Just before US President Donald Trump launched a trade war against China in 2018, he reportedly told his treasury secretary Steven Mnuchin, “The Chinese don’t give a shit about us. They are cold-blooded killers on trade.” Trump then went on to instruct: “You are going to China to kick ass.” Soon after, the Trump administration raised its trade tariffs and barriers on certain goods and services to coerce China into reducing the adverse trade balance of a whopping $400 billion the US faced against it. China retaliated with similar measures, but Trump claimed early victory when US imports from China fell by 12.5 per cent last year. The battle, though, is far from won.
Cut to 2020 and it is Prime Minister Narendra Modi who has to make the tough choice of, as Trump crudely put it, kicking China’s ass by weaponising for the first time India’s $110 billion bilateral trade with its aggressive neighbour. This is not just to set right the trade balance that has tilted heavily in China’s favour in the past decade — as Trump had sought to do — but, more importantly, to wield a stick to persuade China to restore the status quo ante on the border after it unilaterally altered the balance of military forces across the 3,448 km disputed Line of Actual Control (LAC). India has accused the People’s Liberation Army (PLA) of China of surreptitiously amassing forces in critical sectors on the LAC in the past two months in violation of bilateral border agreements. The PLA then made several egregious intrusions that resulted in military casualties on both sides in the first fatal clash between the two armies in 45 years. With India too mounting troops in large numbers on the LAC as a counter, the stand-off has become all the more dangerous.
This has made India’s choices even starker. As a top Indian official dealing with the situation put it, “Blood has been spilt, soldiers have lost their lives. China now has to decide to pull back or it may lead to another friction point that is not desirable for both countries. There are only two ways to go now — either into conflict or resolution. China has to make up its mind.” But with the PLA reportedly also suffering an undisclosed number of casualties, Chinese president Xi Jinping cannot easily pull back without loss of face and a massive dent to the supreme leader image he has assiduously built up in the past decade. The corps commanders of the two armies in the Ladakh area, where the worst fracas had taken place, have met several times, but the situation seems far from resolved.
Modi now has to deal with possibly the worst confrontation with China on the disputed border since the India-China war in 1962 and stave off charges that he is recapitulating Nehru’s blunders in the high Himalayas. The prime minister has to do so even as he has his hands full with handling the unprecedented damage the Covid pandemic is causing to the country’s economy and the health of its people. The prime minister does have several military options to get China to change its mind. But as the stand-off lengthens, these are narrowing, especially as the element of surprise, crucial to the success of any mission, has all but gone.
Moreover, tactical strikes such as the Indian army occupying border territories held by China and then negotiating for a settlement are fraught with risks. Any such counter-offensive could see the Chinese retaliate elsewhere, resulting in more deaths and the possibility of the conflict escalating into an all-out border war that neither side seems to want. India’s best option now is to persuade China to restore status quo ante on the border without further military conflict through a process of de-escalation and disengagement.
HIGH STAKES: PM Modi with Xi Jinping at their informal summit in Mamallapuram, October 2019
With military conflict being the last resort, Modi has in his quiver both economic and diplomatic arrows to strike with. Of the two, raising the economic costs for China could get the dragon to see reason faster. India can do it with conviction because China enjoys a trade surplus of close to $55 billion with India and has steadfastly ignored India’s protestations to correct it. However, we may not be able to sustain a trade war of the kind the US unleashed against China. At $21.4 trillion, the US economy is seven times India’s and 35 per cent larger than China’s. In contrast, India’s $3 trillion economy is four times smaller than China’s. China’s exports of goods to the US constituted 16.8 per cent of its total exports of $2.5 trillion, making it vulnerable to American pressure. But China’s exports to India constitute barely 3 per cent of its total, making India less of an economic threat. Moreover, when Trump took on China, America’s economic fundamentals were strong. Indian economic growth, on the other hand, has been sputtering along in the past two years and is likely to touch rock bottom in the current fiscal because of the pandemic.
Despite the public cries to completely boycott Chinese goods and the sugar high of nationalism that the border fracas has generated, India has good reason to move cautiously on the trade front. It has to carefully calibrate the measures it takes lest they do the economy more harm than good. As a trade expert put it, “We should be careful that being vocal for local does not end up giving the Indian economy a sore throat.” Chinese imports now account for as much as 14 per cent of India’s total imports and China has in the past decade emerged as India’s largest trading partner after the US. In some sectors, such as pharmaceuticals, Indian companies are heavily dependent on Chinese products such as active pharmaceutical ingredients (API) because they are cheaper than those produced in Europe. They now contribute 70 per cent of India’s total pharma requirements. Any move by India to raise duties on APIs or finding alternative sources will raise the costs of production. This could result in drugs becoming costlier domestically, apart from making Indian companies less competitive in the lucrative export market. Chinese companies, on the other hand, may have less to lose as India accounts for only 10 per cent of their share of bulk drug exports.
Similarly, in the bustling auto sector, where India depends on China for 26 per cent of its total imports of auto components, any move to impose strictures will end up hurting Indian companies, especially exporters, more than China. China’s $4.5 billion exports of auto components to India account for just 6 per cent of its total auto component exports of $70 billion. So China may be stirred if India turns the screws in these sectors, but it is India that is likely to be shaken by the impact. Even in the $8 billion mobile telecom sector, Chinese companies that have set up factories in India now account for 66 per cent of the domestic sales. India remains heavily dependent on China for the import of components (almost 60 per cent of the total) and the industry will be hard put to find cheaper alternatives in the short term. As a senior official dealing with trade issues puts it, “The idea that we can suddenly and completely delink our economy from China is not practical and implementable. There is a range of industry-level dependency on China not just of Indian companies but of all major economies in the world because of its strong manufacturing base. Any measure we take should be calibrated and carefully worked [out] to see what items, which areas, which levers and which buttons to press to get China to see reason.”
However, for India not to impose some sort of punishment will further embolden the Chinese on the border. The Modi government, therefore, seems to have adopted a three-pronged strategy for the short term: Target China where it hurts the most, ensure we are not in violation of WTO (World Trade Organization) norms and do this with maximum cost to China and minimal pain to India. These measures should also not provoke China into taking drastic retaliatory measures that could harm Indian interests. One area where China has been pushing hard is in scaling up its technological prowess, especially in the digital arena, to match the US’s in order to acquire superpower status. This is one zone India could target.
As a start, therefore, the Modi government cleverly cited security reasons to impose a ban on 59 high-profile apps made by Chinese companies — TikTok for example — that dominate the Indian market. With half of India’s population using these apps, the impact was immediate and widespread. The move did little to harm the Indian economy, but it was a strong message to China. Even the US applauded India for taking the steps and on the same day announced a ban on government purchases from two prominent hi-tech Chinese companies — Huawei and ZTE Corp. While before the border aggression India had not ruled out the participation of the Chinese telecom giant Huawei in the lucrative 5G sector, it has now indirectly indicated that it could well close that door too.
Meanwhile, India has followed up the ban on Chinese apps with other hard-hitting strikes that will make it difficult for Chinese corporates to do business in India. On July 1, Nitin Gadkari, the Union minister for road transport and national highways, announced that all Chinese companies, including joint ventures, will not be permitted to bid for contracts to build national highways. With the Modi government committing to spend Rs 100 lakh crore on infrastructure, particularly on highways, over the next five years, this should serve as a hard blow to Chinese interests. The power ministry, too, announced in late June that it will stop all purchases of some 2 million smart meters being made in China and go for either domestic substitutes or import from other countries. The Centre is now persuading state governments to follow suit for all their major projects. Maharashtra had earlier announced it was putting on hold Rs 5,000 crore worth of memorandums of understanding with Chinese companies for the rapid rail project in Mumbai.
The Department for Promotion of Industry and Internal Trade (DPIIT) is already taking measures that could hurt Chinese companies but without India falling foul of WTO norms. Instead of blanket bans, the plan is to impose Bureau of India Standards quality requirements to root out cheap, substandard Chinese goods that now flood the Indian market, particularly in the toy, lighting and agarbatti sectors. For toys, apart from raising custom duties in Budget 2020 from 20 per cent to 60 per cent, India has also imposed higher BIS quality standards and demanded that companies adhere to them. Simultaneously, the department has been giving Indian manufacturers incentives to make these goods.
The DPIIT is examining all bilateral and free trade agreements to eliminate distortions that have had an adverse impact on Indian industry. Guruprasad Mohapatra, DPIIT secretary, is careful to maintain that these are “not targeting any specific country” but only those that have an adverse trade balance with India. A good example of inverted duties is the 10 per cent basic custom duty imposed on auto tyres compared to the 20 per cent duty on natural rubber, its key input. This has resulted in imports of tyres at the cost of manufacturing them in the country. There is also concern that China is taking advantage of FTAs India has with some countries by routing its good through them, in violation of rules of origin regulations. “The idea,” says Mohapatra, “is to strengthen domestic industry by incentivising local production, eliminating duty distortions and raising the quality to match that of other countries, which will enable our companies to compete in the export market too.”
The border crisis has been a wake-up call for Indian policy-makers and has exposed India’s extensive dependencies on Chinese imports in a range of sectors. It has highlighted the need for Indian companies to adopt what Deepak Bagla, chief of investment facilitation agency Invest India, calls de-risk strategies to reduce dependency on global supply chains and certain countries. “Many experts,” he says, “feel that Indian industry does not change because there is a better option. It only changes when it has no option but to do so.” A former foreign secretary points out, “We used to think trade policy towards China was decided at the government level. But the reality is that it is the kirana store owners and industry lobbies who have more clout and cause the import distortions.”
BORDER BUILD-UP: A satellite image of the PLA base in Kongka Pass on the LAC. (Photo: Reuters)
One thing the twin crises — at the border and with the pandemic — have done is to give a huge resonance to Modi’s call for an Atmanirbhar Bharat (Self-reliant India). Ravi Shankar Prasad, the Union minister for law, communications, electronics and IT, has made it clear that the self-reliance drive is not a return to higher tariffs and licence raj of the past that protected inefficient domestic industry resulting in shoddy goods and higher prices. He also said it did not signify isolation or an insular policy or just import substitution but is instead designed to make India a hub of some of the global value chains in key sectors.
To make the Atmanirbhar Bharat campaign a success, what is needed is a radical reset in the approach of both the central and state governments to industry and investment. The problem is that successive governments have made industrial development a chakravyuh — difficult for entrepreneurs to get in or out of. Rajiv Bajaj, CMD of Bajaj Motors, put it succinctly when he talked of the persisting unease of doing business in India as well as the need to sort out the 5 Ls — land, labour, logistics, legislation and electricity — that continue to stall rapid industrial growth in the country. Also, as Maruti chairman R.C. Bhargava points out, “We don’t have the tech to make these in India or our cost of production is too high to compete in the global market.” The big message is that India will have to address its own deficiencies rather than blame China for all that plagues its growth.
In certain key sectors, such as pharmaceuticals, medical devices and electronics, the government has already initiated measures to help domestic champions become global players as well as reduce dependency on China. But these will take several years to bear fruit. With the international climate turning hostile towards China’s aggressive postures across the globe, India should leverage its diplomatic clout to turn the heat on Beijing. It should also negotiate free-trade or bilateral agreements with a host of countries, including the US, Europe, Australia and South Korea to reduce its dependence on China. The size of India’s market and its middle class, apart from its appetite for investment, still make India one of the most attractive countries to invest in. But even as it does so, it must be careful not to push relations with China to the point of no return — because it is a formidable adversary. Its ability to stir trouble in the region is tremendous, as we have seen recently in Nepal.
Modi had invested an enormous amount of political capital in Xi Jinping by having as many as 18 meetings with him since he became prime minister. Throughout the crisis, Modi has been careful not to attack Xi personally or China specifically, even at the risk of attracting criticism for his mildness. But the prime minister has sounded resolute about defending India’s territorial integrity and said that there will be no compromise on the issue. In doing so, he has left space for Xi to return from the brink and back to the negotiating table. Modi is on the right track as it does not help either country to be at the other’s throat. Both India and China will emerge as major players in the world in this century, especially with the Asia-Pacific region becoming the fulcrum of global economic activity. Dialogue and diplomacy, rather than debilitating military conflict, are the best ways to settle issues. It would be foolish for China and even India to hold their relations hostage to a few square kilometres of barren land in the high Himalayas when greater things beckon each of them if they can work out their differences.