Hard decoupling from China by any nation is impossible. Therefore, India must identify sectors where investment could be attracted with active consultation and policy coordination.

 

Disruptions in the global supply chains in the wake of the Covid-19 crisis and the bloody clashes at Galwan have given rise to two sentiments in India.

The first is the swadeshi “movement”, which has been there for quite some time. This has been orchestrated by organisations like the Swadeshi Jagran Manch (SJM), with a “boycott made in China” agenda. The agenda has taken root in public mind, especially after the Galwan standoff in which 20 of our bravehearts made the supreme sacrifice. Since 25 May 2020, the SJM has launched a “Swadeshi Self-Reliance Campaign” with a five-point program. The very first point is the boycott of Chinese products. This can also be reflected in a government order declaring 42 Chinese apps as dangerous, followed by the launch of the “Remove China App” developed by One Touch AppLabs, and finally banning 59 Chinese apps including TikTok, SHAREit, Mi Video Call, UC Browser. TikTok, which has the largest consumer base outside China, has estimated a loss of $6 billion after the ban. India has made it clear that if there is bloodshed at the border, it cannot be business as usual. Chinese analysts like Yuan Jirong, a former correspondent of People’s Daily in India, believe that the ban and the border standoff at Galwan cannot be treated as isolated events, however, maintain that this is also owing to the “rise of Hindu nationalism, and India’s mentality and ambition to become a major power”. According to him, India is “evolving from a regional troublemaker to a regional strategic competitor of China,” a popular discourse making the rounds in academic as well as media writings in China.

The second is the dream of making India an alternative global supply chain destination. As Covid-19 triggered a debate on decoupling of supply chains from China, India changed its FDI policy on 17 April 2020 to protect Indian companies from “opportunistic takeovers and acquisitions”, implying that India abolished the automatic route that does not require government and Reserve Bank of India’s permission. Many in India linked the policy change to the People’s Bank of China increasing its stake in India’s largest private credit institution, the Indian Housing Development Finance Corporation—from 0.8% to 1.01%. China immediately rebutted the Indian move, deemed it “discriminatory” and demanded rectification. Draphant, a Chinese start-up that assists Chinese investments in India, in a study argued that “although the policy is aimed at India’s neighbours on the surface, but only China has made significant investments in India. In essence, the policy is aimed at Chinese companies. The policy change involves a variety of Chinese direct or indirect investment behaviours in India.” India deems these as initial responses to China’s posturing at the border, there may be more in the offing.

However, India emerging as the next supply chain destination is a hype and exaggeration. It took China 40 years to develop these supply chain clusters with the support of its detractors such as the US and Japan. It may take many more decades for India to realise the same, but shutting doors to Chinese investment may further prolong it. Going by Moody’s Investor Services, the prospects do not look optimistic, for India’s sovereign rating has been downgraded to the lowest investment grade of “BAA3” from “BAA2” on 1 June 2020. The agency also maintained the outlook from “stable” to “negative”. The US-China decoupling is bound to happen in some sectors, but don’t forget that China is the third largest importer of US goods. If China cannot replace the US as the main security provider in the Asia Pacific, in the same vein, the US cannot replace China as the main supplier of manufactured goods. On the other hand, China too has intensified relocation of its labour-intensive manufacturing supply chains to other countries, especially the developing countries. Countries like Vietnam, Cambodia, Myanmar and Thailand in Southeast Asia and India and Bangladesh in South Asia are the biggest beneficiaries. Since the focus of most governments for the period of 2021-2025 will be the health of their economies, trade and investment cooperation between India and China will be crucial, albeit it would be determined by the benevolent or malevolent nature of the relationship.

Chinese investment in India has risen exponentially. It has crossed the $8 billion mark, of which $5billion was pumped in by the Chinese companies in Indian start-ups, mostly in the “Digital India” project. Alibaba, Shunwei Capital, Fosun Tencent and Xiaomi are the largest investors pumping money in consumers, food-tech, logistics, retail, artificial intelligence, Internet of Things, fintech etc., sectors. Chinese brands such as Xiaomi, Vivo, Oppo, and Huawei have captured 72% of India’s market share. Other industries such as energy and pharmaceutical have also witnessed deep penetration from China. China’s investment in this sector, nonetheless, will face stiff competition from a local giant like Reliance Jio, for bigwigs of the tech world such as Google, Facebook, Intel and Qualcom have shown great interest in it. Facebook, Google, KKR and Vista have invested $5.8 billion, $4.5 billion, $1.5 billion and $1.5 billion each in Jio. Jio, apart from having the above market share of the Chinese in mind, will also participate in the bidding of 5G spectrum, thus keeping Huawei out of India. Huawei has already announced that they are reducing 50% of their employees in India. Chinese media was abuzz with the news of India launching a $6.65 billion plan on 2 June, targeting five global smartphone manufacturers, encouraging them to invest in or expand their smartphone production lines in India. In addition, two other plans will help India produce smartphones and parts worth $133 billion by 2025. There is speculation that these moves, which are part of Atmanirbhar (self-reliance) Bharat program, will gradually push Chinese companies out of the Indian market. Nevertheless, other supply chains in sectors such as electronics, home appliances, optical fibre cable, solar cells etc., will continue to be dominated by the Chinese in the foreseeable future.

Sectors that will continue to be interdependent in short and medium terms are pharma, fertilisers, energy and automobile. Although Covid-19 exposed India’s excessive dependence on active pharmaceutical ingredients (APIs) from China, but cooperation in this sector has emerged as the one having huge complementarities. According to the Trade Promotion Council of India (TCPI), India imports 53 APIs and critical key starting materials (KSMs) from China, accounting for 70% of its API requirements. According to a report in the Economic Times, the total pharmaceutical and organic chemical imports from China are close to $10 billion, of which bulk drug imports are more than $2.5 billion in value as per a report by Haitong Securities. Indian companies such as Laurus, Granules India, Solara Active Pharma were listed as having significant exposure. Even though the government is thinking of building new pharma parks, but the low cost of the API and medical equipment from China will continue to attract the Indian pharma sector. Not only this, 25,000 Indian students studying medicine in China on competitive fee structure add another dimension to this. Energy and automobiles sectors are other promising areas where policy coordination can be initiated. India targets to increase the share of manufacturing in GDP to 25%, which looks difficult to achieve given that growth has contracted by 1% in the July-September quarter of 2019-20, from 6.9% expansion a year ago. China’s MG Motor started selling cars in India in 2019; the company has not fully made its promised investment of $650 million in India. Great Wall Motor has not yet started production in India, but in February said it plans to invest $1 billion in the next few years. Since Covid-19 and tensions at the border has thrown many uncertainties, they are likely to withhold their decision to go ahead with the investment. Irrespective of these negative sentiments, I believe there is still scope for cooperation.

As regards India’s options, I believe hard decoupling from China by any nation is impossible. Therefore, India must identify sectors where investment could be attracted with active consultation and policy coordination. China’s investment in “Digital India” happened because it is a growing sector and is hassle free compared to other sectors where issues related to labour laws and land acquisition are problematic. While safeguarding big data remains a worrisome proposition, but India also needs to worry about lower labour productivity, higher land and industrial electricity costs, higher capital costs, higher logistics and compliance costs, a sudden policy change, delay in performance of government contracts, costly legal procedures and so on, which are visible bottlenecks for attracting investment.

Therefore, when it comes to factors and resource costs of land, labour, capital, raw materials and electricity, India needs to take measures to make these competitive. The price of industrial electricity is too high, which limits the development of enterprises. India lacks world-class infrastructure, especially in logistics, which is necessary for rapid movement of goods in and out of India and a necessary condition for international production networks. Logistics costs in India account for 13-15% of the product cost, compared to a global average of 6%. High logistics costs increase operating costs and hinder competitiveness of the industry.

It is possible to create our own supply chain clusters, provided India acts now, identifies sectors, makes a 27-year roadmap and executes it in letter and spirit. If acted upon. I am sure at the 100th anniversary of India’s Independence, we would be a different India.

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