Can India afford an economic battle with China?

By Kunal Purohit

Published: 11:30am, 27 June, 2020

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  • Military clash in the Himalayas that killed 20 Indian soldiers has an angry public demanding retribution and politicians calling for economic boycotts

  • While Modi has called for India’s ‘self-reliance’, this is a big ask for a country where Chinese capital has come to pervade almost every aspect of life

Indian protesters burn an effigy of Chinese President Xi Jinping in Kolkata. Photo: AFP

When 20 Indian soldiers were killed in a clash with Chinese troops in the Himalayas this month, a fragile peace on the top of the world that has held for nearly 60 years looked dangerously close to shattering.

While diplomats and army commanders remain locked in talks to resolve the tensions on a military level, many experts fear another type of conflict is looming as ordinary Indians demand economic retribution and punishment of their neighbour.

A traders association in New Delhi has demanded hotels ban Chinese visitors and circulated a list of 3,000 Chinese imports for people to boycott; developers have created a mobile application that detects and removes programs developed in China. Google has since taken it down, but not before it was downloaded more than a million times.

Politicians have been quick to join in the calls, demanding a boycott of everything Chinese, from restaurants to mobile applications. Some have even got physical. Members of Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) ransacked a Mumbai store selling toys ostensibly from China, while one of its leaders threatened to “break the legs” of anyone using Chinese goods.

Regional governments, too, have embraced the calls. In Haryana and Uttar Pradesh, BJP governments have cancelled contracts given to Chinese companies while the central government has demanded its suppliers make clear the origin of their products and the percentage of local content. News reports suggest Chinese imports have been disrupted because authorities are delaying clearances.

While the repercussions of these boycotts are not yet being discussed, it is a conversation India must have, and soon. Its economy is expected to contract by as much as 4.5 per cent this year, according to the International Monetary Fund. Can it really afford an economic battle, in addition to the military scuffle, with its single biggest importer?

CHINA, ALL PERVASIVE

According to the data: not quite.

Chinese capital pervades almost every aspect of daily life in India, from buying groceries to hailing a cab to ordering food online and making digital payments. According to a report by Brookings India released in March this year, the current and planned Chinese investment in India is over US$26 billion. Chinese capital has funded at least 92 Indian start-ups – including 14 of India’s 30 billion-dollar unicorns – by pouring in at least US$4 billion, according to a report by Gateway House in the same month. These start-ups include popular brands like Ola, Flipkart, Byju, Make My Trip, Oyo, Swiggy and Zomato.

The Chinese presence is also marked by imports from China of intermediate and capital goods, both of which are used by Indian manufacturers to produce finished goods.

“Around 60 per cent of India’s imports from China fall in this category. Without these imports, our supply chains will not be able to deliver,” said Joe Thomas K, an assistant professor in Chinese studies at the Indian Institute of Technology Madras (IIT-Madras).

Aside from imports, China has also increased its footprint in India vastly by investing in manufacturing.

Many Chinese companies now manufacture in India. Of the top five mobile phone sellers in India, four are Chinese companies cornering over 66 per cent of the market share, according to the Gateway House report. All four now run multiple manufacturing plants in India.

In many areas like telecoms and pharmaceuticals, the dependence on imports from China is so high that the industries would find it difficult to survive without them.

Telecom Equipment Manufacturers Association officials told This Week in Asia that up to 90 per cent of components required for mobile phones were imported from China.

Indian soldiers walk at the foothills of a mountain range near Leh. Anger over the death of 20 troops in a clash with Chinese forces has led to calls for Indians to boycott Chinese goods. Photo: AFP

Critics say that for these reasons a plan floated by Modi to make India “self-reliant” by reducing imports from China may not be a great idea in the short term.

“Such a concept will work in the long term, when we can reorganise our supply chains internally and do so with a great amount of focus and in ‘mission mode’. Being self-reliant will mean that we will have to create the capacities and the right conditions for Indian manufacturers to build products that they currently cannot build due to a lack of expertise or resources,” said Vinod Kumar, president of the India Small Medium Enterprises (India SME) forum, a trade association of 86,000 business owners.

 

MODI’S FLIP-FLOP

Of course, New Delhi might be all too aware that such boycotts are unfeasible. After all, Modi has been one of the biggest champions of building robust economic ties with China. After he took over as prime minister, India’s trade with China increased from US$65.7 billion in 2013-14 to US$87 billion in 2018-19. What is more, over the same period, India’s reliance on Chinese imports increased from US$51 billion to over US$70 billion and its trade deficit went from US$36 billion to US$53.5 billion.

Modi has repeatedly made a show of encouraging Chinese investment in India. On Chinese President Xi Jinping’s first visit to India after Modi became prime minister, in 2014, the two countries signed agreements for increased Chinese investment.

One of them involved the first China-dedicated industrial plant in Gujarat, Modi’s home state, referred to as a “watershed for China Inc in India” by Brookings India as it was the single-biggest Chinese investment in the country at the time.

 

Even before Modi became prime minister he had visited China at least three times as Gujarat chief minister to lure Chinese investors to invest in his state.

An Indian army convoy on the Srinagar-Ladakh highway. Photo: AP

SWITCHING TRACK

So it is no wonder that Modi’s call for India’s “self-reliance” – perceived by many to be a disguised call to stamp out Chinese capital – has perplexed so many.

However, some see it as a good thing.

Invest India, a government agency set up to promote and facilitate investment, said Modi’s call would ensure the “pandemic becomes an opportunity”.

Deepak Bagla, its chief executive, said global investors were looking to realign their supply chains. “Many want to move away from China, many want to have an alternative to China and many want to move closer to the market. India is perfectly poised to be the destination that fits the bill,” he said.

According to Bagla, at least 578 global manufacturers had committed about US$170 billion worth of investment in India, of which US$20 billion had already flown into India. He said Invest India had been holding regular interactions between investors and state governments across the country to facilitate such investment.

Others highlight the difficulties involved. Kumar, the president of India SME, said one problem India faced in nationalising supply chains was having to coordinate so many government agencies.

“The prime minister has made a push for being self-reliant. However, industry is a state subject and hence regional authorities need to adopt it as a priority for our commodity chains to be nationalised.”

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping. Photo: AP

CASTING A SHADOW

Meanwhile, calls for a boycott are unlikely to go unnoticed in Beijing. India has come to be a source of significant economic investment for Chinese companies and any disruption to the arrangement is likely to have political repercussions.

Global Times, the Chinese nationalist daily affiliated with the Communist Party of China’s mouthpiece, People’s Daily, said that the effects of such a boycott would be “potentially devastating … on the already-fragile Indian economy”.

Joe, the assistant professor from IIT-Madras, said deep economic ties developed over the past two decades had helped to keep the peace between the two Asian giants, which fought a border war in 1962.

“Over a period of time, trade between the two countries increased and this correlated to the number of conflicts between the two countries going down. They both focused on building ties,” he said.

According to Joe, stronger trade ties meant that the two countries could keep the border dispute from taking the centre stage in the relationship.

“The two countries could talk about other things.”

However, this unspoken understanding was now starting to fray, he said.

India’s slow but steady moves towards the United States, such as backing Washington’s Indo-Pacific strategy and taking part in the quadrilateral security dialogue with the US, Japan and Australia, might have spooked China, he added.

“Over the last couple of years, strategic security has increased and it has spaced out the importance that we gave to economic ties.

“As a result, economic interdependence has become neglected.”

India and China needed urgently to strengthen both economic and cultural ties, he added. Until then, the peace on the roof of the world would remain uneasy. 

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