions of dollars with Chinese companies after 20 Indian soldiers were killed in a muddy but brutal clash in the Galwan Valley in eastern Ladakh on June 15 as a wave of anger has spread across the country, leading to raucous public protests.

Footage of infuriated Indians breaking and burning their Chinese appliances such as TVs also are doing the rounds on social media. Upping the ante further, Union minister Ramdas Athawale demanded a ban on restaurants selling Chinese food although these are Indian restaurants run by Indian restaurateurs, employing Indian chefs and using largely Indian produce.

Normally when such incidents trigger trade decouplings between countries, both suffer, but in this case, with bilateral trade far in China’s favor, most analysts forecast that India would be the loser. Nonetheless, public pressure is influencing the government to rethink the extent to which it would like to engage commercially with China.

A US$61.8 million contract to a Chinese firm in the Railways’ Dedicated Freight Corridor project has been scrapped, along with the bidding process of the Mumbai monorail project in which Chinese firms were the lowest bidders, and a Haryana tender in which Chinese firms were bidders. The Telecom Ministry has also hinted at its intent to whittle down the use of Chinese equipment in Indian networks with direct ramifications for Chinese conglomerates like Huawei and ZTE which have a sizeable presence in India.

Another project under reconsideration is a financial bid by a Chinese company, Shanghai Tunnel Engineering Co Ltd for the construction of an underground stretch of the Delhi-Meerut Regional Rapid Transit System. The Chinese company's success in becoming eligible for the US$150 million project had already raised a political storm when the Swadeshi Jagran Manch, an affiliate of the rightwing Hindu Rashtriya Swayamsewak Sangh, demanded that the Narendra Modi government cancel the bid. The strongly anti-China SJM is spearheading the campaign for boycott of China-made goods.

“Chinese businesses that operate in India or have bagged contracts for projects in the country will not find the going as smooth as before,” said Ashish Athawale, a public policy expert with a Mumbai based think tank. “Chinese stakes may be in trouble and their bids will definitely come in for far greater scrutiny now. Everything will boil down to the trust deficit between the two nations.”

Meanwhile, reports suggest that the Telecom Ministry has also asked BSNL, MTNL, and other telecom subsidiaries to shun Chinese equipment in upgradation. Purchase of goods manufactured in India is being encouraged.

This push is also part of the government’s "Aatmanirbhar Bharat" launched by PM Narendra Modi earlier this month which is aimed at prioritizing indigenous products and technology over imported ones. However, critics have slammed the Aatmanirbhar initiative as old wine in a new bottle, a repackaging of previous schemes launched by erstwhile and even the current government.

In keeping with its larger aim to minimize Chinese transactions, India is also considering erecting tariff barriers and other obstacles, including subsidizing finance for promoting local power equipment usage and prior-permission requirements for imports from countries with which it has a conflict, as part of a broad economic response to Chinese aggression in Ladakh, Energy minister Raj Kumar Singh told business leaders in New Delhi this week.

The proposed overhaul of norms for the power sector will also include rigorous testing of foreign equipment.  “The policies are primarily aimed at curbing usage of Chinese equipment in the power sector, as part of a wider decoupling exercise from China. They will thwart usage of Chinese equipment in sectors across power generation, distribution and transmission projects, etc,” said a government official in the Energy Department.

Amendments to tighten regulations were already in the pipeline before the border tensions escalated. In April, days after a Chinese bank picked up shares of HDFC, India’s second-largest private bank, at rock bottom rates, the government amended the foreign direct investment policy – including extensive modifications in the Companies Act, the Sebi Act, and Foreign Exchange Management Act – to scupper a similar predatory approach in future.

Be that as it may, policy experts have suggested that rather than simply trying to minimize Chinese involvement in Indian industry, what will fetch higher dividends are sound policies and great infrastructure that raises India’s industrial competitiveness.

“For instance, the government should not have to force people to not buy Chinese products because doing so will come at the cost of the consumer,” said Rajeev Vibhuti, a New Delhi electronics trader. “The hardest-hit victims will be the price-sensitive, middle-class buyers who enjoy access to low-priced Chinese goods whose quality may be suspect but at least they fulfill a need. How about creating good Indian products that are also attractively priced to cater to this demographic?”

Also, the larger question is – considering China’s deep investments in the Indian economy — accounting for US$5.5 billion until last year — how much of decoupling is actually possible between the two economies. New Delhi trades more with Beijing than vice versa.

For instance, China’s smartphone companies hold a share of about 75 percent of the Indian market. Bilateral trade also weighs in China’s favor. The latter’s exports amounted to US$57.86 billion in 2019 compared to imports totaling US$16.32 billion. India is saddled with a US$50-billion trade deficit with China.

More importantly, China’s imports from India are less than 1 percent of its total imports. While China accounts for 5 percent of India’s exports and 14 percent of India’s imports, India’s imports from China are just 3 percent of China’s total exports. In other words, if India and China were to cut trade ties, China would lose only 3 percent of its exports and fewer than 1 percent of its imports while India would be staring at a loss of 5 percent of its exports and 14 percent of its imports.

An analysis by The Indian Express found that Indian companies across import-dependent sectors such as automobile, pharmaceuticals, electronics, telecommunications, have claimed that any move to clamp curbs on bilateral trade would be “counterproductive, impacting the overall competitiveness of the Indian manufacturing sector and undermining our competitiveness to export.”

Some analysts suggest that rather than a harsh decoupling, reducing import dependence could deliver the twin goals of saving forex while also facilitating India’s objective of becoming self-reliant. This aim was highlighted by finance minister Nirmala Sitharaman while presenting the Union budget on February 1. She said that unhindered imports of goods under free trade agreements were hurting domestic industries, particularly MSMEs and such imports required stringent checks.

In other words, rather than emotions clouding its dealings, India’s aim would be better served by employing sound strategy and statecraft to outwit China. Hardcore economic decisions that have long-term political and security ramifications need to be well-thought out and considered no matter how provocative the neighbor.