India needs a coherent economic policy framework for dealing with China

Of course, Cong Je, an editor with Global Times, who authored that piece, should not be taken as the voice of Chinese officialdom. But China often uses its state-owned media to convey in non-diplomatic language what it really wants to say, and also to float test threat balloons.

Cong’s diatribe had come after tax raids in India on Chinese telecom manufacturer, Xiaomi, and the telecom equipment supplier, ZTE, earlier. It would be interesting to see what Chinese state-owned media make of the latest round of raids by Indian authorities on Monday. This time, the enforcement directorate raided Chinese phone-maker, Vivo, in relation to an alleged money laundering case. Vivo had earlier been raided by the income-tax department last year.

The raids came just a day after news broke of another big Chinese exit from India: Chinese automobile manufacturer Great Wall Motor’s proposed $1 billion investment in India is the latest to fall foul of India’s post-Galwan hard-line attitude towards Chinese businesses. Great Wall decided that further waiting was pointless and closed shop in India after failing to obtain the necessary regulatory clearances within the twice-extended deadline set by its agreement with US automaker General Motors, GM, to buy its mothballed manufacturing plant in Talegaon, Pune. The GM plant was to have formed Great Wall’s manufacturing base in India. GM had shuttered its India operations in 2017 and had put the Talegaon plant on the block.

On paper, Great Wall’s exit does not change the automobile sector scenario in India in any measurable way. The Chinese carmaker had just 11 employees in its India office, who have now been laid off. The potential $1 billion investment in capacity and market building was just that – potential. With all major US, European, Japanese and Korean marques already present in India – not to speak of the newly resurgent ‘Made in India’ Tata Motors – one could also argue that the absence of Chinese brands does not greatly affect the choices available to Indian car buyers.

That may be true for the automotive consumer market, but any further breakdown in the increasingly tetchy relationship between the two Asian giants would spell disaster for manufacturers in several sectors of the economy, including automobiles, which is dependent on China for many key components.

India is a huge importer of Chinese telecom products, computer hardware and peripherals, fertilizers, electronic components/instruments, project goods, organic chemicals, drug intermediates, all types of consumer electronics, electrical machinery and all kinds of heavy engineering machinery and equipment.

In Q1 2022, just the four top Chinese mobile handset brands – Xiaomi, Realme, Oppo and Vivo – had more than 64% market share and overall accounted for over two-thirds by value of the Indian mobile phone market. In the pharmaceuticals sector, India’s generic drugs business is heavily dependent on Chinese ingredients as are many higher-end drug formulations.

Apart from consumer products, China is also a significant supplier in India’s key agriculture sector. It is a major exporter of fertilizer and crop chemicals to India. Syngenta, the world’s largest manufacturer of agro-chemicals, which has a significant presence in India, is owned by ChemChina.

China may or may not be India’s biggest trade partner – the Commerce Ministry said in May that US had pipped China to second place with bilateral trade of $119.42 billion in 2021-22, compared to India-China bilateral trade of $115.42 billion, which has been contested by the Chinese, who say China-India bilateral trade amounted to $125.66 billion in 2021, making it India’s biggest trade partner.

In fact, 2021 was a record year for the India-China trade. Bilateral trade grew nearly 61% in H1 2021 as pent-up demand roared back after Covid restrictions were eased. In the first quarter of 2022, bilateral trade has already grown over 15%. This, despite the fact that India banned more than 270 Chinese apps, denied clearance to over $1.63 billion of investment proposals and banned Chinese equipment from India’s 5G trials.

With decoupling not really a possibility in the foreseeable future, given China’s manufacturing prowess and its key role in global supply chains – whatever be the political rhetoric – India needs to calibrate its China policy in a more nuanced manner, keeping its long-term economic interests in mind. Policy certainty and coherence are important.

Banning Chinese apps while Chinese phones account for two-thirds of the market, sends mixed signals and betrays a lack of policy coherence. It might have been worth exploring, for instance, whether allowing a Chinese carmaker a toe-hold in India would have encouraged other global rivals to make greater investments here. Raids are blunt instruments, that must be used judiciously.

While India has joined the US-led Indo-Pacific Economic Framework, the IPEF, translating the new multilateral engagement into outcomes that will lead to a meaningful shift in the trade imbalance between India and China is quite some time away. The same is true of long-pending reforms that can unleash the ‘Make In India’ potential so that the trade imbalance with China gets corrected.

In the interim, India really has no option but to manage the increasingly complicated relationship with its difficult neighbour that is at the same time a key economic trade partner and a serious threat to the country’s territorial integrity. The policymakers’ challenge is to go beyond the inherent conflict in these two sets of realities to create a predictable and stable policy ecosystem for businesses and investors. It’s a nearly impossible task. But one that India cannot afford to go wrong on.