The border clash between Indian army and the Chinese PLA has sparked an anti-China sentiment in the country. Calls to boycott Chinese goods and reduce import from China have been voiced out by political elites and nationalists in India.
A brief synopsis of India China trade
India, initially a non-aligned country to world trade during cold war era, enjoys the status of most favoured nation with most countries around the world. India presently trades with around 140 countries, with China being the biggest trading partner after US.
(India- China trade volume)
The bilateral trade between India and China have grown fourfold in the past decade. The trade volume between the two nations stands at 730,550 Crore INR, more favourable for China than India as India has a trade deficit of 371,018 crores INR with China.
Chinese products hold more than 60% market share in India’s smart phone, solar power and pharma market.
The following are the potential impacts of banning Chinese products or raising tariffs against Chinese imports –
Solar Panels and Photovoltaic cells:
India imports solar panels and solar photovoltaic cells worth $1.5 billion from China. The prices of the equipment are believed to be much cheaper than those produced by domestic manufacturers.
A ban on solar imports or increase in tariff duties shall negatively impact solar productions and subsequently affect India’s committed renewable energy targets under Paris climate accord and International solar alliance.
India imports more than 60% of critical active pharmaceutical ingredients and key starting materials from China and 30% from countries like Germany, Sweden and Italy.
The prices offered by its Chinese counterpart are 25-30% cheaper than the prices offered by other countries. Moreover, the user companies of these APIs have invested deeply in building supply chains that traces back to China.
A ban on API and KCM imports impacts cost and competitiveness of user companies in the external markets especially Africa and South America i.e. the domestic API market is underdeveloped accounting for around 8-10% and API procurements from other countries are charged at cost plus premium which shall cost India with 0.89% of GDP annually.
Funding of Indian Start-ups:
(Chinese investments in Indian start-ups amounting to $4.6 Billion)
Chinese investments in Indian start-ups have grown fourfold and presently stands at $4.6 Billion. Any adverse policy change by India like ban on products or increase in tariff shall affect India’s foreign policy credibility at a time when India has been trying to attract foreign investments. It shall also cause investors to liquidate their investments in India or realign their risk return perceptions and demand higher returns for the increased risk.
Consumers and Retailers:
A ban on Chinese products or increase in tariffs shall affect price sensitive consumers. The switching costs that a consumer shall incur in purchasing imported products of other countries are much higher. Moreover, since the Chinese products in India are already paid for, banning them shall affect the poorest retailers, because of their limited ability to absorb unexpected losses.
Approach to progressively reduce interdependence on Chinese products –
Government scheme’s and subsidies should be aligned towards creation of product alternatives which can compete both in terms of quality and cost against Chinese products. For example, Despite the existence of incentive schemes and subsidies to boost domestic production of solar panels and solar cells, the domestic products are not at par with Chinese products in terms of efficiency and durability
(India’s R&D expenditure as a % of GDP)
The Government should increase its resource allocation for R&D expenditure and encourage private investments in R&D via subsidies and concessions so as to revitalise the innovation ecosystem in India. Currently the government’s expenditure on R&D (as a % of GDP) is 0.86. An increase in R&D expenditure shall equip the industries with technology and skill to maintain their competitiveness in the market.
Liberalization of foreign direct investment norms are required to facilitate the domestic industries to move towards better productivity and efficiency as presently India receives only 25% of the FDI that China gets and 10% of what US receives.
The way forward
India adopting a protectionist policy at a time when it is facing a sharp GDP decline, could be more detrimental to India than China and turning a border dispute into a trade war is unlikely to solve the border dispute. The employment of traditional channels like dialogue and consultation are the need of hour to solve differences at the highest levels. Thus, a strong India-China relationship is important not only for the mutual benefit of its people, but also for the world.
Written By – R Mrithyunjay