Can India afford to sever its economic relations with China?

Saad Rajput offers a closer look at bilateral trade patterns between the two neighbours

Can India afford to sever its economic relations with China?
The Himalayas are heating up. After months of mounting tensions, Chinese and Indian troops broke out into a full-fledged brawl high above the Galvan Valley, some 14,000 feet above sea-level. Both sides blamed the other for entering its territory, in a clash that is the latest in a decades-old series of border-related conflicts between the two neighbours. As many as 20 Indian soldiers lost their lives leading to demands for revenge across India. With blood in their eyes, the usual faces on Indian TV cried for a befitting reply to Chinese escalation, while Indian social media called for a #BoycottChineseProducts campaign.

As pressure now mounts on the BJP government to avenge the lives of its twenty soldiers, the possibility of waging an economic war against China is gaining traction in New Delhi. Even before the standoff took place on June 15, the Indian government had already taken a controversial decision to block opportunistic takeovers of Indian businesses by Chinese investors. The government expected that as Indian businesses would gasp for capital following a recessionary environment amid the covid19 pandemic, predatory capital from China would aim to acquire strategic stakes in the Indian economy. Thus, the foreign direct investment (FDI) rules for “countries that bordered India” were amended, stating that FDI from these countries would now have to go through the Indian government rather than the previously more direct route. There was little doubt as to which “bordering country” the amendment was aimed at.
About a fifth of India’s auto part imports – valued at $4 billion in 2019 – come from China, which are crucial to its cost-efficient automobile sector

One cannot dismiss India’s concern as completely unfounded, since the line where government control ends and private sector begins in China is usually unclear. Similar barriers have also been erected by countries such as Australia, Spain and Italy following China’s strategic acquisitions in US and European markets. In India too, FDI from China has grown at a fast pace to reach about $5 billion in 2019, with the automobile and electronic equipment sectors being major recipients.

Now, with cries for revenge getting louder, the BJP government is mulling further tightening of investment money flows from China. Chinese money in Indian capital markets is within the crosshairs, and there is a possibility that foreign portfolio investments (FPIs) from China could see further scrutiny from the central government in India. This would cause frustration not only for Chinese investors but also for Indian businesses that are struggling for much-needed capital as a global recession looms. Most sectors that have received FDI from China in the past – such as automobiles, electronic equipment, book printing and services – are severely impacted by the covid19 pandemic and will be looking for the infusion of fresh capital soon.

India’s tech start up space too could suffer due to its dependence on Chinese money. Out of India’s 30 start ups that are valued at $1 billion or more, 18 are recipients of Chinese funding. Stakes in Indian start ups have been bought by Chinese giants such as Alibaba and Tencent. Fact of the matter is that even though genuine concerns around data security and platform control were always present in the Indian start up space with respect to Chinese money, these concerns were pushed under the rug. This is partly because the financial performance of Indian start ups has remained to be a major cause of concern. Most Indian start ups have not been profitable, and with reported losses in the range of $50 million to almost a billion annually, they need to raise capital every few years.

Another option for India would be to increase tariffs on or completely ban certain Chinese imports. Such protectionist policies would also feed into the larger self-reliant economy narrative that Prime Minister Narendra Modi has tried to put out. The idea of a self-reliant economy raised on import substitution and protectionist policies is not new in India, as the economy only started opening up to the world in the 90s. Gains made during the past few decades that were only possible through the opening of the Indian economy to the world and greater collaboration with foreign capital would be lost if the BJP government regresses back to policies that have little meaning in the global economy of the 21st century. The notion of a closed economy goes well with the BJP’s hyper-nationalist narrative but has little grounding in economic logic.

To understand this, a closer look at bilateral trade patterns between the two neighbours is needed. In 2019, India bought goods worth $68 billion from China and sold it about $17 billion worth of its own goods, resulting in a trade deficit of around $50 billion. Indian exports to China made up 5% of the country’s total exports, while its imports from China made up 14% of its total imports from the world. Most of these imports are high-quality, low-cost inputs for several of India’s key industries.

About a fifth of India’s auto part imports – valued at $4 billion in 2019 – come from China, which are crucial to India’s cost-efficient automobile sector. Chinese raw materials have also been a crucial component of India’s booming pharmaceutical sector which contributes greatly to India’s export earnings. More than half of the sector’s active pharmaceutical ingredients (APIs) come from China. India’s smartphone sector also relies on Chinese phones, as does its consumer electronics sector on intermediate products from China.

Any moves made by the BJP government in the coming weeks to limit their economic relationship with China will thus come at a significant cost to the Indian economy. And these are unprecedented times: for the foreseeable future, the Covid-19 pandemic will continue to wreak havoc across economies, shrinking incomes and bankrupting businesses. We saw the Indian economy’s desperation when the government was forced to ease lockdown restrictions despite a resurge in the number of new infections. While the coming weeks may be tricky, perhaps the world will only see Indian media’s usual spin doctors try and make Prime Minister Modi look like the victor in an otherwise embarrassing situation.

The writer is an economist