Why economic disengagement with China is key to India’s growth: 8 key points

Chinese exports to India have been declining at a constant rate now as from USD 63 billion in 2017-18, it has plummeted to USD 48.7 billion in 2019-20. At a time when both the countries are engaged in a standoff along the Line of Actual Control (LAC), demands are being voiced in India for reducing economic dependence on China and trim down trade relationships with the hostile neighbour.

China is probably the only country in the world that has a trade surplus with more than 130 economies in the world. This upper hand in the trade has also empowered it to prevent liberal countries from speaking against Chinese aggression and breach of human rights.

In the first set of reforms, we need to resort to selective boycotting of Chinese goods coming to India. China has itself been resorting to this tactic and has brought countries like South Korea, Japan, Indonesia, and many others on their knees. We need to have a mix of sharp anti-dumping, substitutions, and arbitrations wherever required.

Many countries have resorted to anti-dumping and discriminatory tariffs to check the business of foreign counties on their soil. A number of such multi-pronged steps have not at all been opposed by the WTO. In the Argentina and Brazil Poultry Anti-Dumping case of 2003, the WTO ruled that the trade has to be in consonance with law of the land and allowed anti-dumping mechanisms to be applied in accordance with the sovereign laws of a country. Favouring Argentina, the WTO ruled that the country did not violate Article 6.8 by disregarding the submissions of a company for not fulfilling the procedural requirements of the domestic laws of the country.

Similarly, in the Australia-Canada Salmon case of 2000, the WTO ruled that differential treatment must not necessarily be a restriction to international trade. In the case, WTO decided that Australia did not violate Article 5.5, as different forms of regulatory protections imposed by it did not mean disguised restrictions on international trade. Besides violation of WTO rules, a number of countries have openly violated the Bilateral investment treaties in case of conflicts. Most importantly, the logic of national security has always been used to nullify or violate Bilateral investment treaties.

The second area that needs a series of reforms in the area of discriminatory tariffs. India needs to check the inflow of Chinese goods to India through discriminatory tariffs in specific or blanket categories. The largest portion of Chinese goods in Indian markets is of low-cost items. Besides differential tariffs on low-cost items, India should also support its domestic industries to manufacture low-cost goods. India can also look towards Vietnam as the country is emerging as a global giant in the mass production of low-cost goods, most of which China currently produces.

A major region behind the trade deficit with China is the unchecked functioning of Chinese companies in India. Through the third category of reforms, India needs to ensure more transparency and accountability of Chinese businesses operating in India. We should also ensure that China doesn't continue its unfair trade practices in India. India needs to streamline the process and conduct check the under-invoicing of Chinese imports and subsequent screening. There is a need to pay special attention to e-commerce. E-commerce companies should be asked to explicitly indicate the country of origin of the items on every delivery. In addition, the e-commerce platforms operating in India could be asked to source a majority of their products from the Indian market, in a specific proportion.

Fourthly, India should also try to replace Chinese investments with those coming from western countries, especially in the technology and manufacturing sector. India could also explore possibilities of attracting those countries to set up their manufacturing units in India who are willing to economically decouple from China and looking for alternative destinations for their manufacturing set-ups. In this regard, Japanese and South Korean companies could be reached out for the starters. The laws regarding investments of certain countries in India shall be liberalized and companies shall be entitled to single window access and a time-bound response mechanism.

India needs to bring in reforms with special regards to digital technologies. Chinese companies have unanimously taken over the Indian telecom sector as they now control 51% of India’s $8 billion smartphone market. And as of last year, of the 100 most popular used in India, 44 were Chinese, including five in the top ten. India urgently needs to encourage domestic smartphone companies and promote apps developed in India. The Chinese companies working in the sector shall be allowed to continue operation only if they increase certain components from our domestic market.

Fifthly, Taiwan has emerged as a tough global competitor for China as it produces many items that China has expertise on, that too, with superior quality. Taiwanese are geniuses in semiconductors and other electric and electronic items. We have already been enhancing our trade with Taiwan over the past few years and shall try to develop Taiwan as an important alternative import destination. Our trade has reached from US$ 66 million to 6 billion just within a matter of some time. Now the time has come to explore the possibilities of working on a Free Trade Agreement with Taiwan.

We would be able to export more, only if we manufacture more. Hence, sixthly, India needs to promote cottage industries by supporting them as well as to support the MSMEs, which are already going through a tough phase. In the course of manufacturing, we shall also concentrate on manufacturing items under two major categories. First, the goods that India imports, and second, the ones that China imports. By focusing on both areas, we shall not only be able to sustain ourselves but also export more goods to China which it is scarce, Most importantly, India should try to build its capacity to manufacture API at a massive scale and revive its production at a rapid pace, as we have been dependent on Chinese imports for the product and it is the pre-requisite to maintain our pharma industry.

In the seventh set of reforms, India shall leverage the sectors that are its strong areas like textiles, agricultural products, chemicals, software, etc. There is a need to make efforts for re-organizing these sectors and enhance their own exports. Similarly, there is also a need to organise and streamline the area of emerging technology in which India has a good potential to excel including Artificial Intelligence (Al) and blockchain. India is yet to come up with rules and legislation on trade in areas of Al, blockchain, cryptocurrency, fintech, etc. India needs to seize the opportunity by early initiation of market-friendly laws in these areas to ensure that India emerges as an export hub in these areas.

Eighthly, India can also try to leverage geopolitical and diplomatic dynamics while dealing with its trade deficit with China. Though we contribute 2.5% of Chinese imports, India constitutes 11.5% of China's surplus trade. Besides India, the US is another major country contributing to 83.5% Chinese trade surplus. It implies that out of the total trade surplus for China valuing US$ 430 billion, 95% of the trade surplus comes from only two countries — India and the US.

There is also a striking difference in the basic nature of Indian and Chinese economies. The economy of China is largely based on exports and the economy of India is based on its own consumers. We need to change this and exploit it as China remains to be an export-dependent economy.

These reforms shall certainly need a series of steps and might prove painful for India at instances. However, India needs to reduce its economic dependence on China, cull-out agreements, and decouple its business relationship as far as it can.