If we are aiming to be an alternative manufacturing hub, then we should first reduce our dependency on the Chinese supply chain
The recent Chinese aggression at the Line of Actual Control (LAC) came as a surprise for India at a time when the entire world was facing the Coronavirus crisis. The Modi Government had its hands full, revamping healthcare facilities to meet the challenges posed by the pandemic and reviving economic activity brought to a grinding halt by the extended lockdowns. But now the national discourse has shifted from COVID-19 to the Chinese misadventure at the LAC and though a dialogue is on to resolve tension along the 3,488 km border, there are no guarantees how long this uneasy peace would hold. In fact, Defence Minister Rajnath Singh’s recent call to the Indian Air Force to stay on alert came at a time when a pullback of troops from key friction points along the LAC seemed to have come to a halt with no change in the situation for a week.
Military and economic might are important factors for claiming the status of a global power. As far as China is concerned, its economic strength and not military might is making a difference. China has established itself as the world’s factory while India can at best claim the status of the world’s back office. This situation is not going to change in a short span of time and apart from policy interventions by the Government, India should use diplomatic channels to convince multinational corporations to minimise the risk of geographical concentration.
It is no secret that Chinese goods are of substandard quality. However, it is quite surprising that despite running a trade deficit amounting to billions of dollars for years, the Indian Government has not yet come out with technical specifications for curbing import of such cheap-quality goods. If we want to make ourselves self-reliant, then we simply cannot go by the rulebook of international trade because China has engaged in various sorts of manipulation.
If we really want to tame the dragon and improve our economic strength, then the Modi Government should go beyond the sensation which is created out of nationalistic fervour. The social media in India is abuzz with “boycott China” messages but at the same time we continue to award big contracts to our troublesome neighbour. Some imports are unavoidable because of a lack of our self-sufficiencies. Chinese companies are executing various Government contracts and it may be highlighted here that India is not a signatory to the World Trade Organisation (WTO) agreement on Government Procurement (GPA) and, therefore, we must safeguard our national as well as economic interests while awarding contracts to nations hostile to us. We can learn from developed nations like the US on how to deal with the dragon. Trade malpractices adopted by China should be highlighted at international fora. The US Trade Representative Report issued in March highlights such issues which are against WTO rules. Various concerns have been raised in this report which range from Government subsidy against WTO rules to investment restrictions. The Commerce Ministry should also publish such reports to highlight the foul practices China indulges in. The Information Technology (IT) sector makes immense contribution towards economic development and Indian IT companies have a global presence, except in China. Our IT companies are not getting a level playing field in the Chinese market and this is primarily due to the “Made in China 2025” plan, which has a specific thrust on IT.
In fact, the Chinese Government has identified ten strategic sectors for increasing its worldwide market share and is aggressively pursuing this. Hence, there should be a tit-for-tat policy. In fact, the Indian Government’s recent decisions to ban Chinese apps and cancel the use of Chinese equipment for BSNL and MTNL’s 4G upgrades are moves in the right direction because it impacts their investment. China has taken all sorts of tariff and non-tariff measures to increase its exports and protect its domestic market. It has smartly used its currency exchange rate to grab a large share in global markets. The Chinese yuan has depreciated more than 15 per cent against the US dollar since July 2015 when it was traded at $1 equivalent to 6.2 yuan.
Among various factors, the depreciation in the yuan is not in line with the interest rate and inflation in China. The People’s Bank of China has deliberately allowed the yuan to fall and this currency manipulation was even highlighted by the US Treasury department. The context of these actions and the implausibility of China’s market stability rationale confirm that the purpose of the currency devaluation is to gain an unfair competitive advantage in international trade. This pattern of actions is also a violation of China’s G20 commitments to refrain from competitive devaluation.
India has to begin with curbing non-essential imports if it wants to get a hold of this trade battle. If we are trying to convince the world to look at us as an alternative manufacturing destination, then we should first reduce our dependency on the Chinese supply chain and start creating the requisite infrastructure now with graded tax breaks.
Of course, there will be teething issues in terms of a small price rise and production cost if we start sourcing material from other countries, while incentivising local manufacturers to scale up, but this will help us in the long run. From the investment perspective, we are not dependent on China and the cumulative Foreign Direct Investment (FDI) from our neighbour is hardly 0.51 per cent of the overall FDI. It is high time we go for a policy change along with strict implementation and continuous monitoring. Let not our soldiers’ deaths go in vain.
(The writer is an economic policy analyst)