India must work with other countries to erode China’s economic influence


The latest border standoff has aggravated anti-China sentiments in India to a record high. Faced with an assertive neighbour and multiple occasions of confrontation in recent years, India is scrambling for an effective response. As of now, the focus is on economically damaging China by boycotting its products and regulating incoming Chinese investments in the economy.

Moves to boycott Chinese goods and restrict Chinese capital in India are driven by some fundamental concerns. These include safeguarding national security by reducing Chinese financial and functional presence in strategic sectors like telecom; reducing import-driven economic dependence on China, which might limit flexibility in responding to aggressive Chinese behaviour; and finally, the overpowering urge to teach China a lesson.

India’s concerns, particularly those on security, are valid. But economic sanctions won’t hurt China. Rather, they might end up damaging the Indian economy in the foreseeable future.

India is not among China’s biggest markets. Out of $2.5 trillion overall Chinese exports in 2018, India accounted for around $70 billion, roughly 3% of total exports. This is a rather small share. Targetting such a small share through boycott and tariffs is not going to inflict any damage on China.

India, as it is, would find it difficult to stop most Chinese imports. A very big chunk of what it sources from China is essential for the domestic industry. These include electrical equipment and machinery, mechanical appliances, semi-conductor devices, fertilisers, iron and steel products, coal, auto components, textile fabric, project goods and accessories, and antibiotics. Indian industry’s dependence on these imports is organic and has developed over the years and decades. India’s supply chains are critically reliant on these imports. China is certainly not the sole source of these products, but it is the leading source. No other country is able to supply such large volumes as quickly at competitive prices like China.

It is impossible for the Indian industry to stop using Chinese imports at a time when industrial systems across the world are functioning way below normal capacity due to Covid-19. This makes the prospects of sourcing same imports from other countries limited. Furthermore, if India imposes tariffs on these imports, they would become more expensive for the domestic industry, increasing their economic hardships when they are struggling to revive sales and reduce operating costs. Tariffs can’t also be raised on critical consumer goods imports like hand sanitisers, aprons, protective clothing, and goggles. These are extensively required by hospitals and healthcare staff for fighting Covid-19. China is the leading source for all these imports. These imports can neither be boycotted nor made less affordable.

China is also not among the largest sources of inward FDI into India. In Asia, Singapore and Japan are the largest recipients of Chinese investments. In more recent years, Chinese investment has been increasing in Asian countries that are part of its Belt and Road Initiative (BRI), such as Malaysia, Sri Lanka, and Pakistan. India is not a part of BRI and therefore not a recipient of large-scale infrastructure funds from China. Tighter rules on Chinese inward FDI in India won’t damage much the overall prospects of such investments. However, Chinese businesses, particularly the Alibaba and TenCent groups, have been funding several tech startups in India. Tighter rules on upfront Chinese investments might dry up funds in India’s startup space. On the other hand, it might not be entirely possible to block Chinese funds. They might be routed through Hong Kong, or other global investment hubs such as Cayman Islands.

The current border provocation has irked India into precipitate action on Chinese goods. But instances of such calls for boycott have been witnessed before too. These instincts are rooted in a phobia around China, along with a larger deep-rooted aversion for imports, pushing the idea of replacing everything foreign by local substitutes. This has made India walk out of major regional trade agreements like the RCEP. Several domestic industry lobbies described it as a free trade agreement with China and vociferously campaigned for staying out of it. By opting out, India lost the great advantage of being part of a trade pact, which could have helped it in reshoring some supply chain functions. RCEP has several Indian allies, Japan, Korea, Australia, Vietnam, Singapore, Indonesia, who could have been instrumental in doing so.

Ad-hoc economic actions like boycotts won’t affect China. For eroding China’s economic influence, India must work with other countries. It has damaged such prospects by quitting trade pacts and pushing economic nationalism. India is boycotting Chinese products. But none others are till now. It would be difficult for India to mobilise a collective economic offensive against China.

DISCLAIMER : Views expressed above are the author’s own.


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