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Cross-border trade emerges as the next flashpoint in conflict

An Indian fighter jet flies over a mountain range near Leh, the capital of the Union territory of Ladakh, on Monday.Premium
An Indian fighter jet flies over a mountain range near Leh, the capital of the Union territory of Ladakh, on Monday.

  • Govt re-evaluates key projects and contracts given to Chinese firms as cross-border trade is set to be the next flashpoint in the ongoing conflict
  • Telecom firms are unlikely to order 5G equipment from Chinese gear makers amid tensions between both countries

MUMBAI/NEW DELHI : As the deadly border clashes with China prompted an outpouring of rage and grief in India, local policymakers are considering cancelling government contracts to Chinese entities and raising import tariffs as retaliation against the country’s northern neighbour.

The Maharashtra government has, for instance, put on hold foreign direct investments worth more than 5,000 crore from Chinese firms within a week after signing agreements with them. The investments will now be subject to a central government review, the state said on Monday.

The state’s decision is part of a wider decoupling exercise embarked on by the Indian government since the 15 June border clashes with China that left 20 Indian soldiers dead and at least 76 injured.

This isn’t the first such move. In the past week, the Indian government has cancelled key projects and contracts given to Chinese companies. Among the decisions are barring of Chinese firms from supplying telecom equipment to state-owned Bharat Sanchar Nigam Ltd. Telecom operators are also unlikely to order 5G equipment from Chinese gear makers given rising tensions between both countries, several industry executives said on condition of anonymity.

Maharashtra’s decision has put in jeopardy automaker Great Wall Motors’s plan to set up a factory in Maharashtra at an estimated cost of more than 3,000 crore.

With cross-border trade clearly emerging as the next flashpoint of the conflict, analysts said that there are more such curbs in the offing. The immediate targets are imports of solar cells and modules on which India will shortly decide on the date from when a 20% basic customs duty (BCD) will be imposed, said two people aware of the development. To do so, the government may not, however, extend the safeguard duty imposed from 30 July 2018 on solar cells and modules imported from China and Malaysia, that is to expire on 29 July.

To be sure, the 2020 Union budget presented by finance minister Nirmala Sitharaman had approved an enabling mechanism to raise tariffs on imports of green energy equipment, that involved imposing a BCD of 20% on cells and modules. There is no BCD levied currently on such equipment.

“After the safeguard duty comes to an end, the basic customs duty will be applied. The rates and trajectory of the BCD is to be finalized. We are of the view that the safeguard duty shall not be extended. An announcement to this effect may be made shortly," said a senior government official, one of the two people cited above, requesting anonymity.

According to government documents reviewed by Mint, the ministry of renewable energy was earlier in favour of imposing the BCD from 1 April 2021.

The fast-growing domestic market for solar components is dominated by Chinese firms due to their competitive pricing.

India imported $2.16 billion worth of solar photovoltaic cells, panels, and modules in 2018-19. The surge in imports led the government to impose a safeguard duty. In a sharply worded editorial soon after the border violence, China’s state-run Global Times warned India against imposing trade restrictions against Chinese companies. “India will suffer more losses if it launches a trade war against China, and the Indian people’s livelihood, which has been supported by Chinese products, will bear the brunt," “Indian nationalists should stop using ‘boycott Chinese products’ to please themselves", the Global Times editorial said.

To be sure, the Indian government may merely use the proposed measures against Chinese companies as negotiating leverage, analysts said.

Currently, imports from China account for roughly 14% of India’s total, and the trade deficit remains heavily skewed in China’s favour. It is estimated that India can narrow its trade deficit with China by $8.4 billion over FY21-22, which is equivalent to 17.3% of the deficit with China and 0.3% of India’s GDP. This can be achieved by the rationalization of just a quarter of India’s imports from that country in select sectors where India has well-established manufacturing capabilities, said Acuité Ratings and Research in a recent report.

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