Since the face-off between India and China in Ladakh, there has been strident cries for boycotting Chinese products. The government has already put some barriers on economic engagement with China. It has restricted Chinese FDI approvals and blocked 59 Chinese Apps, imposed stricter regulations for Government procurement, restricted import of colour TV (since China is the biggest exporter of it to India) and many more restrictions are in the offing.
There are counter arguments also against decoupling from China. This is because India is over dependent on imports from China for the development of electronics and telecommunication. Nearly, 38-39 percent of total imports of electronic and telecommunication equipment and parts are from China. Of these, 42 percent were accounted for by telecommunication equipment and mobile phones.
These industries registered dramatic growth since India and China came closer economically. China was the biggest trading partner of India till 2018-19. It turned a major catalyst to boost India’s new industries. In 2014, India had few mobile manufacturers. In 2019, India became the second largest manufacturer of mobile phone in the world with 200 units. The industry provided a major boost to employment and successfully wooed global players like Foxcom, a Taiwanese giant.
India is also one of the global leaders for manufacturing and exporting pharmaceutical products. One of the reasons for its growth was large imports from China. Bulk drugs or the Active Pharmaceutical Ingredients (API) are the raw materials for making formulations and medicines. These are used to manufacture at least 12 essential drugs such as paracetamol, ranitidine, ciprofloxian, met formin, acetylsalicylic acid, ofloxacin, metronidozole, ampicilin and ascorbic acid. India imports 80 percent of API from China, according to Dr Saktivel Sevaraj, Director, Health Economics. Chinese APIs are 20 – 30 percent cheaper than India.
While political relations have turned frosty, China is also facing two major headwinds. They are the ongoing trade war with USA – the biggest destination for China’s exports and the exodus of foreign investors from China, after the outbreak of COVID-19.
FDI in China declined by 6.2 percent during the first five months of 2020. Japan is the first nation to inspire its investors to shift their investment from China to other low-cost countries like Vietnam, other ASEAN nations and India. USA has also discouraged American investors from investing in China and export to USA.
In order to reduce import dependence on China, India can either find alternatives to China or develop domestic supply chains by increasing production, or both in conjunction.
Vietnam is fast emerging as an alternative to China. According to US Census Bureau, imports from Vietnam into USA jumped by 33 percent in the first half of 2019. Low labour cost is one of the attractions for investment in Vietnam. It is almost 50 percent lower than China. Vietnam’s biggest specialisations are in production of electronics, textiles and furniture. Eventually, electrical machinery, including electronics, are the biggest items of Vietnam’s exports.
Finding alternative sources for supply chain however will not be enough to tide over overdependence on imports. Eventually domestic production and import substitution will matter more. Import substitution should be an important lever to self-reliance.
Import substitution will encourage foreign investors to produce in the consuming country and may give a new lease of life to the domestic investors and enable them to join hands with foreign investors for technology transfer and avoid capital investment risks.
Another way out is to encourage Indian investors to invest abroad. Alongside the development of domestic industry, investment abroad will supplement the supply chain production. In other words, integrating the countries with domestic production should pitch for a stable supply chain for production.
A lesson can be learnt from Asian car policy of Toyota Motor Company. With a bid to cut costs, the Japanese company invested in Thailand, Philippines, Malaysia, Indonesia and India to build up a new supply chain. It set up production facilities for diesel engine, press parts, axle in Thailand, manual transmission (middle type) in Philippines, engine computer in Malaysia, gasoline engine and door lock in Indonesia and manual transmission (large type) in India.
India’s dependence on imports should adhere to the new dynamism. India- Vietnam bonhomie sparked when both became victims of China in South China Sea. The turning point was when Indian Prime Minister Narendra Modi visited Vietnam in September 2016 – the first visit by an Indian Prime Minister in 15 years, and back to back visit by the newly elected Vietnam President Tran Dai Quang
(The writer is Adviser, Japan External Trade Organization (JETRO), New Delhi. Views are personal)