Indian companies relying on Chinese imports for capital goods may have to review their procurement strategies as relations turn volatile between the two countries.
Analysts said capital goods—essentially heavy machinery used in producing finished products—currently figure as the second most highest in India’s import bill from China. But going forward companies will be compelled to diversify their sourcing elsewhere.
“Typically, capital goods used in setting up and replacing machinery requires long-term engagement with the manufacturer, who controls the critical technical know-how. In the event of a future flare-up, Indian companies may find it hard to obtain spares and technical support from China, which may greatly impair their operations," said a person who is part of the senior management of a large steel company, requesting anonymity.
As things stand, Indian Inc’s dependence on Chinese capital goods such as machinery, power plant components and mechanical appliances has only grown over the years. Experts attribute this to cost-effectiveness and easy availability of financing, often provided by Chinese manufacturers themselves, typically backed by state-sponsored institutions.
According to government data, from March 2019 to February 2020, India imported $12.78 billion of capital goods from China, the second biggest category after electronics, televisions and electrical appliances ($18.12 billion). India’s total commodity import bill from China over the same period was $49 billion, according to the ministry of commerce.
“Most power plants (components) are imported from China," Anil Agarwal, founder and chairman, Vedanta Resources, tweeted on Thursday. “BHEL, a PSU, is very capable of producing the best power plants. If given full autonomy, it can not only cater to Indian demand but also export projects on a turn-key basis."
“We can manage for the short term by importing capital goods from other parts of the world," R.K. Goyal, managing director, Kalyani Steels, told Mint. “If you can compromise on the cost, and customers are willing to accept a higher price, we can meet our capital goods requirements by procuring partly from India and the rest from Europe. You can start local manufacturing within 6-12 months. The shortage we foresee in the steel industry will be for refractory materials (made from a combination of natural and synthetic materials), where the raw materials are difficult to source," he added.