Indo-China relations: 4 ways India can neutralise economic dependence on China

In the popular drama series "Game of Thrones", the 'mother of dragons' Daenerys Targaryen realises that while one may bring up dragons successfully, the relationship with them will always be a tenuous one. The experiences in a fiction can sometimes find resonance in real life as well, particularly if the dragon in question is also highly ambitious.

Economics is not just concerned with the optimal use of resources and management of wealth and prosperity, but it can also be a major source of power to a nation for geopolitical domination. With the ongoing border conflict with China, there has been a reinforced sentiment against the Chinese strategy of economic dominance, not only in India but across the US, South Asia, and Africa, and murmurs even among their friends.

China's aggressive strategy of creating an economic burden on other nations, thereby exerting inordinate pressure on them, is not a recent phenomenon. It has been practiced for long with extensively huge investments by Chinese firms in businesses in various countries, especially in infrastructure projects, to own key assets.

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It virtually owns a few countries, or at least most of their resources, as they are highly debt-ridden. With ambitious projects like One Belt, One Road, and the string of pearls already underway, China's dominance over the Asian region could pose serious threats to India. According to data by AEI, China has invested a staggering $2 trillion abroad with about $600 billion in Asia alone.

However, the focus, for now, is on reducing the huge trade deficit between India and China. As per a report by Acuite Ratings and Research for the current financial year, India's estimated exports have stood at $16.6 billion while the imports have been a whopping $65.1 billion.

The gap of $48.5 billion is a veritable chasm, which would require some concerted effort to address. The top imported products from China include electronics, electrical components, reactors/boilers, and their parts, organics, and chemicals (including Active Pharmaceutical Ingredients), machinery and equipment, as well as common items like festive diyas and idols. This is particularly alarming since not only has China made Indian markets dependent, it is now threatening the local economy.

Let me outline a pragmatic pathway, sans the jingoistic rhetoric, with which the Indian economy can neutralise its dependence on China, both in the current scenario and in the long run.

The situation so far

Keeping in view the economic losses due to the pandemic, as well as, the current anti-China sentiment, the government has taken a few steps to weaken the reliance on China. It fired the first salvo when it banned 59 Chinese mobile applications as a move to protect user data from misuse by Chinese authorities, particularly in the wake of the National Intelligence Law (2017) of China, which states that Chinese corporations cannot refuse to share sensitive consumer data if the Chinese administration demands. While this may have a signaling effect to an extent, the substantive impact would be next to nothing.

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The government has also doled out a scheme to allocate Rs. 10,000 crore to boost the production of APIs (Active Pharmaceutical Ingredients) in India in conjunction with a plan to increase trade barriers and tariffs on around 300 imported items. While this will certainly ruffle the feathers of the dragon, it is still not enough.

A recent study has suggested that India has the potential to reduce the trade deficit by $8.4 billion over the next financial year (FY22) through rationalisation of a part of the imports on selected 40 categories in which India already has available manufacturing facility/infrastructure, and it is in addition to this that we need to work on several fronts.

The road ahead

As the economy struggles to recover post the coronavirus lockdown and disputes with China are aggravating, a few steps in tandem can help us dance with the dragon on more equal terms.

1. Import substitution

By this, we do not only mean substituting non-essential imports with already manufactured alternatives or potentially easy ones to produce but also examine other items that can be imported from other countries at comparable prices. This can be an opportunity to strengthen trade relations with other countries and enable mutual benefits for the economies, thus, catalysing recovery from the COVID-19 crisis.

2. Attracting investments

The coronavirus pandemic has led to major corporations contemplating shifting their manufacturing bases from China. India can attract a few of them by implementing a competitive strategy that would require radical changes in law, particularly in the areas of land acquisition, labor issues, tax incentives, and ensuring quick permissions/clearances.

3. Empowering local substitutes

Many local goods fail to compete with their Chinese counterparts due to their incredibly low-cost or high-value for money. The government can help boost the demand for local substitutes by providing tax benefits, rate cuts to reduce costs, and incentives to improve quality. Using the expertise of institutes of eminence and those of national importance, an enabling ecosystem can be created for improving the quality and marketing of these products. The ODOP initiative of the government of UP could be a model to begin with.

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4. Reciprocal policies for Chinese firms

The government can make it mandatory for new Chinese entrants to have a joint venture with an Indian firm as a partner, should they choose to start a business in India (a similar policy is followed by China). Software companies should be urged to set up their data centres at Indian locations with necessary controls on data usage, access, and dissemination.

The long game

There are some steps that can help India recalibrate its relationship with China, but these would require long-term consistent efforts. For instance, empowering the manufacturing sector so as to considerably reduce the need for imports can be of help, provided we incorporate the lessons we have learnt in the implementation of "Make in India" initiative.

Policy changes to make them transparent and effective in serving their purpose of strengthening business operations and investment in infrastructure will not only boost foreign investments but also mobilise local businesses and manufacturing.

A critical component of the long-term strategy has to be the promotion and incentivisation of Research and Development (R&D), not only in technology and management techniques but also in consumer trends and behaviors.

Finally, the messaging on the importance of consistent strategic efforts, commitment, phase-wise implementation, and most importantly, shedding skepticism, needs to be sent out constantly and consistently.

By developing a positive ecosystem, we can come up with novel and innovative solutions to not only strengthen the economy but also contribute to global value. The 'One Sun One World One Grid' project is an excellent example of how India can come up with global value maximisation through sustainable ideas that can win hearts.

(The author is Director, IIM Indore.)