Boycotting Chinese goods: A bridge too far

As a populist political statement, boycotting Chinese goods or snapping economic ties with China may sound like a vengeful theme, given the current ugly mood of the Indian public seeking retribution for Galwan. The economic fallout of such an action, however, is altogether too drastic to envisage.

India, a consumer- and service-based economy, will have to think right through till the end, the consequences of severing economic ties with a manufacturing hub like China.

China is one of India’s largest trading partners. Between April 2019 and February this year, it accounted for 11.8 percent of India’s total imports. However, India’s total exports to that country was a mere 3 percent. This trade deficit with China, also a major contributor to India's overall trade deficit, is one of the world's biggest between any two nations. The deficit with China stood at $3.3 billion in February, a 13 percent rise from the year-ago period. This is even as India’s overall trade deficit remained flat from a year ago at $9.8 billion, according to the Union Ministry of Commerce data.

As per a Brookings India Report, the total amount of current and planned Chinese investment in India has crossed $26 billion or around Rs 1,98,000 crore. China-based companies are also stepping up their investments in Indian companies, including start-ups. The numbers reveal India's heavy reliance on Chinese imports and any disruption of trade ties will substantially hurt Indian businesses. To be sure, China will lose a vast market like India, but the collateral damage could hit India harder.

This imbalance could be addressed if India opens its oil and energy sector to Chinese investment, but that is unlikely to happen anytime soon.

The boycott call goes beyond merely throwing out low-cost artefacts such as Chinese toys, bindis and crackers. That does not mean much. It has major ramifications for the Indian economy and is certain to impact the import of capital goods, machinery and electricals, chemicals, as well as intermediate and consumer goods.

Interestingly, while India has declined to be associated with China’s Belt and Road Initiative (BRI) for heavyweight projects, China has quietly created a significant place for itself in India in the last five years – in the technology domain. Unable to persuade India to sign on the BRI, China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their applications, says Gateway House’s ‘Chinese Investments in India’ study.

Chinese funding to tech firms

Chinese funding to Indian tech start-ups is making an impact disproportionate to its value, given the deepening penetration of technology across sectors in India. TikTok, owned by ByteDance, is already one of the most popular apps in India, overtaking YouTube; Xiaomi handsets are bigger than Samsung smartphones and Huawei routers are widely used.

According to this report, these are investments made by nearly two dozen Chinese tech companies and funds, led by giants like Alibaba, ByteDance and Tencent, which have funded 92 Indian start-ups, including unicorns suchas Paytm, Byju’s, Oyo and Ola.

The findings are remarkable: 18 of the 30 Indian unicorns have a Chinese investor. This means that China is nicely embedded in the Indian economy, and the technology ecosystem that influences it. Unlike a port or a railway line, these are invisible assets in small sizes – rarely over $100 million – and made by the private sector, which doesn’t set alarm bells ringing.

With closely enmeshed businesses, separation from China is going to entail huge costs. Since India imports well above 60 percent of electronic products and components from China, a snapping of economic ties would impact the prices of electrical gadgets and smartphones.

Chinese companies such as Xiaomi, Oppo, Vivo and OnePlus nearly control over 66 percent of India's over $8 billion smartphone market, as of the first quarter of 2019, points out Counterpoint, “India Smartphone Market Share: By Quarter.”

There is increased penetration of smartphones and apps, like TikTok, especially in the country’s Tier-II and Tier-III cities. The potential to influence Indian minds is massive. By 2024, India’s smartphone users are expected to double to 1.25 billion from 610 million in 2018-9.

India's emergence as the biggest overseas market for Chinese mobile phone companies is one of the most significant developments in China's relations with India over the past five years. The India sales of those top Chinese smartphone brands totalled more than $16 billion in 2019.

Interestingly, these smartphone makers have embraced Prime Minister Narendra Modi's "Make in India" programme with a zeal. Xiaomi, for instance, locally manufactures 95 per cent of the phones it sells in India. Any adverse announcements forcing Chinese businesses to shut shop will makethese employees jobless.

In the power sector, especially renewable energy, India is heavily dependent on China. The country’s import dependence for meeting its solar equipment demand stood at over 90 percent in the past three financial years, Power and New and Renewable Energy Minister RK Singh told the Lok Sabha last year. Most of these imports were from China.

Key sectors of the Indian economy, like health, are critically dependent upon China. In 2018-19, China supplied a whopping 80 percent of the antibiotics imported by India. In this time of a health epidemic, India can scarcely afford to let the supply of medicines take a hit. Not surprisingly, the single largest Chinese investment in India is the $1.1 billion acquisition of Gland Pharma by Fosun in 2018. This accounted for 17.7 percent of all Chinese FDI into India.

To be able to boycott Chinese goods, India needs to reduce its trade deficit with China and strengthen its manufacturing sector to be able to produce goods back home, providing cheaper products to customers.

That, however, is easier said than done. The cost of production of Indian manufacturers is high due to expensive raw material, old worn-out techniques of production and higher fixed cost. As a result, Indian products cannot compete with Chinese products not just at the global level, but even in India.

And there are good reasons. Notes the Encyclopaedia Britannica in its chapter on the Chinese economy: “The development of industry has been given considerable attention since the advent of the communist regime. Overall industrial output often has grown at an annual rate of more than 10 percent, and China’s industrial workforce probably exceeds the combined total for all other developing countries.”

The low price of Chinese products is a big attraction for Indian buyers. The cost of production in China is competitive due to the availability of cheap labour force and because the all-powerful manufacturing sector in the country gets a subsidy from the government, which reduces the cost of production. The result: India has turned into a hub for assembling, rather than manufacturing goods.

Then there are wheels within wheels. Chinese funds and companies often route their investments in India through offices located in Singapore, Hong Kong, Mauritius and other safe havens. For example, Alibaba’s investment in Paytm was by Alibaba Singapore Holdings Pvt. Ltd. These don’t get recorded in India’s government data as Chinese investments. Thus, official FDI inflows from China to India do not present the full picture of Chinese investments in India.

Can India prevent the supply of Chinese products in the Indian market? The answer is `No’, because as per World Trade Organisation (WTO) rules, it is not possible to impose a full ban on imports from any country even if there are no diplomatic, regional and trade relations with that country.

But India has banned some Chinese products based on health and security issues. According to government data, India had prohibited Chinese mobiles not carrying IMEI numbers. China, in retaliation, had also prohibited Indian milk products, using health standards as the ruse for doing so. Under the circumstances, with businesses so enmeshed and economic stakes so high, to talk of a ban on Chinese goods is like putting the cart before the horse.

Ranjit Bhushan is an independent journalist and former Nehru Fellow at Jamia Millia University. In a career spanning more than three decades, he has worked with Outlook, The Times of India, The Indian Express, the Press Trust of India, Associated Press, Financial Chronicle, and DNA.