India must plan disengagement with Chinese economy well

China’s border aggression against India has led to calls for a major drawdown of Chinese imports as a means to shape Beijing’s geopolitical behaviour. Unfortunately, given the total quantum and nature of trade, it is unlikely that Zhongnanhai will moderate its current revanchism due to such moves. On the other hand, removing dependence on imported Chinese parts & components (P&C) should in any case be a national imperative as it would increase India’s own geostrategic freedom while boosting potential growth. The motive for reducing imports from China is important since it will inform the manner in which the same will be executed. Rather than a knee-jerk jingoistic reaction, what is instead required is a well-thought out time-bound implementation strategy that significantly increases the size of India’s own supply-chain.

Read: Imports from China facing physical inspection at customs based on intelligence inputs - Report

India imported around $70 billion worth of goods and services from China in the financial year (FY) 2019-20. This figure is definitely on the decline in 2020-21 due to the pandemic-induced shock. However, it must be noted that even the figure for FY 2019-20 is a mere 0.5 per cent of China’s estimated nominal gross domestic product (GDP) for that period. Now, if one were to take into account an export multiplier effect (i.e. the impact of a change in exports on overall GDP) of 1.5-1.6 for China based on old World Bank (WB) estimates, a $70 billion loss in exports would translate to a decline of $105-112 billion in China’s nominal GDP. This would still amount to less than a percent of China’s annual GDP. So, even a total boycott of all Chinese imports by India will at most reduce China’s GDP by around one per cent.

The impact of a complete Indian rejection of China’s exports on Chinese wage income and employment may seem less minor though. In 2016, WB estimated that every $100 of Chinese gross exports support $42 in wages. So, a $70 billion hit to China’s exports will result in around $29.4 billion in terms of lost wages. And since, China’s exports have also been found to be a key source of labour demand, the overall loss in terms livelihoods will not be insignificant. Nevertheless, the magnitude of these losses is unlikely to be enough to change Chinese geopolitical behaviour towards India in the short-term.

Also read: Banning Chinese goods not feasible for India - Export body

Especially, since Beijing knows that due to the nature of India’s basket of imports from China, New Delhi won’t be able to eschew Chinese supply altogether. This in turn means that the actual losses to Beijing will be even lower than the maximal calculations made above. Apart from consumer items, a majority of Chinese imports are in the form of capital goods that build things and P&C that are used to build things. ‘Electrical machinery and equipment’ & ‘Machinery & mechanical appliances’ together account for nearly half of all imports from China. India’s supply-chain dependency on China in sectors such as electronics, power, automobiles, pharmaceuticals and even garments ranges from considerable to acute.

Unsurprisingly, at the moment, New Delhi seems to be concentrating its economic pushback in scrutinising inward Chinese investments, making it difficult for Chinese firms to bid for Indian government contracts and imposing tariffs on lower-end finished Chinese goods to promote import substitution.

However, the industrial lockdowns that followed the viral outbreak in China has convinced large Indian industrial players of the need to escape Beijing’s industrial web. In fact, reports suggest that Indian companies are already worried about a second disruption in the event of hostilities with China. As such, there may be a move towards more local sourcing as well as imports from the West even if costs are higher. The Indian government can of course make things easier by rolling out an ‘encouragement’ framework akin to what it has already done for the electronics sector such as production-linked incentives, a scheme for promotion of local component manufacturing and support for cluster development.

In the post-pandemic era, there is a worldwide realisation that the doctrine of comparative advantage can no longer occupy the commanding heights of trade policy. Instead, considerations related to resilience, dependency and national security are going to become more important. Trade is getting weaponised and India would do well to remove whatever leverage China has on this front, particularly when dealing with vital sectors such as pharmaceuticals.

So, India must localise supply chains at the earliest. Obviously, this ‘earliest’ would still take a few years, and that in addition to the fact that India’s imports are a small fraction of Chinese GDP, means that a realistic boycott will not serve as much of a punitive deterrent against China’s aggression. That aggression should ideally be met with a mature military response even as India increases its geostrategic freedom by disengaging with China’s economy in a phased but decided manner.

(Saurav Jha is the author of the forthcoming book Negotiating the New Normal: India's Economic Choices in the Post-Pandemic World. He tweets at @SJha1618)