Has India’s economic warfare against China post Galwan clash worked?

A war by any other means, a ban by not naming a name. A year after blood was spilt on the desolate heights of Ladakh on their de facto border, the India-China tango continues awkwardly, as if to the tune of ‘Love to Hate You’.

Or make it ‘Hate to Love You’. The June 15 clash between soldiers may be the bloodiest between the two distrustful neighbours in decades, but interestingly, it did not lead to any bullets ringing or artillery being fired across the length and expanse of the Line of Actual Control. The hyper-patriotic colours of post-Uri Narendra Modi’s India instead decided to hunker down and adopt a more sober reaction in the form of an economic spurn. Apps were banned, contracts were cancelled and cargo shipments got vexed.

“This is the first time India has adopted economic warfare as a policy,” pointed out Sethurathnam Ravi, noted economist and former chairman of the Bombay Stock Exchange. “At one point or the other, India has had (economic restrictions) on countries like Afghanistan, Nepal etc over issues which got resolved, but the first time against China. After the 1962 war with China trade got affected, but that was a natural phenomenon rather than a policy decision.”

With no love lost, India’s slew of economic measures against its neighbouring behemoth actually started even before the border clashes in June. While Finance Minister Nirmala Sitharaman’s Union budget in February 2020 had a few provisions for hiking customs duty on import of cheap Chinese raw materials, a bold strike came a few weeks into the pandemic and national lockdown. Spurred by a Chinese state-run bank picking up a minority stake in HDFC Bank, the Indian government brought out an order blocking the automatic route for Chinese investments in Indian entities.

To maintain a veneer of diplomatic decorum perhaps, that order (or any of the ones which came later targeting the People’s Republic) does not mention China by name. Instead, the restrictions were imposed on ‘countries sharing a land border with India’. National security was cited in many later contract cancellations. All that did not stop Beijing from seething with anger, though.

But after Ladakh, and anti-China sentiments at a high, India went trigger ‘app’y on its neighbour, shooting through economy crosshairs. Along with a couple of hundred other apps, out went TikTok, a Chinese short video app that was a rage with young India. State-run entities cancelled contracts with Chinese companies, ranging from solar panels and telecom equipment to railway infra. ‘Country of Origin’ tag became mandatory for products on the government’s e-Marketplace, in an effort to identify Chinese-origin goods.

The restriction of buying power supply systems from China was particularly significant, as power equipment was one of China’s big ticket export items to India. Road Transport Minister Nitin Gadkari also indicated that Chinese firms will miss out on India’s ambitious highway construction projects that would see spending of several lakh crores in the coming years.

A year on, has it worked?

The numbers tell a shocking story. Trump-era US had replaced China as India’s biggest trading partner in recent years. But ironically, China regained its numero uno slot in the very year India was trying to snub it. Commerce ministry figures show that India imported goods worth USD 65 billion from China last year – its highest from any country or trading bloc. It is also interesting to note that while overall trade declined in the year of a pandemic and national lockdown by 32 per cent, trade with China fell only 15 per cent. The government actually had to ask ports and customs points last month, as the second wave of COVID-19 crippled India, not to delay oxygen and other equipment coming in as cargo. It even appears many Chinese life-saving items were re-routed through Singapore as a face-saver.

So, even while a LocalCircles survey after the Ladakh clashes showed 87 per cent of Indian consumers willing to boycott Chinese goods, the reality is different. Possibly due to pent-up demand for raw materials once the Unlock process started, Chinese imports actually increased to near pre-lockdown levels in the months following the clashes.

“Reducing dependency (on China) depends not just on choice but greatly on the availability of alternatives. The wait might be longer than what we have expected,” Gurmeet Singh, chairman and managing director of Johnson Controls-Hitachi Air-conditioning India told THE WEEK. “India has reinvented itself in the past and it has the potential to do so again in spite of all the adversities,” he added.

This need for reinvention is at once due to the pragmatic realisation that any sudden economic boycott of China will hurt India more, as also the real purpose of all the measures—a leg up for ‘Atmanirbhar Bharat’. PM Modi had actually announced the ‘Vocal for local’ initiative three weeks before the border clashes happened, and the Chinese aggression has only reminded the nation once more how it is too dependent on its powerful neighbour for comfort, and alternatives need to be found.

“The whole government’s thinking is to create an Indian economic infrastructure,” explains Ravi. “I look at the measures in two ways – some, like restricting Chinese funding, was a symbolic way of saying ‘we don’t want your money’. The banning of apps were actual steps (meant to hit China where it hurts). A lot of (Chinese) apps lost money as they had deep roots in India. So, it was effective that way.”

The aim is also to kickstart a domestic ecosystem, and if apps were supposed to be the ‘laboratory’ case, the results have been promising. ““Since the ban on TikTok and other foreign apps, a slew of new domestic apps have emerged. The Indian government’s decision has pushed Indian applications to the forefront,” points out Shivank Agarwal, CEO & co-founder of Mitron TV, a short video app that claims it gained 5 crore users largely due to the TikTok ban.

India’s dependency on China is real. A staggering 70 per cent of electronic components, 70 per cent of Active Pharmaceutical Ingredients (APIs or raw materials that go into making medicines by India’s pharma companies), and 40 per cent of leather goods come from China. In finished goods, more than half the smart TVs in India are Chinese, since an alternative, say from Japan, could be pricier by up to 45 per cent. About 80 per cent of all smartphones sold in India right now are Chinese brands. While the big ones are now ‘made’ in India, it is more an assembling set-up, with many components coming in from, yes, you guessed it right, China.

Cost is a major factor. Fertilisers are 76 per cent cheaper, electronic circuits 23 per cent etc. One of the reasons Indian telecom operators would have preferred Huawei for 5G technology and equipment (the Chinese company has been barred from 5G trials), is the fact that it would have been cheaper, some estimates put this at as much as 20 per cent, than rival players.

“Cost is obviously at the centre of it all,” admits Singh, “The service sector has always attracted FDI. If through various initiatives they are diverted to the manufacturing industry, then it would prove to be a huge boost.”

That is exactly the strategy. The production-linked incentive (PLI) schemes where companies both foreign and domestic that set up manufacturing are offered something akin to a ‘cashback’ for meeting annual targets forms the crux of it. Already, such schemes have been announced for mobile handsets, electronics, auto components, electric batteries, LED bulbs. Additionally, the Centre has also set up industrial parks to kick-start an environment conducive to development of domestic production, like those announced for pharma industry, toys.

It’s not going to be quick, or easy. “If you say that in just a year since government started taking measures, industries (should) completely move away from China to some other country, it’s not possible,” said Arjuna Bajaj, director of Videotex, a big manufacturer of TVs for various brands, and depends on Chinese component imports for the same. “It’s a very slow process and requires huge, huge, huge, huge investments by companies to set up manufacturing facilities like that.”

To take an example, open cell panels account for up to 70 per cent of the cost of a TV—setting up a production plant for it is estimated to cost a massive Rs 60,000 crore. Obviously, something like that works only if there is a well-developed business hub around, with many TV manufacturers buying from it for a global market. Obviously, it is one of the areas where China has a stranglehold on, with even Korean TV brands buying from it.

For manufacturers, China is cost-effective and offers a time-tested, flourishing raw material supply network. It makes sense for them to uproot and come to India only if there are enough attractions in the form of land and tax breaks, as well as a well-developed supply chain. And the supply chain won’t come in unless there are manufacturers in place. It is a chicken-and-egg situation. 

“We have to give incentives for companies in China or elsewhere who want to invest in India and set up plants like that,” feels Bajaj. “It cannot happen overnight; the groundwork has to be set up.” His estimate is that if the government makes it attractive with the right measures, India could well become the manufacturing hub of the world in 5-10 years.

“India has to build its own infrastructure and go in a very granular way to replace imports from China. That approach is not there at the moment,” points out Ravi. “We have kept the Chinese at bay physically, we have pushed them back and shown the strength of India, but not necessarily gone all the way to substitute them.”

In a globalised economy, moving away completely from China may also not be reasonable. Since February, reports have emerged of the government slowly easing investment and other restrictions, though it was officially denied. “The global market dependence on other economies is so complex that absolute independence is an unrealistic expectation,” feels Singh. “The focus should be on taking the Indian industries to the next level of readiness which capacitates it to play a dominating role in the changed future global market. Everything else will follow.”


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