Biting off More than We Could Chew?
Biting off More than We Could Chew?
A Guide to the Chinese Boycott
The anti-China sentiment is at its peak. The week began by Ministry of Electronics and Information Technology announcing a ban on 59 smartphone applications citing threat to national security and sovereignty. While the order did not mention China, apps that featured on the list made it obvious that the ban was in response to China’s adventurism in Ladakh. Union Minister Ravi Shankar Prasad was quick to term the ban as a “digital strike” on China to protect the data of countrymen.
(PM visited one of the forward locations in Nimu in Ladakh early morning yesterday. Source: @BJP4India/Twitter)
Boycott Bleeds Deep
Various groups have called for a boycott of Chinese goods and services. Within the last one month, Indian Railways terminated an INR 471 crore contract given to a Chinese firm, Department of Telecom directed BSNL not to use Chinese equipment to build its 4G infrastructure, clearance to chinese goods have been put on hold at ports and Government e-Marketplace made it mandatory for sellers to mention country of origin for listing products. Union Consumer Affairs Minister Ram Vilas Paswan stated that the Bureau of Indian Standards (BIS) will notify new rules to restrict substandard Chinese goods from entering India and Nitin Gadkari stated that Chinese firms will not be allowed to participate in highway projects including those through JVs. India has made it clear that trade and investment relations cannot continue as usual unless Chinese disengage their troops and re-establishes status quo ante.
Bilateral trade, investment and access to domestic markets is a key instrument in any country’s foreign policy. Economic sanctions are often imposed when diplomacy or propaganda would be too mild a response but covert action or military action, would be too severe. Economic pressure has proved to be a potent deterrent against state and non-state actors.
This isn’t India’s first rodeo at boycotting foreign-made goods. India boycotted foreign-made goods over a century ago during the Swadeshi Movement of 1905 that was started in response to the Bengal partition. It was the first movement against the British that saw participation of masses including women and students.
As with any policy measure, there has been skepticism about it. Questions have been raised whether an economic boycott is possible given the globalized nature of modern supply chains, its unintended consequences on the Indian economy and effectiveness of economic sanctions on authoritarian regimes like China.
Why It Shouldn’t
Currently India’s trade deficit with China was roughly $57 billion last year. China’s exports to India include pharmaceutical compounds, electrical machinery, equipment and their parts, nuclear reactors, organic and inorganic chemicals, fertilisers as well as vehicles, their parts and accessories. In the smartphone market, four out of the top five selling brands are Chinese. India, a pharmaceutical manufacturing giant imports two-thirds of the total imports of bulk drugs and drug intermediates from China.
Even as an export market, China is a major partner for India. At $15.5 billion, it is the third largest destination for Indian shipments. At the same time, India only accounts for a little over two per cent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO). While Beijing has criticised India’s actions and asked India to review its actions, retaliatory non-tariff barriers must not be ruled out. Recently, China imposed punitive tariffs on Australian crop exports after Australia called for investigation into the spread of COVID-19.
Various experts have argued that the limited linkages between India and Chinese economy and a trade deficit favouring China shows limited or no impact of India’s actions on the Chinese economy. However, what has to be considered is that Chinese economy has already taken a big hit due to the pandemic and its trade war with the United States. Even before the pandemic, companies were shifting their manufacturing bases from China threatening job losses. Its actions in suppressing unrest in Hong Kong have already triggered Hong Kong’s wealthy to relocate and the passage of the controversial National Security Law is going to trigger further scrutiny and criticism from the international community. While it is difficult to predict whether India’s economic pressure will cause China to withdraw its troop buildup across the LAC, it will definitely impact Chinese companies on the economic front and in turn on the Chinese economy.
As expected, the repercussions of India’s economic blockade have already started to show for India Inc. For instance, imported agriculture equipment consignments have been delayed at ports, garment manufacturers of Tirupur are facing disruptions as their consignments of zippers, buttons, embroidery accessories await clearance at ports.
As supply chains have become complex, products that can claim to have no foreign component have dwindled. For instance, nearly 80 per cent of the silk threads that weavers use across the country come from China. This includes manufacturers of the iconic Banarasi sarees. All major smartphone manufacturers, including Chinese brands like Xiaomi, Vivo, Oppo have manufacturing plants in India. While most of the components continue to be sourced from China, these companies have created thousands of jobs in their assembly plants, service centres, retail outlets, etc. Xiaomi alone claims to have employed over 50,000 people.
FDI from China has played an instrumental role in the Indian startup ecosystem. Indian startups raised around $4 billion from Chinese investors in 2019. Chinese investors like Alibaba, Tencent have backed unicorns like Paytm, Ola, Snapdeal, Zomato. In April, DPIIT revised the Foreign Direct Investment (FDI) policy to make investments from a country that shares a border with India subject to government approval. The revised policy was to limit opportunistic takeovers and predatory investments due to COVID-19, however, the move has already had an impact on investor sentiment. The move significantly limits fundraising options for Indian startups and makes them more vulnerable to predatory investments made by other investors and Chinese investments routed through Singapore, Hong Kong or Mauritius.
Patriotism and nationalistic sentiments can inspire citizens to make defer purchases or make a sacrifice to choose an inferior or more expensive non-Chinese product, however, any such behavioral change be in vain if it is unaccompanied by capacity building. The pandemic, followed by the call for boycott of Chinese goods has exposed major flaws in India’s growth story and its ambitions to become self-reliant.
PM Narendra Modi while announcing an INR 20 lakh crore economic package made a call for ‘Atmanirbhar Bharat’. He stressed on the need to limit imports and bolster domestic manufacturing to revive the economy and make the country self-reliant. Since the policy contains elements of import substitution, the government has reiterated that the policy’s objective is to enhance exports and is not isolationist or protectionist in nature.
India is no stranger to import substitution policies. India’s early economic policies were influenced by Soviet style industrialization that required extensive state intervention and import substitution. We made strong efforts to reduce our imports with tariff and non-tariff barriers to the point that our imports as a proportion of the gross domestic product (GDP) were just 4% in 1969-70. Our excessive regulations gave rise to licence-raj, corruption, cronyism and encouraged rent-seeking behaviour. What it did not encourage was entrepreneurship and free markets. We denied our entrepreneurs access to world class raw materials and machinery as a result the quality of our products remained substandard and were uncompetitive at global level. This led to catastrophic forex issues that ended only when India undertook significant economic reforms in the 1990s.
(Source: Getty Images)
We should be vary of going down that failed path again. We need to identify areas of our comparative advantage and pursue an export-oriented policy. We need to produce quality products in a cost-competitive manner. This would require optimum allocation of labour and capital by the private sector and as Dr. Rajan mentioned development of roads, railways, airports, affordable housing, human capital, availability and access to electricity, water, raw materials, markets, etc. on the part of the government.
The fact that India’s industries have tremendous potential is incontrovertible. Post Covid, countries and companies are looking for alternatives to China. Its authoritarian regime, lack of transparency and cagey approach to disclosures about the extent of coronavirus has poisoned its relationship with many countries. Companies are also looking to shift supply chains closer to markets and factories. India needs to become a more transparent, stable, open alternative to China.. Atmanirbhar Bharat and Make in India have to be more than just a welfare scheme or a rhetoric to counter China and score political points. The passion to be ‘vocal for local’ must not end with resolution of border dispute with China. These policies need to become instruments to deliver economic growth and prosperity to the masses.
Ravneet Singh is a final-year law student at Campus Law Centre, University of Delhi and holds a B.A. (hons.) in Business Economics.