How China fear hits Indian traders

“Suddenly, there are too many restrictions on imports. There’s no clarity. To make things worse, the domestic market is yet to pick up after the pandemic and the (subsequent) economic slowdown. Meanwhile, container freight rates have gone through the roof. There is no option for me but to down the shutters," says Shah. He adds that a large part of the Chinese import trade that he has seen others indulge in while doing business over the years is unethical and illegal, with unimaginable levels of under-invoicing and bribing at the customs and ports.

Yet, the new norms have put barriers on even seemingly legitimate business. Shah is hardly alone in expressing distress. Rebin Sunny of Omega Trading, who used to import half a dozen 40-ft containers of car tyres from China and Taiwan every month, is at a loss too. “Abrupt changes in import policies have jeopardized my business," he says.

The pandemic and the government’s efforts to reduce Chinese imports following the India-China border skirmishes in June have unsettled the trading community all across the country. In parliament, the commerce minister Piyush Goyal had claimed that imports from China have declined by more than a quarter (around 28%) to $22 billion during April-August 2020.

After New Delhi clamped restrictions on imports, thousands of importers, traders, and wholesalers are now forced to wait and watch while struggling to make ends meet.

Several months into the onset of diplomatic tensions which left a shadow on trade, India’s approach still seems to be largely blunt force instead of being targeted. And unintended consequences are steadily piling up. For instance, when Customs authorities began compulsory physical checks on all shipments originating from China, starting June, it further messed up economic revival in certain key sectors that rely on imported goods.

The import basket is quite diverse; Indians lap up a whole range of goods manufactured by its neighbour. They include electronic goods, smartphones, consumer durables, solar cells, pharmaceutical ingredients, industrial goods, vehicles, tyres, toys, fancy goods, sports goods and music instruments, among many others.

Most importers agree that bilateral trade has been growing alarmingly in the past decade and that India may need to take steps to reduce its dependence on China. But a barrage of tariff and non-tariff barriers came in at a time when India is already facing an economic crisis, without giving importers adequate time to prepare for the rainy day. The question now is: How quickly can India adopt a more nuanced strategy that would cause the least amount of impact on local actors?

Anti-China sentiments

There are a few quick takeaways. Despite all the political din, China continues to enjoy the Most Favoured Nation (MFN) status. Goyal said in a statement that there is no proposal currently under consideration to withdraw the MFN status. While the government’s efforts are on to encourage local manufacturing and exports, India cannot afford to shut imports from China officially. Over the last few years, the government has forced many companies, especially in the telecom and auto sectors, to set up assembly lines and local production. Some companies have already started domestic sourcing and their products go under the ‘Make in India’ label.

Some importers in India have in fact sidestepped China and turned to Asean countries for sourcing their requirements due to fears of abrupt policy changes. On the other hand, some traders have started rerouting their imports through other countries. So, the expectation in some quarters is Chinese goods may end up in India via Taiwan or Vietnam, though costs shoot up for traders in case of rerouting.

A cross-section of importers has told Mint about how they’ve already been forced to shut down their businesses or go slow over the last few months. “The anti-China sentiments went through the roof. Many who had already built an inventory were struggling to empty their warehouses. Where is the question of placing new orders?" asks Sumit Rawat, a Mumbai-based importer of high-end audio/video equipment.

Praveen Khandelwal, secretary general of the Confederation of All India Traders (CAIT), which claims to represent 70 million traders in the country, said that there are several complaints that have been received in the last few weeks about ships being stranded and shipments being put on hold. “If there are curbs and ship movements are restricted, it’s also impacting exports. We have requested traders to send in their grievances so that we can take them to the government."

The organisation intends to meet Piyush Goyal with two requests. “We need to get all shipments cleared without any delay. Second, the government should come up with short-term policy guidelines till the next Budget. The lack of clarity is not good for the economy," said Khandelwal.

FM’s long battle

On 1 February, finance minister Nirmala Sitaraman unleashed a furious attack on Chinese imports. The customs duty on tableware and kitchenware made of porcelain or China ceramic, clay iron, steel and copper were doubled to 20%. The duty on several electrical appliances such as water heaters, hair dryers, ovens, cookers, toasters, coffee makers, heaters, fans and grinders, among an array of such products, were also doubled to 20%. Duty on toys, dolls, tricycles and scooters saw a steep hike from 20% to 60%. The government was killing two birds with one stone: Slowly shutting down Chinese dominance wherever possible, and pushing local manufacturing.

For Kochi-based Kottaram Trading Company, which owns the popular Nolta brand of crockery ware and kitchen appliances, the Budget proposals were the first blow, quickly followed by the lockdown and the anti-China sentiments and the concomitant non-tariff barriers. Siby K Thomas, director (finance), said the economic slowdown induced by the pandemic and the recent tensions at the border have been the proverbial final nail on their Chinese imports.

“We have steadily brought down dependence on imports and moved to Indian production for half of our product line-up. But Indian production lacks the cosmetic finish that Chinese products provide. There is also at least a 10% increase in the cost of production. Going forward, we plan to spread out imports to other countries instead of concentrating on China. We have already begun importing glassware from UAE and Thailand. We will look to import goods from Asean countries and avail the duty benefits. Since there is a ban on foreign travel, we are going slow," says Thomas.

The pandemic has shrunk the domestic market, especially in south India, which is a big market for Thomas. “During the first three months of the lockdown, we saw a 40% drop in the purchase of consumer durables such as non-stick vessels, cutlery, glassware, crockery ware and such. The recovery is pretty slow," he says.

While overall business has shrunk, the spike in container freight cost in a highly volatile market has cut their profit margins too.

The ripple effects

For long, the Indian government wasn’t comfortable with China’s growing clout in the bilateral trade. In 2019-20, the trade between China and India stood at $82 billion, with a deficit of $49 billion in China’s favour. There is a dip in the deficit, but India’s exports continue to remain a fraction, one-sixth of the value of goods imported by India. China, which was India’s largest trading partner between 2013-14 and 2017-18, has already slipped below the US in 2018-19, and is likely to slide down the ranking further.

But the fact is that a flurry of recent moves to counter imports came at a cost. Many raw materials and key ingredients have been in short supply as imported goods keep getting detained at various ports and airports. In June, there were huge delays in the clearance of containers from ports. But before the situation could get out of hand, the government did swing into action and exempted import of some key raw materials for pharmaceutical products as well as goods brought in by top importers from compulsory checks. However, smaller companies and traders continue to face the music.

Delay in imports has had a devastating effect on Indian manufacturing. For instance, India’s pharma sector depends heavily on the Active Pharmaceutical Ingredients (APIs), or the raw materials, produced in China. Two-third of India’s imports of APIs come from China. Bloomberg has estimated the Chinese import bill at $2.4 billion, out of the total spending of $3.56 billion for API imports.

In June, the government also banned tyre imports and shut down a big parallel market in the country.

“We were regularly importing car tyres from Maxxis (Taiwan) and Linglong (China), two of the world’s top 10 tyre manufacturers. Even after paying over 43-45% duty (28% GST and 15% import duty), the tyres used to be sold at nearly 50% discount to the Indian products," says Rebin Sunny of Omega Trading. He was retailing them through a wide network of dealers in south India.

While most of the imported tyres went to the replacement market, there is also a sudden shortage of ultra-high performance (UHP) tyres in India, he says. “The luxury car makers in India were sourcing their special tyres from plants abroad run by Pireili, Continental, Michelin and the like. These companies do not have manufacturing facilities in India. Also, it’s difficult to build specialty tyres here because of low volume."

After some automakers raised a hue and cry, the Director General of Foreign Trade (DGFT) has now started issuing licences on demand to them selectively for importing superior quality tyres that are not manufactured in India. “Apparently, these licences come with a caveat. You can import tyres only if they are meant for export-oriented vehicles," Sunny says. This leaves the luxury cars sold in the domestic market in a dilemma.

The government move to classify tyre imports into the restricted category was primarily to prevent dumping of low-quality tyres from China, which were retailed in India at 25-30% of the price of locally manufactured tyres. Of course, the move has helped domestic players to enhance production. A senior official from CEAT said most of the tyre factories in India, including those run by his company, are running at nearly 100% capacity, something not seen in many years.

Two other segments that are facing acute difficulty are electronic music instruments and sports goods. A whole range of keyboards and electric guitars from the likes of Korg, Yamaha and Fender was coming from China while most badminton/table tennis rackets, shuttles and accessories were being imported from China too. The stringent and time-consuming checks at ports are delaying the imports, creating a severe shortage in the domestic market.

In June, the government also restricted imports of television sets and agarbattis. In October, it banned the import of air conditioners with refrigerants. All these decisions were taken to boost domestic production.

As the government keeps an eye on dumping by China and other countries into India, traders are at the receiving end of sudden shifts, which have become frequent this year. “Surely, India should not be a dumping yard for anyone. Dumping is unethical and creates a lot of problems," says Khandelwal. But there is a caveat.

Only when a country or a firm exports an item at a price lower than the price of that product in its domestic market can it be called dumping, as per international trade rules. Of course, it impacts the price of that product in the importing country, leaving local manufacturers in the lurch. In such situations, international trade rules allow countries to impose tariffs on such products to provide a level-playing field to domestic players.

But for Indian manufactured goods to fill the emerging void, they will have to get price competitive. And fast. Or else, China’s loss may just be another Asian country’s gain.

“Most traders who earlier depended on Chinese imports are now shifting their procurement to other countries like Vietnam, Taiwan and South Korea," says Khandelwal. “It may take a year or so to stabilize." There is enough empirical evidence to suggest that India is on an unfinished agenda.

Anto T. Joseph is a senior journalist based out of Mumbai