How to cut import dependence on China

INDIA faces a dilemma in its trade with China. For security reasons and the need to become self-sufficient, India needs to cut down imports from China. But the two-way trade has continued to grow vigorously. With it has burgeoned the trade balance in favour of China amid border tensions in recent years.

Trade between India and China rose to $115.83 billion in the 2021-22 financial year, according to the Commerce Ministry, with India’s trade deficit soaring to around $74 billion. Trade between the two nations this financial year (April to October) has been to the tune of $69.04 billion.

A look at the key imported items gives us an idea as to why Indian demand for Chinese goods is so robust. They stretch across the board — from capital goods to intermediates to raw material used in industries like electronics, organic and inorganic chemicals, medical and pharmaceutical products, fertilisers, and materials used by the leather industry.

Interestingly, the rise in these imports is not necessarily a negative development. As the government has explained, the rise in the import of electronic components, computer hardware and peripherals and components for phones is resulting from India’s attempt to become a digitally empowered society with a burgeoning knowledge economy.

Ironically, the rise in imports is the result of India’s attempt to boost its manufacturing economy. It also seeks to play host to global companies following a policy of ‘China Plus One’ through which they wish to de-risk themselves by relocating some of their manufacturing units out of China to Southeast Asia and South Asia.

India and Vietnam in particular are on the radar of these global tech companies. Foxconn plans to more than double its production capacity for iPhones in India from the current level by next year. It further plans to eventually source half of its production from out of India compared to the present 4 per cent.

If India succeeds in playing host to some of the factories being relocated out of China then that will be mostly assembly plants which create the maximum number of jobs. Most of the intermediate goods that will go into these finished products will likely have to be imported out of China. This will raise the import bill further.

A similar story relates to pharmaceuticals. India has emerged as a global supplier of generic formulations. The drug intermediates and bulk drugs that go into these formulations are mostly imported from China. Both in the case of electronics and pharmaceuticals, reducing import dependence on China can only be done in the medium or long run and has to be part of an overall policy. The nation’s policymakers have to decide if it wants to remain an integral part of the global economy, sans China, or go in for a major course correction in order to become as self-reliant as possible.

The current thinking of the government is indicated by the fact that the commerce department has asked other formations in the government to take steps to reduce the import of non-essentials from China by raising the domestic capacity. There is some sign of the share of consumer goods imports from China going down, but these are early days.

In non-essentials, the government has met with some success in curbing the import of toys. Now, it seeks to turn its attention to electric fans and smart meters. It is using a somewhat novel tool to do this — by issuing quality-control orders. Presumably, this will raise barriers in the way of import of low-value consumer goods. China is today, to an extent, on the same stage as Japan was in the 1960s when it succeeded in raising its export on the basis of price rather than quality.

Trade relations with China became a cause for immediate concern when China was hit by protests against the restrictions imposed by the government while pursuing the zero-Covid policy. China plunging into political turmoil would have meant serious disruption of economic activity and uncertainty over continued imports, which play a key role in enabling Indian economy to go forward.

Fortunately, the Chinese government has backed down and the protests are off, but the nation needs to have a plan to live with serious disruption in the India-China trade.

So how can India square the circle? Use imports from China to go forward as a manufacturing power even while trying to curb such imports? Relatedly, how can India avoid seeking to micromanage a critical part of its foreign trade so as not to go back to the practices which were ended with the economic liberalisation that began in the 90s under the guidance of former PM Manmohan Singh?

A research project undertaken by the Indian Institute of Management, Indore, and the Wharton School of the University of Pennsylvania, at the behest of the NITI Aayog, has thrown up some ideas. A key one is for India to play a more active role on multilateral economic platforms such as ASEAN (Southeast Asian countries), MERCOSUR (trade bloc of South American nations) and NAFTA (free trade agreement between North American countries). The essence of regional economic agreements is that member countries agree to lower trade barriers between themselves. The simple point is — lower trade barriers, don’t raise them.

The study suggests the following process. First, the government departments should do their own strategy planning in consultation with industry bodies and the NITI Aayog and the PMO should formulate country-level inputs. Then these need to be put together in the overall country-level plan which should be made up of department-level plans.

The study has also divided 900 products imported from China into four categories. These are high-tech products, electronics, commodity technical products and commodities. The first two categories of products, whose manufacturing requires advanced efforts that take time to shape up, can be imported from alternative global suppliers for three years. The next two categories which incorporate basic technology and are traded on the basis of price differentiation can be imported only for six months.

As to how the government should change its way of working, the report suggests something that is so well known that it is axiomatic — the government departments should stop working in silos. To that can be added one more thought that has also lately become axiomatic. It is that the Central and state governments should get together to achieve a quantum leap in improving the ease of doing business.