Sino-Indian Trade Dynamics

The recent skirmish between Indian and Chinese soldiers in Galwan Valley led to demands for the ban on the use of Chinese products. In this article, we will try to look at the current trade dynamic between the two countries and the extent of dependence of various sectors on Chinese imports.

China is the largest economy in Asia and the second largest in the world with a GDP of close to $13.6 trillion. India is the third largest economy in Asia and fifth largest in the world with a GDP of over $2.7 trillion. China accounts for about 5% of Indian exports and 14% of Indian imports.

On the other hand, India accounts for merely 3.1% of Chinese exports and 0.9% of Chinese imports. All this shows that India is more dependent on China in terms of trade than China is on India. China also accounts for a bulk of India’s trade deficit. India’s trade deficit with China has been growing continuously as seen in the graph below.

Automobile Sector

A quarter of Indian auto part imports (valued at $4.2 billion) were imported from China according to data from the Auto Component Manufacturers Association of India (ACMA).

Many critical components including the ones belonging to engine, electronics and transmission are imported from China and are difficult to source elsewhere immediately. Imports from China are also critical to meet the BS 6 which recently came into effect in our country.

Just to emphasize the importance of Chinese components, Covid-19 related shutdown in China forced Indian automakers Hero Motocorp, TVS Motors, Tata Motors Ltd, Mahindra and Mahindra Ltd to cut production by over 10% due to shortage of parts. Chairman of Maruti Suzuki, Mr. RC Bhargava said “We don’t import because we like to, but because we have no choice”.

This clearly depicts the current situation of the automobile sector. Increasing import duties and making the parts costlier for automakers now is not the right way to go given the current economic conditions. Investments have to be made to plug these gaps in supply but this will not happen overnight. Until then our dependence on China will continue.

Pharma Sector

India is the largest provider of generic drugs globally. Indian pharmaceutical sector industry supplies over 50 per cent of global demand for various vaccines, 40 per cent of generic demand in the US and 25 per cent of all medicine in UK. But on the raw material side, India is heavily reliant on China for raw materials. Some of India’s biggest drug makers like Sun Pharma, Lupin get over 70% of their Active Pharmaceutical ingredients (APIs) from China.

Domestic API manufacturing accounts for only 8-10% of India’s pharma market. The rest is imported from China and EU countries like Germany and Sweden. Chinese imports are cheaper by over 25-30% and also are used in huge quantities. Given the situation, the government might push pharma companies to decrease the reliance on China and increase imports from EU in the shorter term. Establishing local capacity should be a priority in the long run.

Real-estate Sector

Indian real estate sector imports around 10% of its supplies mostly from China. After the border standoff, developer lobby credai has asked its 20000 members to shun Chinese goods. The government is mulling imposing tariffs on close to 370 products which are already being produced in India so that imports from China are discouraged.

The Real estate sector is currently not in full swing. This might be the right time to re-engineer the supply chains by substituting Chinese imports with supplies from our small and medium scale industries.

Telecom

World over, use of Huawei’s telecom equipment is being banned due to rising concerns over data security. After the border stand-off with China, India joined the bandwagon by instructing its state telecom operators.

BSNL and MTNL to refrain from using Chinese equipment for establishing their 4G network (Yes that’s right, BSNL is yet to roll out 4G in many circles). Government also instructed the private telecom operators, Airtel, Vodafone and Jio to stay away from Chinese companies.

This could further complicate matters for Airtel and Vodafone which are already reeling due to the AGR issue. Chinese equipment is preferred mainly due to their cost advantage. Also, when it comes to 5G, Huawei is ahead of its European competitors, Nokia and Ericsson. Banning Chinese equipment will not only make rolling out 5G costlier but also will delay the process.

Infrastructure

According to policy think tank Brooking India, between 2014 to 2018, India ranked 31st in the list of countries where China invested.

Chinese machinery and equipment are being used in many infrastructure projects across the country. Sany, world’s sixth largest heavy equipment manufacturer in the world established a manufacturing plant in India in Chakan, Pune.

It is Sany’s biggest plant outside China. Liugong, another equipment manufacturer also set up a manufacturing plant in Pitampura. Chinese firms have penetrated into highway construction and railway sector. Currently Chinese companies are involved in construction of highways amounting to 1000 km.

Union minister Nitin Gadkari recently announced that Chinese firms will not be allowed to take up Highway construction projects in India even as a part of a Joint Venture. The government is planning to amend the rules to ensure that even smaller contractors are eligible to bid for highway projects without partnering with Chinese firms.

Consumer Durables

Consumer Durables is a sector where Chinese products have reigned supreme. India has emerged as the biggest overseas market for Chinese smartphone makers. Four of the top 5 best-selling smartphone companies of India are Chinese.

Samsung is the only non-Chinese company in the list. Xiaomi tops the charts with a market share of about 30% followed by Vivo, Samsung, Realme and Oppo. Xiaomi has set up manufacturing plants in India and is trying to get under the “Make in India” umbrella. The company claimed that 95% of the mobiles sold in India are manufactured here.

Indian smartphone makers like Micromax have been dethroned by the Chinese. Even Micromax during its hay days manufactured its phones in China. China is also trying to increase its presence in Air Conditioners, Refrigerators and Washing Machines.

Apart from this, even Indian companies are heavily dependent on China for key parts like compressors, LED chips, motors and mobile phone displays. In fact, electrical machinery account for a major share in imports from China. Any increase in tariffs will adversely affect many Indian manufacturers as well.

Investments in Start-ups

According to foreign policy think tank Gateway House, in the last 5 years, Chinese investors have put $4 billion into Indian Start-ups. According to inc42, 17 Indian unicorns have Chinese investors on their board. The below table from inc42 gives the list of Indian Unicorns with Chinese investors on their boards.

The Indian government recently amended the FDI policy for curbing opportunistic takeovers or acquisitions of Indian companies due to the ongoing Covid-19 pandemic. According to the amendment, any country which shares a land border with India can invest only under the government route.

This will limit Chinese investments in Indian start-ups. India will have to rely on Japanese investors like Softbank. Domestic VC firms should also step in and fund the start-ups during these trying times.

India is very far from being completely independent of China. Closing borders to Chinese imports at this point will only be counter-productive. A knee-jerk reaction of raising tariffs selectively on certain non-essential products will provoke China to stop the supply of essential items which will put our industries in jeopardy.

India should nurture and develop partnerships with countries like U.S. and Japan which are against China. India should incentivize firms cutting down on Chinese imports and picking local sellers. This will help in developing local capabilities over a period of time.

China is a behemoth and it will need lot of patience and perseverance to be completely independent. It cannot be done overnight. The government should create policies which will enable us to reach a level where we can take on China head on.

The changes in FDI rules, ban on Chinese involvement in Highway construction, probable ban on Huawei’s and ZTE’s telecom equipment, ban on 59 Chinese apps all point towards such policy changes.

India’s MSMEs will be the answer to all the problems. Protecting and nurturing them will enable us to build “China free” supply chains. India has a long road ahead but with proper leadership, policy interventions and tactful foreign policy, I am sure we can rival China at its own game.

An Article by – Bhargav