On May 3, the United Nations Security Council (UNSC) designated Jaish-e-Mohammed chief Masood Azhar a global terrorist, ending weeks of hectic diplomatic manoeuvring between India, the US, the UK, France and China. The Narendra Modi government was quick to claim it as a diplomatic victory for the country under its watch, dubbing the UNSC’s move the third strike against Pakistan after the surgical strikes in September 2016 and the air strikes this February in Balakot. “This terrorist will not be able to enjoy privilege in Pakistan now. This is the third strike. The arrogance of Pakistan has been shattered,” Prime Minister Modi said at an election rally in Rajasthan on May 3. Getting Azhar listed was certainly a diplomatic win for the Modi government. Yet even what should have been a straightforward designation of a terrorist took four attempts, and nine years of hard bargaining with China, who appeared to finally relent in the face of American pressure and an unprecedented diplomatic coalition built by India at the UN.
Illustration by Raj Verma
The BJP expects the UNSC move to bring it electoral rewards in the remaining phases of the ongoing Lok Sabha election. However, the success with the Azhar listing should not obscure the fact that the question of tackling an increasingly confident China has only grown more difficult over the past decade.
Graphics by Tanmoy Chakraborty
Notwithstanding its satisfactory denouement, the long-running Azhar saga was the latest reminder of the stark challenge in dealing with the five-times-larger economic behemoth next door, particularly with India falling deeper into its economic orbit.
Every political slugfest with China seems to trigger five stages of grief. Denial that Beijing will play spoilsport is followed by anger, bargaining, depression and, then, acceptance that the intractable neighbour across the Himalayas will forever remain so. The political debate gets most heated in stages two and three, when the focus shifts to what options India has to put the dragon in its place.
Graphics by Tanmoy Chakraborty
Will boycotts work?
In March, when China placed its fourth technical hold on the listing, the most popular response on social media was to boycott Chinese goods, with the #boycottChinesegoods hashtag trending on Twitter. Leaving aside the peculiarity of a smartphone-led boycott call in a market currently dominated by either Chinese, American or Korean brands that manufacture or assemble in China, the campaign fizzled, barring headlines in the next day’s papers.
That a boycott of Chinese goods is unlikely to succeed should not have been a surprise. As was the case with the November 2016 attempt, when Indian trade associations issued calls for a nationwide boycott during Diwali, the now-annual tradition of burning Chinese goods at Delhi’s Sadar Bazaar failed to make a dent this year too. Burning cheap Chinese plastic toys is one thing. Expunging more than $75 billion (over Rs 5 lakh crore) in annual imports of expensive telecom, power and electrical equipment that has become a key ingredient of most Indian supply chains is an entirely different question.
Indeed, in the three years since the 2016 boycott campaign, India’s dependence on Chinese goods has only grown. In 2017-18, the two-way trade reached $89.7 billion (around Rs 6 lakh crore), up 25 per cent from the previous year, according to Union ministry of commerce data. India’s exports to China made up just $13.3 billion (Rs 91,770 crore). China’s exports to India have grown to $76.3 billion (Rs 5.3 lakh crore), accounting for 85 per cent of the total two-way trade. The trade imbalance in China’s favour stood at $63 billion (Rs 4.3 lakh crore), up from $52.7 billion (Rs 3.6 lakh crore) in 2015-16. Contrary to public imagination, cheap consumer goods account for a fraction of India’s imports-less than 5 per cent.
Still, China has a large presence in India’s consumer goods. A substantial share of mobile phones is imported from China, either directly or indirectly, via CKD (completely knocked down) kits. Chinese firms also have a presence in the white goods sector, but a boycott of Chinese products could send product prices spiralling upwards. “Unfortunately, we have boxed ourselves into a corner by a systematic neglect of the manufacturing sector, allowing the Chinese firms to fill the big hole created as a result,” says Biswajit Dhar, professor at the Centre for Economic Studies and Planning at the Jawaharlal Nehru University in Delhi. Successive governments have talked big about the revival of the manufacturing sector ever since the beginning of the economic reforms in 1991, but all India has done is to embark on opening the market without considering the ability of the domestic firms to cope up with import competition. “I don’t think there’s anything in the short run that we can do to overcome the dependence on China,” Dhar adds.
Pharmaceuticals is a case in point, where India imports 75 per cent of its active pharma ingredients (APIs) that go into the manufacture of medicines from China. In 2017-18, India imported $2.5 billion (Rs 17,250 crore) worth of APIs and intermediates from China while exports to the country in pharma products amounted to just $200 million (Rs 1,380 crore). “China has the advantage of low product prices due to cheap labour, and its government has been boosting its exports with incentives. However, of late, salaries there have gone up and so have the prices of pharma products,” says Udaya Bhaskar, director-general of the Pharmaceuticals Export Promotion Council (Pharmexcil) of India. Moreover, the Chinese are upgrading their facilities in tune with the International Council for Harmonisation (ICH) guidelines,
and have even closed a few pharma units that were polluting the environment. However, these have not affected China’s exports to India much. “Indian companies continue to import products at twice the price,” says Bhaskar. India missed out on boosting domestic production of APIs after it began to focus on the more profitable formulations in the mid-1990s. A revival is not in immediate sight.
The one big consumer good that contributes the most significant amount of revenues to China is the smartphone. Indian consumers have been spending heavily on Chinese smartphones-as well as cheaper mobiles. Chinese smartphone brands such as Oppo, Vivo, Xiaomi and Huawei are among the five bestsellers in India. Some of these smartphones, including the likes of Xiaomi and Vivo, are also being assembled and are likely to be manufactured in India by Indian workers.
Where does that leave India? Some experts say the country can leverage the huge trade surplus China enjoys with it. But a close reading of India’s trade relations suggests this is a simplistic conclusion, considering how entrenched Chinese products and equipment are in various supply chains, with no immediate prospect of alternatives. Costs imposed on Chinese companies, in many cases, will be transferred to their Indian partners and subseque-ntly to Indian consumers, in the absence of first ensuring credible alternatives either domestically or elsewhere from overseas.
Boycotting Chinese goods could create shortages in the markets for critical products like electronic goods. It may not work as a pressure tactic, as India is a relatively small market for China. Only 3 per cent of China’s exports of manufactured goods entered India’s market in 2017. Further, India was only the sixth largest market (4 per cent share in 2017) for Chinese communication equipment, including mobile phones. “Of course, things may change if the Donald Trump administration’s trade war starts hitting China so hard that it has to look for alternative markets. India would have larger negotiating chips at that point,” says Dhar.
“The dominant economic partner will always have more leverage,” says former foreign secretary Shyam Saran. “Just the density of trade and investment does not mean we have more leverage. If the overall power relationship continues to be weighed against you, then you’re not in a position to use economic leverage to change the political or strategic relationship. On the contrary, the more powerful country may use the economic leverage against you. China has done so with Australia, Korea and even Japan. It does not have independent, atomised private sector companies, and even large MNCs like Alibaba and Huawei have deep ties to the Chinese state. Rather than see economic ties as part of political spinoffs, they should be pursued on their own merit.”
That does not always have to be the case, say experts. But building leverage, they warn, will not be easy. It will require long-term planning and difficult decisions aimed at both reducing reliance on Chinese goods and changing the nature of the trading relationship. It will also require, to begin with, a comprehensive study-which, remarkably, no government has undertaken till date-of the sector-wise penetration of Chinese companies into the Indian economy and an assessment of vulnerabilities. And, more than anything, for India to be in a position to inflict economic pain on a five-times-larger economy will mean narrowing the asymmetry with China’s economic might itself, without which all options will only have a limited effect on influencing Chinese behaviour.
India is far from being the only country that has grappled with the dilemma of engaging China economically while dealing with political difficulties. In a globalised world, it is not possible to avoid close relations-and, in the process, developing dependencies-on a country that is the world’s second-largest trading partner and biggest exporter. At the same time, countries that are democratic and market economies often face an unequal contest in dealing with an authoritarian party-state that is ready to mobilise the power of its businesses to serve its political aims.
For India, says former envoy to China Ashok Kantha, there have been two sets of considerations while dealing economically with the country. “One is purely economic and commercial interests, and given China’s status as the world’s second largest economy, that makes sense. There has also been a political consideration. Considering the complexity and difficulty of the India-China relationship, we felt that a significant economic engagement and creating mutual economic stakes can become a factor of stability in relations.”
Kantha points to the China-Japan example, where despite a rivalry and historic animosity that runs deep, both countries have developed an enormous economic interdependence. Japanese technology and investments have propelled China’s economy, while for many Japanese companies, the China market has become all-important. “If you consider the China-Japan example,” he notes, “one of the factors that led to the post-2015 stabilisation in relations is the consideration by both sides that they need each other economically. This worked as a stabilising factor.” This was also the logic pursued by both India and China following the liberalisation of ties in 1988, with the hope that creating mutual stakes will reduce the likelihood of conflict, an approach that has largely worked even if China’s stakes in India, at present, are nothing like its well-entrenched relations with its East Asian neighbours.
At the same time, he notes that the examples of Japan and South Korea also serve as warnings to the limitations of the stability provided by economic ties when it comes to dealing with China’s authoritarian one party-state, where even the private sector can be mobilised to penalise countries in the service of the state. In 2012, anti-Japanese protests that the state tacitly backed saw crowds vandalise Japanese car showrooms and some Japanese auto companies temporarily withdraw personnel from factories. Similarly, in the case of South Korea, Chinese anger following the deployment of the US THAAD missile defence system saw a public campaign in China aimed at South Korean companies as well as the use of Chinese tour groups to stop tourist travel as a means of pressuring Seoul.
“These cases show us that China can use these levers given the nature of its polity, economy and society. That option is not quite available to us,” says Kantha. In the case of India, most of the bilateral trade is conducted through the private sector. “We cannot use diktats saying stop buying. The government of India can take trade measures as an incentive or disincentive, but we can’t order companies. The second factor is a certain economic logic as to why we are buying from China. The private sector is taking the call, whether sourcing telecom, power or solar equipment, because it happens to be cheaper. So, for a called ‘weaponisation’ of the trade surplus, we have to be careful as there will be implications.”
If the odds are stacked against India on the trade front, there are selective measures that the country can take. The best option for India, says Arvind Virmani, former chief economic advisor to the government of India, and chairman of the policy group Foundation for Economic Growth and Welfare, is to show resolve by putting in place non-tariff barriers “of the kind China applies routinely to push exports and punish foreign countries opposing its foreign policies”.
“The non-tariff barriers should be focused on areas that pose a potential long-term threat to India and all free, open democratic societies,” he says, such as software and telecom. “The primary objective of such a symmetry policy would be to demonstrate to the Chinese Communist party leadership that India will not be cowed down by its attempts to stall or slow the country’s rise,” adding that India would have to be prepared to bear the costs in the short term.
India can also consider selective measures to let China know it has to make a choice if it wants to continue doing business with it. “For instance,” says Kantha, “we can convey that Chinese companies can choose whether they want to continue doing business in PoK [as some are under the China-Pakistan Economic Corridor] or if they want to be in the Indian market. They have to make a choice. We can consider a far more targeted and nuanced approach than a general weaponisation of the trade surplus.”
When the demand for Chinese products is inelastic-in other words, they are in the nature of essentials-any increase in tariffs will only increase the price of the products that the consumers will have to pay, says Dhar. “We also need to understand that Trump’s action against China has not been without cost. A study by a group of researchers from several leading US universities concludes that the US’s GDP was put back by $7.8 billion in 2018, and more than a million jobs were lost,” he says, adding that building resilient manufacturing capacities in critical areas is the only way forward.
The challenge, however, is that the biggest stakeholders for continued dependence on China are Indian companies which, for instance in telecom, have been the biggest supporters of allowing in equipment which is now under the scanner in some western countries. “Business as usual is always the least costly option in the short run,” says Virmani. “But if the long-term benefits of reducing excessive dependence on Chinese telecom equipment is recognised, the least-cost policies for reducing it can be devised. For instance, a revenue-neutral, higher tariff cum rural telecom subsidy can change the incentives for domestic production of telecom equipment.”
Indeed, this is a long-term challenge for India on many fronts, from changing the structure of its trading relationship with China to creating the right policies to boosting domestic manufacturing, failing which companies will prefer to import their solar panels and telecom equipment from Shenzhen and Guangzhou. “This is one area where we certainly need a long-term strategy,” says Kantha. If you consider APIs, the level of dependence is certainly not desirable and we need to get out of this situation with a country that has a track record of using economic leverage as pressure points.” The other new area of concern, he says, is in the technology space, where China has not only emerged as a major source of funding for Indian start-ups but is also now both a prominent investor in Indian firms as well as, according to some reports, accounts for a little under half of the hundred most popular apps used by Indians, from Tik Tok to UC Browser.
India will also have to be prepared for similar countermeasures from China if it chooses economic measures as a means to pressure Beijing. If China chose to, it could cripple India’s economy by blocking exports of APIs and rare earths, which are crucial for a number of strategic industries and currently completely dominated by China. China attempting an India-specific cut-off would be a violation of WTO rules, although that is no guarantee. China has unofficially stopped exports in the past as a means to pressure countries. The reality is that little has been done to reduce critical dependencies on China or even to begin a process of evaluating which sensitive sectors need to find alternatives. Until that is done, officials say, thinking of using economic and trade measures as leverage is a non-starter.
“The inescapable conclusion,” says Saran, “is that the only long-term solution is to narrow the asymmetry we are now facing with China.” Until that happens, he says, any attempt to pressure and influence the behaviour of a five-times-larger economy is going to face tall odds. “The good news,” he adds, “is that if there is perhaps one country that can shrink this asymmetry, if not overhaul it, it is India.”
How to tame the dragon
1. Assess vulnerabilities
Where do India’s dependencies and weaknesses lie? Remarkably, no government has yet undertaken a comprehensive economy-wide study despite near 75% dependency on Chinese active pharmaceutical ingredients and rare earth minerals-two key vulnerabilities.
2. Build self-sufficiency and seek alternatives
Once the threat is assessed, build self-sufficiency and seek overseas alternatives in key sensitive and strategic sectors to minimise the risks of Chinese retaliation.
3. Targeted economic measures
While blanket bans on major Chinese imports will hurt India’s power and telecom sectors, selected targeted measures can be taken to send a signal to China. For instance, any Chinese company doing business in PoK can be barred from entering the India market, or-follow the Chinese playbook-by quietly imposing temporary non-tariff barriers targeting Chinese firms. This, however, will risk retaliation.
4. Acquire leverage
Chinese companies, from telecom to power, make billions of dollars selling to Indian private companies addicted to cheap equipment. Few manufacture or invest in India. Imposing strict terms that require them to manufacture in India for access to the domestic market will force them to be more invested stakeholders while also giving India assets that could potentially be leveraged in a trade battle.
5. Grow, grow, grow
The only long-term solution is for India to narrow the asymmetry, which means getting our own growth story right. Until then, no amount of economic or trade pressure will threaten a five-times-larger adversary.