Red Dragon White Elephant

Has the fiery and flaming China tamed a tired India? The Dragon may seem quite powerful at the moment, but can the elephant wake up and gallop away to the final finishing line? Can we build a brighter future that takes us ahead of our neighbour?

By Alam Srinivas
  • PM’s masterstroke lies in a change of a single alphabet, from ‘d’ in Made to ‘k’ in Make. This transformed the mindset and message behind Indian manufacturing
  • the Productivity-Linked Incentive scheme can enhance manufacturing at “competitive costs, which will give considerable competition to China”
  • ‘Make in India’ can coexist with the new global China+1 supply chain strategy as many countries realise that they cannot rely on a single supply basket -China
  • Chinese conundrum will only be replaced by third-party twisters. Inefficiencies and artificial import restrictions will necessarily breed corruption

IT is a political hot potato, which is evident from the manner in which the political opposition lambasts the government over the issue. It is a geopolitical disaster, as the Indian economy is lopsidedly dependent on a decades-old enemy neighbour, which eyes the country’s strategic border territories. It is a cultural and religious embarrassment; the Buddhist-Confucian nation stays miles ahead of the majority Hindu one in the race to emerge as this century’s superpower. Most importantly, it can lead to electoral reverses for the central ruling regime, or at least contribute to them in the near future. The fiery and flaming Red Dragon (China) seems to have tamed a tired elephant (India).

One of BJP’s angry rhetoric is to ban Chinese products, stall investments from there, and force its companies to exit from India. Yet, as recent figures indicate, Chinese imports have zoomed, even as the bilateral trade deficit (difference between imports and exports) has skyrocketed. Between 2014-15, when the BJP came to power at the Centre, and 2021-22, both imports from China, as well as the deficit, jumped by more than 50% each. What’s worse, the deficit came down in 2020-21, and then reversed direction to soar by 66%. The trends in the first seven months (April-October) of this fiscal year (2022-23) show that both annual imports and yearly deficit are likely to be higher than the previous one.

However, the ruling party downplays the ramifications. Its supporters contend that Chinese investments have slowed down, and there are pressures on Chinese firms from the tax department and Enforcement Directorate. A successful clampdown banished Chinese social media and services firms. Even in terms of imports, Piyush Goyal, Minister for Commerce & Industry, told Parliament that the import basket comprises capital goods (for setting up new plants), and raw materials and intermediates (to make value-added final products). In essence, what we buy from China helps us boost our GDP, and churn out goods that are more profitable. It’s a win-win situation for India.

‘Made in India’ was the BJP’s desired goal in the 1990s – Indian products for Indians and others, made only by Indians. Modi’s ‘Make in India’ emerged as a new objective – Indian products, made by Indians and/or foreigners, for Indian and foreign markets

As the government defends itself against vociferous attacks from the opposition, local industry eyes opportunities that may open up because of political skirmishes, and consumers wait apprehensively to calculate if their budgets are likely to go haywire. Media reports indicate that the 2023 Budget may increase import duties, or impose fresh ones, on Chinese products. This will enable local firms to sell more, but domestic buyers may end up paying more for these products. Given the high prices prevalent now, India may enter a dangerous zone of high growth, high inflation, which is indicative of a hot and unstable economy. It’s a tightrope game; any imbalance can topple the economic applecart.

This is why it is important and imperative to understand the nuanced nature and insightful implications of Chinese imports. The Dragon may seem quite powerful at the moment, and the BJP may be on the back foot. But can the elephant wake up – yet again – and gallop away to the final finishing line? It may be fire and smoke that has engulfed the Indian economy. But when it clears up, and the ashes are cleaned, can we build a brighter future that takes us ahead of our neighbour? When you think of the bilateral trade between India and China, you need to assess and reassess the trends along the following lines.

POLITICS VERSUS GEOPOLITICS  

In the recent past – last 21 months – China is not the only beneficiary of India’s import boom. Other nations such as Russia, Saudi Arabia and UAE have gained ground. This reflects not just on our economic situation, but on the ever-changing and ever-evolving diplomacy and geopolitical strategies. New Delhi wishes to engage with Washington, as it has in the past two decades. 

At the same time, India wishes to keep the US on tenterhooks, as the former strengthens its ties with Russia, fuels its machinery via the Middle East, and continuously looks over the shoulder towards the East. In between these uncertain and contradictory chess-like moves, New Delhi and Beijing wait for the other side to blink first.

Consider India’s stance during the ongoing Russia-Ukraine war, which startled and rattled the West. As the US and European nations adopted a hardline military and economic approach, India veered towards Russia. So did China and Saudi Arabia. An informal, unsteady, short-term eastern axis of power emerged. This increases India’s import dependence on these countries. Russia and the Middle East are critical for crude oil imports, a critical ingredient to keep the economy on track. China supplies the machinery (capital goods) to spur private and public investments in India. The US can wait, especially as Washington spars with Beijing, and India enjoys a surplus in bilateral trade with America.

Clearly, this is tricky and complex. Indian policy makers have to remember that Red Dragon (China) deployed similar tactics and strategies, only to find itself in a fierce trade confrontation with Uncle Sam, and others like Australia. At present, bilateral relationships across the globe are fickle, and enemies turn friends, and vice versa, within no time. New Delhi has to be careful if it wishes to increase import exposure to Beijing in the short run, even as it hopes to derail the massive Chinese manufacturing locomotive in the medium term. For decades, India has tried to emerge as a substitute global hub to China. It hasn’t worked. For it to do so in the near future requires policy precision and nano-calibration.

GREED VERSUS NEED

Ad-hoc hikes in import duties, based on industry lobbies and politics, will not help. The regime needs to decide national needs, as opposed to corporate greed. For example, there is a clamour to curtail supplies of low-tech and low-value items like toys and umbrellas from China. Local makers contend that these are neither strategic nor crucial, and buyers can adapt to their products without fuss. But if this reduces choices, especially toys that aid education, it can impact the knowledge base over generations. Umbrellas may not mean much. But in places that witness heavy rainfalls, and umbrellas break regularly, more expensive local brands can hurt low-income consumers, who need them the most.

Consider the other extreme – imports of laptops and mobile phones. These are high-end, high-tech consumer goods. Chinese imports hint that despite India emerging as a global production hub for these products, there is an unfulfilled domestic demand, especially for inexpensive imported brands that are sold in the smaller cities, towns, and rural areas. The same is true for laptops. A deliberate and forced reduction in the inflow of these items can enhance the existing digital divide among castes, classes and gender. One of the success stories in the country relates to technology adoption, and the high and cheap usage of mobiles. The policy makers have to push this trend, rather than rein it in based on China scare.

Between umbrellas and mobiles lie the so-called intermediates, which include components and pharmaceutical ingredients, as well as capital goods like electrical and mechanical machinery. The government may feel satisfied that the former are converted into high-value final products, and the latter indicate a positive investment climate. However, as Covid disruptions in global supply chains proved, Chinese imports can unwittingly or deliberately rock any economy. For example, as imports of chips and semiconductors from China became difficult, the prices of several electronic items, including critical defence equipment, shot up. In such cases, the government has to think of new solutions.

MAKE VERSUS TAKE 

Obviously, the best way to combat the Dragon, even hurt it, is to ‘Make in India’. Not, ‘Made in India, but ‘Make in India’. Mark the subtle, almost invisible, difference between the two phrases. Prime Minister Narendra Modi’s masterstroke lies in a change of a single alphabet, from ‘d’ in Made to ‘k’ in Make. This transformed the mindset and message behind Indian manufacturing. ‘Made in India’ was the BJP’s desired goal in the 1990s – Indian products for Indians and others, made only by Indians. Modi’s ‘Make in India’ emerged as a new objective – Indian products, made by Indians and/or foreigners, for Indian and foreign markets. An inward-nationalist blueprint was reversed into a nationalist-outward one.

Media reports indicate that the 2023 Budget may increase import duties, or impose fresh ones, on Chinese products. This will enable local firms to sell more, but domestic buyers may end up paying more for these products

A recent study by the PHD Chamber of Commerce and Industry (PHDCCI) concludes that there are three dozen sub-sectors, where domestic expertise exists, but volumes are low. If the country can enhance capacities in these areas, India can substitute 40% of Chinese imports. 

Recent policy initiatives like the Productivity-Linked Incentive (PLI) scheme can enhance manufacturing at “competitive costs, which will give considerable competition to China”. More importantly, they will add to Indian exports over the next few years. While PLI sectors can constitute the first phase, states the PHDCCI study, the second one can include labour-intensive sectors such as textiles, iron and steel, and furniture.

Experts contend that ‘Make in India’ can coexist with the new, post-Covid and global China+1 supply chain strategy being pursued by several nations. Most countries realise that they cannot rely on a single supply basket named China. They need a substitute base, even if it turns out to be slightly more expensive. Indian importers can do the same. A few studies suggest that contrary to popular beliefs, there are alternate suppliers for several imported products, who possess the requisite capacities and are as cost-competitive as the Chinese producers. Thus, Indian firms are unlikely to suffer if they switch suppliers, or add new non-Chinese ones.

LAIR VERSUS FAIR

Contrived and superficial ways to restrict Chinese imports will result in future traps for Indian industry, which may be gobbled up by wild and untamed economic beasts. Consider this example. The government insists on “country of origin” proof for public procurement. This is to avoid vendors from importing cheap Chinese goods via third countries – show origin as China and destination as UAE, and divert the goods to India on high seas, or import Chinese goods directly from UAE. This will only force the Indian importers to illegally hide the country of origin, or hike their auction bids to include more expensive non-Chinese supplies. Budget 2023 aims to make the “country of origin” norm stringent.

As mentioned earlier, any policy-level attempts to deliberately restrict the inflow of Chinese goods can increase costs, and fuel inflation, if the substitute vendors aren’t competitive. If they are replaced by Indian products, it can result in inefficient local producers who, thanks to protective import duties, will have no incentives to reduce costs or prices. Even if China is blocked for the moment, cheaper suppliers from other nations will enter the Indian markets. The Chinese conundrum will only be replaced by third-party twisters. Inefficiencies and artificial import restrictions will necessarily breed corruption. In the end, Indian industry and the country’s economy will suffer.

In the recent past China is not the only beneficiary of India’s import boom. Other nations such as Russia, Saudi Arabia and UAE have gained ground. This reflects not just on our economic situation, but on the ever-changing and ever-evolving diplomacy and geopolitical strategies

Subsidies and incentives can never replace systemic and structural changes. The former can help local industry up to a point. In addition, incentives invariably lead to intense lobbies that lead to more, rather than less, inefficiencies. Media reports indicate that both private producers and Central Ministries in chosen sectors under the PLI scheme have asked for higher budgets from the Finance Ministry. Companies talk about gaps in a bid to get more incentives. This is bound to happen. The only option: in the medium term, Indians need to become globally cost-competitive, at least in goods and services that they enjoy certain advantages. More importantly, a country does not have to produce everything. It is fine to import certain items, especially if it aids the manufacturing sector.

Whether one makes in India, or takes from another nation, even if it is China, depends on national core competencies and comparative advantages. The idea of Atma-Nirbhar is fascinating and noble. But one cannot splice the nose to kill a wasp, or injure the elephant to swat a dragon. In essence, one cannot compete with China on Chinese terms; India has to find a manufacturing strategy with Indian characters.

Alam Srinivas

Alam Srinivas is a business journalist with nearly three decades behind him, working for The Times of India, India Today, Outlook, Financial Express and Business Today. He is the author of “Cricket Czars: Two Men who Changed the Gentleman’s Game”.

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