A plan to counter China economically

Over the past few years, the growing aggression of the Chinese Communist Party (CCP) has rang alarm bells across the world. As the CCP has tightened its stranglehold on the Chinese economy, the United Kingdom, Australia and some members of the European Union have attempted to reduce their dependence on it. The United States (US) has named it as a key threat.

PREMIUM

India, too, has reasons to worry, given its tense three-year-long border standoff with China. In April 2020, India announced a stricter investment regime for countries with which it shared a land border. Beijing was the prime target, even though it wasn’t named. As India-China border tensions escalated that summer, India took more overt steps. It banned hundreds of Chinese apps, including the popular social media app TikTok. Indian policymakers declared that India’s dependence on Chinese imports must be curtailed, and the old motto of self-reliance regained currency.

The overall impact of India’s reactions appears to have been modest. To some extent, these moves helped draw global attention to the CCP’s aggression. The TikTok ban certainly set an example for other countries, including the US. But India’s moves don’t seem to have had the desired effect on China. It is unwilling to give up its claims on territories it has occupied, or on those it has set its eyes on. Earlier this month, it published maps renaming parts of Arunachal Pradesh, reiterating its claim to the entire Indian state.

On the trade front, India’s dependence on China remains higher than it was in the decade leading up to the pandemic. China’s share in Indian imports shot up in fiscal 2021 before falling marginally since then. From electric vehicles to mobile phones, Indian manufacturing continues to rely heavily on Chinese raw materials and industrial inputs. It is unlikely that the make-in-India dream can be fulfilled without made-in-China machinery.

This shows that it is time for India to define clearly what self-reliance means and how that syncs with India’s ambitions of becoming a key node in global supply chains. As most economies around the world have come to realise, it is nearly impossible to build a China-free industrial supply chain. Some Western economies now advocate a China-plus strategy to diversify their sourcing of industrial inputs.

The China-plus strategy seems to have buy-in from several large companies. But this strategy essentially relies on relocating production to countries such as Indonesia and Vietnam, which depend upon China for industrial inputs. Their imports from China have gone up in tandem with their exports to western markets. Note that these East Asian economies also have territorial disputes with China in the South China Sea. But that has not stopped them from deepening economic ties with the central node of Factory Asia.

The Indian government also seems to be accepting the reality that it is difficult to shun China, and still be a part of global supply chains. Prodded by the American tech giant, Apple Inc, the Indian government seems to have warmed up to the idea of Chinese investments in mobile phone manufacturing.

Yet, such ad hoc policy adjustments don’t seem to be backed by a clear framework on trade and investment. The recently released foreign trade policy of the commerce ministry doesn’t have anything substantive to say on these issues. And India’s national security establishment is yet to produce a national security strategy document that identifies the precise sectors that are critical for India’s security requirements.

Once India’s core strategic requirements are delineated, it would allow India to open up on trade and investments in all other areas. To develop a national consensus on this issue, the Union government will need to take along the views of all stakeholders, including state governments and Opposition lawmakers. A broad consensus on national security and trade issues will help India develop a stronger negotiating position at regional and multilateral forums. It will also prevent India’s trade links from being held hostage to vested interests.

India’s last-minute refusal to join the pan-Asian trading bloc Regional Comprehensive Economic Partnership (RCEP) in 2019 appeared to be influenced by certain specific sectors, led by the dairy industry. The fear of China was used to block the deal, denying several sectors the benefits of integrating with the world’s most dynamic trading hub.

India’s position on trade thwarts its ambitions of playing a more influential role in regional and global affairs, the trade economist Amitendu Palit of the National University of Singapore argued in a 2020 research paper. The lack of negotiating capacity in official circles and the vocal opposition of protectionist lobbies prevents India from developing deeper trade ties with its Asian peers, Palit wrote.

As several trade economists have argued, India cannot expect to become a key node in global supply chains unless it opens its doors for trade. Without opening up the doors to imports, it can’t expect to scale up exports. Without greater exports, it won’t be able to raise productivity and growth. Without higher growth, it will not be possible for India to bridge the power gap with China.

The most effective economic response to China lies in raising India’s growth trajectory. In the medium term, that calls for greater integration with China and Factory Asia.

Pramit Bhattacharya is a Chennai-based journalist.

The views expressed are personal.