Can India Decouple From China?

Following the catastrophic clashes between Indian and Chinese troops at the Galwan Valley in Ladakh in June 2020, India has taken several steps to reduce its economic engagement with China. These efforts have included enhancing scrutiny on incoming Chinese investments in India and banning more than a hundred Chinese apps, such as the widely popular TikTok, as well as WeChat and PubG. Chinese companies have also been blocked from participating in road and highway construction projects in India, supplying equipment to Indian telecom service providers, and participating in 5G telecom trials.

In its wider responses to reducing strategic economic dependence on China, India is collaborating with Japan and Australia in promoting the resilient supply chain initiative (RSCI) for reshoring production away from China. It is also a part of a 5G club along with several major global democracies working on alternatives to Chinese 5G telecom technology.

The ostensible motivation behind these efforts is New Delhi’s desire to demonstrate to Beijing that economic dependence is not going to get in the way of India’s responses to China’s provocations on the border. India is not the only country wary of an assertive China. Its decision to take economic actions to curb China’s alleged belligerence has resonated with the U.S., Japan, Australia, the U.K., and several countries from Europe (such as France, Germany, Italy) enabling the formation of country coalitions for restricting China’s economic and technological domination. 

Trade Dependency on China

India’s largest source of economic dependence on China is in external trade. China is India’s second largest trade partner after the United States with bilateral trade of nearly $82 billion in fiscal year 2019. The trade balance is conspicuously skewed in favor of China, with India’s exports of $16.6 billon being roughly a quarter of its imports of $65.3 billion. India imports far more from China than it exports to it, underpinning the dependency of Indian industries and consumers on Chinese products. 

Rising hostilities with China have reinforced “Boycott China” demands in India. Prominent local bodies representing countrywide trader interests, like the Confederation of All India Traders (CAIT), have demanded the boycott of more than 3,000 products imported from China. The Swadeshi Jagran Manch (SJM) – a domestic interest group with strong inward-looking views on national economic policies and an affiliate of the politically influential Rashtriya Swayamsevak Sangh (RSS) – was instrumental in India withdrawing from the Regional Comprehensive Economic Partnership (RCEP) in November 2019 over apprehension of the deal opening the proverbial floodgates for more Chinese imports. The SJM – along with Vishwa Hindu Parishad (VHP), another RSS affiliate – has urged broad-based rejection of Chinese goods by Indians, and highlighted the current strained conditions as the right occasion for doing so. 

It is interesting to note that, so far, India’s responses to disengaging economically from China have not included actions specifically restricting imports from China. Trade-restrictive actions have been more generic in nature. India has restricted imports of specific consumer goods, such as split air conditioners, LED television sets, and car tires. While India imports these items from China, it also imports them in large amounts from several other countries in Asia-Pacific and Southeast Asia. Generic restrictions on imports, while having the impact of curbing imports from China, also restrict imports of the covered goods from other countries. In another generic restriction, though primarily aimed at China, large e-commerce marketplaces like Amazon and Flipkart have been asked to display “country of origin” labels on items for sale. The perceived expectation in this regard is that heavy “anti-China” sentiments prevailing in India would cause consumers to refrain from buying items labelled “made in China.”

Given the current domestic resentment against China, and India’s efforts to retaliate economically, more China-specific trade actions for restricting imports from the country were expected. The fact that such restrictions haven’t been announced is due to India’s heavy reliance on China for several critical imports. The persistence of this dependence constrains India’s ability to act tough on China with regard to imports. Furthermore, it also checks the extent to which India can economically disengage from China, notwithstanding domestic demands for banishing Chinese products altogether.

The Latest Trends in Imports From China

India’s import dependence on China is broad-based and includes imports of raw materials, intermediate goods, and finished products. Most prominent Indian imports from China are machineries and parts and components. 

Electrical machinery and equipment account for nearly one-third of India’s imports from China, followed by machinery and mechanical appliances with a share of around 20 percent, and organic chemicals with a share of just over 12 percent. India’s dependence on China for these essential imports is evident from China’s preponderance in India’s total imports of these products. Electrical machinery and equipment, and machinery and mechanical appliances, imported from China, account for 45 percent and 32 percent respectively of total such imports by India, while organic chemical imports from China account for 38 percent of total organic chemical imports. Beyond these groups, India’s reliance on imports from China is noticeably high for fertilizers, plastics, iron and steel products, machinery parts, automobile parts and components, and optical, medical and surgical instruments. 

Has India’s dependence on Chinese imports fallen in recent months, following the rise in mutual hostilities? Bilateral trade statistics are available only through July 2020. Based on these statistics, the following trends can be observed for India’s top 20 imports from China for the first four months of fiscal year 2020, April-July 2020.

Imports in 16 categories have declined so far in fiscal year 2020 compared with the corresponding period of fiscal year 2019 (April-July 2019). These include coke and semi-coke of coal; mineral/chemical fertilizers; iron or steel tubes and pipes; air/vacuum pumps; air-conditioning machines; electrical transformers; electric accumulators; electrical apparatus for telephone; radio/telephony transmission apparatus; reception apparatus; parts of transmission and radio apparatus; diodes, transistors and semiconductor devices; electronic integrated circuits; motor vehicle parts; two-wheeler and cycle parts; and project goods . For all 16 categories, India’s overall imports have declined so far this fiscal year in comparison to 2019.

Among those product groups whose imports have declined in fiscal year 2020 for five groups – coke and semi-coke of coal, electric accumulators, radio/telephony transmission apparatus, two-wheeler and cycle parts and project goods – imports from China have declined more than those from the rest of the world. For the others, imports from China have declined less than the decline in overall imports. 

Imports in four product groups from China – heterocyclic compounds with nitrogen, antibiotics, insecticides and fungicides, and automatic data processing machines – have increased during fiscal year 2020 compared with 2019. Out of these, India’s imports of heterocyclic compounds with nitrogen and insecticides and fungicides from China have grown faster than those from the rest of the world. Antibiotic imports from China show a relatively lower growth than overall imports. Automatic data processing machines are the only category whose imports from China have increased, notwithstanding their overall import showing a decline.

The decline in 16 out of India’s top 20 imports from China, including electrical machinery, mechanical appliances, motor vehicle parts, fertilizers, iron and steel products, and semiconductor devices, are largely attributable to overall declines in these imports by India. This, again, is a result of the halt in domestic industrial production following the announcement of a national lockdown in India from March 25, 2020, to check the spread of the COVID-19 pandemic in the country. The drying up of demand from industry, as well as consumers, due to the functional and operational restrictions imposed by the lockdown, led to an expected decline in India’s imports from all over of the world, including from China. Lower imports from China during this period therefore cannot be attributed to their discontinuation due to domestic anti-China sentiments or India’s economic actions.

The four categories of imports from China that have increased in recent months, despite the lockdown in India, are pharmaceutical and digital industry products. The latter are those rare industries whose economic prospects have improved during the pandemic all across the world, including in India. The rise in these imports from China in recent months underpins the nature of integration between Indian industries with China across industrial value chains that are critical and almost indispensable.

Supply Chain Integration and Dependence

Organic chemicals, as mentioned earlier, are among India’s most significant imports from China. Within organic chemicals, heterocyclic nitrogen compounds and antibiotics are the most prominent imports. Both comprise products used extensively used by India’s pharmaceutical industry as intermediate goods. India’s pharmaceutical imports from China are largely bulk drugs, processed further into formulations for final consumption. Indian pharmaceutical companies (like Dr. Reddy’s Laboratories, Torrent, Glenmark, and Lupin) have achieved great proficiency in preparing formulations, and in their packaging and marketing, making India the world’s largest producer of generic drugs and a prominent source of affordable medicines for the rest of the world. That achievement, however, has much to do with the ability of Indian pharmaceutical companies to source bulk drugs from China. From a value chain perspective, the downstream proficiencies of the Indian pharmaceutical industry to produce large-scale medicinal formulations have been conditional on the upstream sourcing of raw drugs from China for use as active pharmaceutical ingredients (APIs) in formulations.

Imports of heterocyclic nitrogenous compounds and antibiotics from China during recent months have witnessed a surge amid the spread of the COVID-19 pandemic in India, which points to the critical dependence of the Indian pharmaceutical industry in sourcing inputs from China. Several key APIs, such as penicillin-G, streptomycin, and tetracycline are not available in India. Such unavailability, and high demand from pharmaceutical producers for a variety of APIs for making drugs to tackle COVID-19, have led to antibiotics like ampicillin and its salts, streptomycin, neomycin, and norfloxacin, along with some heterocyclic compounds with nitrogen, like phenazone (antipyrine) and its derivatives that are used in medicinal formulations, to be sourced significantly from China during fiscal year 2020. The later months of fiscal year 2020 might show an even greater increase India’s imports of these chemicals from China, as production in China – the world’s leading supplier of APIs – gradually returns to full capacity, particularly in Hubei province, which was the worst affected by COVID-19. The dependence of the Indian pharmaceutical industry on China for APIs, in this regard, is organic and evident from sourcing high imports from the country, even at a time when anti-China sentiments in India have been at a peak.

Other critical imports by India underline similar integration in different segments of value chains with China. Like antibiotic imports that have increased since the onset of the pandemic in India, imports of insecticides, like mosquito repellants and disinfectants, from China have increased rapidly in recent months for improving general hygienic conditions. These are final products being widely used across the country. Such imports wouldn’t have increased had their domestic productions been sufficient for tackling burgeoning demand during the pandemic. 

Among automatic data processing machines, personal computer laptop imports from China have increased rapidly in recent months. The increase can be explained by the functional changes ushered in by COVID-19, in form of the rapid increase in e-learning, online engagements, and digital interfaces. The preponderant shift to work-from-home formats for schools, colleges, businesses, and institutions has led to a sharp increase in demand for personal computers, much of which has been met by imports from China.

Might Self-Reliance Reduce Imports From China?

The recent trend of imports from China confirms a long-held impression. When it comes to quick sourcing and large amounts, China remains an irreplaceable source of imports for India for several critical items. This dependence is unlikely to disappear soon. Those imports which have declined from China in recent months, as part of an overall decline in imports by India, are expected to rebound as domestic industrial recovery in India gathers momentum following the end of restrictions.

Is it possible for India to reduce its dependence over the medium term as it pursues the objective of economic self-reliance? Becoming self-reliant means lessening the country’s overall dependence on imports, and thereby, on imports from Chin, too. This, ostensibly, is the core objective of “Atmanirbhar Bharat,” Prime Minister Narendra Modi’s “self-reliant India” vision.

Self-reliance will remain an unfulfilled vision unless the Indian economy’s capacity to produce goods and services is radically reorganized. It would require India to execute significant parts of production in different stages of various industrial supply chains within its territory that it does not currently do. This would further entail India producing a much more diverse range of raw materials and industrial inputs, and enabling its industrial enterprises, particularly small and medium business, to efficiently process inputs upward, at various levels of the supply chains. For most major Indian industries, a lack of adequate indigenous raw materials and intermediate goods – such as bulk drugs, coal, crude oil, iron and steel, fertilizers, machinery parts and components – leave no choice other than to rely on imports. The reliance is identical for finished capital goods, like electrical and non-electrical machinery and mechanical appliances, many of which, particularly those with international quality specifications, are not available in India in large numbers and at affordable prices.   

A very long journey on the road to self-reliance awaits India before it can expect to substantially reduce dependence on imports. As a result, its dependence on China is going to continue.

Some would argue that sourcing from China can be reduced, if the same imports are sourced from elsewhere. Price becomes a decisive factor in this regard. For several industrial items China enjoys the advantage of being able to offer large volumes at low prices. This would be a critical issue in India’s hunt for locating alternative sources. Electrical machinery and semiconductor devices for example, are imported by India from a large number of sources. Apart from China, these include Hong Kong, Vietnam, Taiwan, Singapore, and South Korea. For vehicle parts and components, India’s other prominent sources include Germany, Japan, South Korea, and the United States. The possibility of India importing more from these countries by switching from China depends significantly upon costs and availability, including the prospects of sourcing large volumes at short notice. There is less possibility of switching, though, for key inputs like antibiotics, given that other countries are much smaller suppliers for India. The prospects are better for fertilizers, as India sources large amounts from Saudi Arabia and Russia, as well as for coke and semi-coke of coal, from Poland and Russia.  

The lack of sufficient broad-based industrial capacities at home, primarily in terms of availability of multiple raw materials and intermediate goods required by domestic industries, and limited processing capacities, combined with China’s ability to supply inputs by large volumes and at competitive prices, makes discarding imports from China a difficult proposition. The inevitability of sourcing from China during episodes of high domestic demand, such as the current COVID-19 pandemic, was again evident with China being the leading supplier of hand sanitizers, aprons, medical masks, and protective clothing, used as personal protective equipment (PPE) by healthcare professionals and others.

Looking Ahead

India’s economic actions against China, until now, have focused on restricting the Chinese commercial presence in the country. Restrictive measures on Chinese investments and digital content are similar to those taken by several other countries and are part of a broad anti-China pushback. To some extent, these actions can impact Chinese imports also. As the numbers of Chinese-funded projects in the economy shrink, particularly in import-absorbing sectors like road construction and telecommunications, Chinese imports of project-related items will inevitably decline. Such declines, though, are unlikely to change India’s heavy dependence on China for various other critical imports.

At a time when the world economy is struggling with the worst economic contraction it has experienced in decades, and most developed economies and large emerging markets, including India, are encountering deep growth plunges, China looks to have overcome the contraction by recording 4.9 percent growth in GDP during July-September 2020. It appears to be the only choice for India – and much of the rest of the world – to continue sourcing several key products required by businesses and consumers from China. 

The Indian economy needs to source extensively from China to enable domestic industries to return to full operational capacity and revive its own GDP growth. Much of India’s prospective growth rebound is premised on the hope of its pharmaceutical industry being the world’s leading producer of COVID-19 vaccines, which countries are desperately looking to obtain. Capitalizing on this opportunity will require Indian pharmaceutical companies to source inputs extensively from China. Furthermore, for the Indian pharmaceutical industry, China could also turn out to be a major market for selling vaccines in the days to come, offering substantial commercial opportunities.

The call for self-reliance in India, backed up by specific measures like the production-linked incentives announced for growth of large-scale electronics manufacturing, including smartphones and electronic components, will take time to create sufficient domestic capacities. India’s current strained public finances may prevent it from offering such financial incentives across the board. Over time, specific domestic incentives, and concerted multi-country production relocation efforts like the resilient supply chain initiative, might diminish some import dependency on China by expanding local production. But overall import dependence is expected to continue. 

India’s efforts to reduce economic dependency on China have clearly been noted by the rest of the world, including China. India stands to reap strategic dividends, if in spite of restricting China in its domestic economic space, it is still able to achieve and sustain high rates of economic growth. The achievement would gain India geopolitical influence, generated by economic success. The outcome is possible if India combines the political and institutional push toward self-reliance with pragmatic domestic and external economic policies. Implementation of long-pending domestic reforms in agriculture and industrial relations are positive steps. These need to be backed by purposeful external trade policy for connecting closer to other trade partners and markets for reducing dependence on China.