Q. Can India use bilateral trade and access to its domestic markets as ways to rein in an increasingly aggressive China?
>> Bibek Debroy
Yes, it can. But this cannot be achieved overnight. Trade is not delinked from investments. The two go hand in hand. China does not have market economy status under the WTO (World Trade Organization) rules, which apply to countries, not companies (except in the case of anti-dumping agreements). Moreover, the MFN (most-favoured nation) clause doesn’t apply to all services. Therefore, a selective and gradual phasing out of Chinese imports is indeed possible.
>> Ajay Sahai
One of the reasons for China’s recent aggressive stance is to divert the attention of its people from the slowdown of its own economy. Therefore, hitting it economically can be an effective strategy. However, we have to evaluate its pros and cons. India’s exports to China stood at $17 billion and our imports from China at $68 billion in 2019. Thus, in aggregate terms, containing bilateral trade will, naturally, adversely affect China much more. However, China’s share in our exports was 5.2 per cent while India’s share in their exports was 2.72 per cent, thus retaliatory action will have some bearing on our exports as well. The loss in exports can be nullified by working out strategic trade partnerships with countries harbouring anti-China sentiments — like the US, parts of Europe, Japan, South Korea, the Philippines, Taiwan and Australia, among others. Another approach could be to facilitate imports of raw materials and intermediate goods from China while encouraging value-added exports from India, and discouraging our raw material exports, which help Chinese manufacturers become more competitive.
>> R.C. Bhargava
I don’t have data, but I would think that India’s imports from China would not be a large enough percentage of their exports to cause China enough concern to shape their relationship with India.
>> N.R. Bhanumurthy
It’s not impossible, but might involve many interventions, more so of strategic and diplomatic nature. The US has been adopting such means to contain China’s imports, with limited success.
>> Ashwani Mahajan
Absolutely. The country required political will to take on China. There are ample tariff and non-tariff barriers available to execute this. The cheap Chinese imports were killing jobs and manufacturing capacities in India, along with increasing security risks in some sectors. Trade should be done on equal footing. The government must consider improving the standards for Indian products and follow up with policies and incentives to build and strengthen indigenous capability.
>> Biswajit Dhar
Over the past decade, India has not been able to use its bilateral FTAs (free trade agreements) effectively to strengthen its manufacturing sector, in particular. Policy-makers recognised this weakness in the manufacturing industries in the previous decade, and yet nothing significant was done to revive them, despite announcement of ambitious programmes like Make in India. In such a situation, FTA partners have continued to exploit the Indian market, leaving India with rising trade deficits. The domestic market was facing a serious demand squeeze even before the pandemic. Given the widespread lack of jobs now, demand conditions in the domestic market are far worse than before. Unless serious steps are taken to revive the MSME sector, the demand side will continue to be a major bottleneck.
>> Sachin Chaturvedi
India can use several levers — tariff or non-tariff — to block Chinese products. The country has enough policy space to do it. But for this, we need to get ready to become an expensive economy in the short term. There is cost to developing the local ecosystem for components and certain products.
A) India’s dependence in some key sectors, such as auto, pharma and electronics, seems too heavy to be taken lightly. Can Indian manufacturers do without Chinese raw materials?
B) Will the price impact of a blanket ban be too heavy for Indian manufacturers and consumers?
>> Bibek Debroy
A. It is a gradual process. There is no reason why a variety of consumer goods should be imported from China. Doing away with Chinese inputs means India will have to integrate itself even more into global supply chains through reforms.
B. I don’t think anyone contemplates a blanket ban. But international negotiations are built on reciprocity.
>> Ajay Sahai
A. This is the most opportune time to draw a roadmap for manufacturing of raw materials in India in the medium to long term. We should provide ‘plug and play’ facility to investors so that they can kickstart production quickly. The fiscal support given to electronics, pharma and medical equipment manufacturing is a step in the right direction. For our immediate requirement, we should also look for alternative sources of these supplies from Southeast Asia and Europe, which may not be the most competitive but would certainly be more reliable.
B. A blanket ban may temporarily disrupt supply chains as China accounts for a little more than a fifth of India’s non-oil imports and, in some segments, the dependence is very high. In many tariff lines of electronics, telecommunication, formulations and specialty chemicals, China accounts for over 50 per cent of India’s imports. However, this is the time to develop domestic capability in such sectors as Covid has taught us that we need to avoid supply disruptions.
>> R.C. Bhargava
A. As long as India does not manufacture those raw materials, they will have to be imported. It will hurt the growth of Indian industry, and the consumer, if these are imported at a higher price. Unless there are compelling reasons for not importing from the lowest-priced source, we should not change. The semi-conductor industry is non-existent in India and till it is developed, there is no alternative to imports.
B. (Addressed in the answer above)
>> N.R. Bhanumurthy
A. Right now, Indian manufacturing is highly dependent on China and tensions with them will create disruptions in the way our manufacturing sector does business. It might also increase cost of production, reducing India’s competitiveness in the international market. However, it is important to take a long-term view on India’s relationship with China. These disruptions may be inevitable in the short term.
B. If a blanket ban happens, price impact on Indian manufacturers and on all sectors that depend on trade will be huge. There is a clear trade-off between trade and inflation.
>> Ashwani Mahajan
A. Yes. In the short-term these sectors might feel the pinch. This is an opportunity for companies in the US, Europe, Japan and Korea to join hands with India — a win-win situation for all.
B. Nobody is talking about a blanket ban but a substantial cut-down. Import of cheaper products is not healthy for an economy like India. It is turning us into a mercantile economy with limited manufacturing capacity. We have to take a broader national view. Increasing domestic capacities will create jobs, add to the national income and strengthen price stability.
>> Biswajit Dhar
A. Indian manufacturers in electronics and pharma depend on intermediate goods from China. It will be very difficult, if not impossible, to replace the Chinese suppliers, either with domestic producers or those from other countries in the short run. If the government can get the right incentives in place for domestic manufacturers immediately, there can be a possibility of decreasing reliance on imports in the medium term. In auto, the situation is relatively better since the two largest CBU (completely built unit) manufacturers-Suzuki and Hyundai-have domestic component manufacturers to lean on.
B. A blanket ban will create shortages in the Indian market and might even encourage smuggling via neighbouring countries. In either case, consumers will be hard hit.
>> Sachin Chaturvedi
A. Pharmaceuticals (especially APIs, vaccines and medical devices), electronics and banking finance are some of the sectors where indigenous strength would play an important role. Given the liberal financial policies of several countries, it is not geographic restrictions but sectoral ones that may play the desired role.
B. India’s industrial policy can comprise all possible actions to promote industrial development that go beyond the scope of free-market forces. India can perhaps take inspiration from the policies in the larger East Asian newly industrialised economies and Japan, which were designed to upgrade existing manufacturing activities, encourage entry into advanced new activities, raise local content, and develop the base of local technological capabilities.
a) Is it practicable to make a distinction between essential/ non-essential imports? Will China play ball if India goes that way?
b) Would Chinese capital in Indian start-ups/ industry count as ‘non-essential’?
>> Bibek Debroy
A. The essential versus non-essential debate is simplistic. By China playing ball, I presume the reference is to retaliatory action by China. The question isn’t what China does with the bat or the ball, but what is in our best strategic interest. It’s possible that for some items, in the short-term, alternative sources will involve marginally higher prices.
B. There are some strategic sectors where it isn’t desirable to have Chinese investments. India isn’t a signatory to the government procurement agreement. Therefore, except for multilaterally-funded projects, global tendering is not necessary. There is a legal difference between taking action against a country and against specific companies.
>> Ajay Sahai
A. It definitely makes sense to reduce dependence by choosing between essential and non-essential imports. The non-essential imports may be immediately checked while essential ones may be given some rope. The focus should be on achieving competitiveness by attracting investments in such sectors and taking advantage of economies of scale. While working out this strategy, we should factor in retaliation by China, but not be unduly worried about it.
B. India is not short of capital. However, start-ups require heavy investments and are often unable to get the same from domestic sources. The government should provide liberal tax concession to individuals to invest in start-ups so that the tax benefits offset the risks involved in investing. This should be in addition to the encouragement given to venture capital funds and financial institutions to invest in such companies.
>> R.C. Bhargava
A. I believe it is possible. Fireworks, idols and toys are hardly essential. I’m not sure what the WTO rules are, but the real answer is to make these in India at a lower cost. There is no reason why that can’t be done if we reduce unnecessary additions to manufacturing costs.
B. All capital is the same. How Chinese capital is treated is really a political question.
>> N.R. Bhanumurthy
A. Theoretically, yes. However, given our infrastructure at ports and airports, it will be very difficult. Further, China is part of the global supply chain in a big way, and it is going to be a big challenge to determine if the imports are from China and then if they are essential.
B. This would create another dimension of ambiguity. Importing capital from China will pose risks for India equally, if not more.
>> Ashwani Mahajan
A. Yes. In the past, too, we made similar distinctions. But the country has the capability to manufacture both. Our aim should be to make India self-reliant for essential products and gradually move towards building the capability to manufacture non-essential goods. This requires not only a clear roadmap, but also efficient execution by both bureaucrats and industry.
B. This decision has to be taken by the promoters and the consumers of these products. The government must look at what Chinese investors are expecting from these ‘loss-making’ start-ups. There is an immediate need to tighten norms to restrict transferring of data. The government should look at ways to block any such investment in the future.
>> Biswajit Dhar
A. It is impossible. How would the idols being imported from China be classified, essential or non-essential?
B. Chinese capital must be considered as essential, especially if the employment potential of the unicorns is considered. Further, Chinese capital, directly or indirectly, was coming into infrastructure projects. If these projects are adversely hit, as they seem to be, there will be a domino effect on the Indian economy.
>> Sachin Chaturvedi
A. There is no objective answer to this. It is up to any country to decide what is essential for them and what isn’t. But the dynamics of global manufacturing is changing. Countries are looking at alternative sources for components and products. As we speak, alternatives are emerging, if at a slightly higher cost.
B. There is no denying that Chinese companies have demonstrated remarkable interest in the Indian economy. The cumulative FDI now stands at $8 billion, but in the last one year itself, start-ups attracted investment of nearly $1.5 billion (additional $3.5 billion from other routes). With the emerging shortfalls, it is important for India to have a calibrated approach on FDI norms.
Q. Is raising tariff barriers selectively a practical option? What other levers, if any, can India effectively employ to level the field?
>> Bibek Debroy
Basic customs duties are subject to restraints, but anti-dumping or safeguard duties are not. There is also scope to use NTBs (non-tariff barriers).
>> Ajay Sahai
We can increase tariffs for MFN (most-favoured nations) up to the bound rates. A hike in tariff on non-essential imports is pragmatic, though it may slightly increase prices for consumers. However, given the context, Indian consumers are unlikely to mind such a surcharge. We can also invoke the national security clause in the WTO rules to invoke specific duty only on imports from China. Better still would be to restrict market access, which does not attract much attention and is frequently used by some countries, including China.
>> R.C. Bhargava
I believe in making Indian industry lower cost and competitive. Both the State and entrepreneurs have a role to play in that.
>> N.R. Bhanumurthy
Raising tariffs to contain imports is an old game. That may not help India in the long term. And this is exactly the apprehension that most trade economists have-that India might get into bad old import-substitution strategy. One way, rather the only way, to ensure a level playing field is to have measures that could improve productivity and competitiveness of our goods. This is exactly what China did three decades ago.
>> Ashwani Mahajan
Strategy has to be deployed from product to product. Rising labour costs in China have depleted its price competitiveness in various products. China’s trade war with the US has already blocked the North American market for several Chinese goods, many of which China is now dumping in India. Moreover, India’s capacity utilisation in various sectors is less than 70 per cent. Tariff rationalisation should be done to cut imports in these sectors. Effective tariffs in India are less than 10 per cent, whereas WTO bound rates are 40 per cent.
>> Biswajit Dhar
Raising tariffs will only increase the cost of the products and would hit the consumers when they are already suffering from loss of income. I cannot think of any instrument to control imports from China that would not hurt the Indian consumer.
>> Sachin Chaturvedi
China’s urge to capture technology is also generating fear across various partner countries. The conflicts are not helping China and it would have to position itself in a way that its rise is not seen as a destabilising entity. This is all the more important since China has witnessed an unprecedented slowdown in the past 30 years. The growth slowed to 6.1 per cent last year, and is likely to go down to 6 per cent this year.
At the national level, efforts should be made to enhance the competitive character of firms and enterprises, reducing logistics-based production and shipment costs, and paving the way for a fresh look at trade agreements, both at a regional level and trans-continental level.
Q. China is accused of using India’s free trade agreements with other countries to gain a backdoor entry into India. Should these FTAs be reviewed?
>> Bibek Debroy
Yes, they should be looked at. This is fundamentally a Rules of Origin Regulations (ROR) issue, which is difficult to enforce.
>> Ajay Sahai
If the goods made in China are re-routed via partner countries with whom we have FTAs, the circumvention clause can be invoked. Customs can ask for details to establish how the ROR requirements were adhered to. If violations of ROR are found, we can suspend tariff concessions on such imports and take up the matter bilaterally. In the past, duty benefits on import of gold jewellery from one of the FTA countries were denied by India on grounds of circumvention.
>> R.C. Bhargava
The focus should be on making our own manufacturing much more competitive as quickly as possible. FTAs would then become an opportunity for the Indian industry.
>> N.R. Bhanumurthy
I understand that the commerce ministry had already initiated the review of all existing FTAs/ BTAs (bilateral trade agreements) even before the present friction with China began. In my opinion, India has not benefited much through these agreements since these have given China indirect access to Indian markets. With weak database, India mostly ended up with sub-optimal trade agreements, and for these reasons, I personally was against India joining the RCEP (Regional Comprehensive Economic Partnership). But this doesn’t mean we are against trade.
>> Ashwani Mahajan
Yes. The ASEAN countries have agreed to review this deal. The principle of ROR has been pushed by Indian negotiators. There is also a need to identify the source of capital and entrepreneurs to determine the ROR. We are pushing the government to do such review not only with ASEAN countries, but with all FTA and similar agreement partners.
>> Biswajit Dhar
The FTAs should surely be reviewed. But, more importantly, India needs to strengthen the implementation of the provisions relating to RORs. Cases of circumvention need to be identified and checked effectively.
>> Sachin Chaturvedi
In the past decade, India signed seven FTAs and four PTAs (preferential trade agreements). Upon analysing the performance of FTAs, we can see that imports have multiplied, but so have exports. In the case of ASEAN pre- and post-FTA, we find an average growth of 19.7 per cent in exports and 15.4 per cent in imports. The South Korea pre- and post-FTAs exports registered a growth of 6.4 per cent, while imports 15.5 per cent. For Japan, exports saw a growth of 14.4 per cent while imports, 10.7 per cent.
Many of these agreements do require upgradation. The ASEAN countries have agreed to renegotiate the agreement. There are schools of thoughts, which want the principle of ROR to be negotiated.
Q. How should one understand Prime Minister Modi’s ‘atmanirbhar Bharat’ slogan in this context? Is it possible to draw a legible policy line between self-reliance and interdependence?
>> Bibek Debroy
I think this should be interpreted not as isolation and insulation but as building up domestic competitiveness. The government’s policies are designed to ensure that. Given the uncertain, worsening external environment, sources of growth will have to be endogenous.
>> Ajay Sahai
“Atmanirbhar” refers to self-reliance, which is aimed at developing capabilities indigenously without shunning imports. Though our domestic supply is currently not very efficient, it is reliable, and in the trade-off between reliability and efficiency, the former should get a preference over the latter. We all were dependent on our reliable neighbourhood kirana stores and not on the ‘efficient’ e-commerce marketplaces during the Covid-19 crisis. It is good that we are focusing on import substitution to reduce imports in some key sectors.
We need to evaluate on a sector-specific basis to see whether self-reliance is feasible or if turning to other countries will be a better option. Even if we focus on self-reliance in some sectors, we need to build an ecosystem to level the playing field for such manufacturers. This means we not only need to give them parity of import tariffs, but also extend concessional credit along with competitive electricity tariffs and efficient logistics. Currently, Indian manufacturers pay more for inland freight, while supplying machinery, say, from Visakhapatnam to Ludhiana, than a foreign supplier dispatching it from North or Southeast Asia to Ludhiana.
>> R.C. Bhargava
I understand the prime minister’s lamentations over our failure to be a competitive manufacturing country and being dependent on large imports to sustain our manufacturing and export industries. ‘Atmanirbharta‘ requires India to grow manufacturing rapidly and become highly competitive.
>> N.R. Bhanumurthy
There appears to be some ambiguity with regard to the economic philosophy of ‘atmanirbhar Bharat’. In my view, it is an extension of this government’s policies like ‘Make in India’. While there is a need for intellectual discussion on this, I do not agree that it is against trade. Rather, the ultimate objective, in my view, is that India producing a whole lot of commodities for both Indians and for the world as a whole is almost the same as what China has done for the world for the past three decades.
>> Ashwani Mahajan
‘Atmanirbhar Bharat’ is not a protectionist campaign but an effort to rejuvenate domestic manufacturing and products. Nobody wants India to stay isolated, but industry in India must be strengthened, more opportunities should be given to access the best technology, be more productive, be more competitive, excel and export in the global market.
>> Biswajit Dhar
The PM did not elaborate as to what he meant by ‘atmanirbhar‘, but several ministers have interpreted the concept as shunning imports. This implies that the concept should be understood as “self-reliance” in the classical sense, which would then require India to adopt import substitution policies yet again. My personal view is that this policy is neither feasible nor desirable in the 21st century. It is not feasible because the country lacks both financial and technological resources needed for implementing this policy. It is not desirable because to follow this path, India would have to embrace autarchy, and shut itself off from the rest of the world.
>> Sachin Chaturvedi
If India has to become a super power, trade, investment and interlinkages with technology development would have to be nurtured in a way with value chains to help in localisation of production architecture. Self-reliance is not an autarchic concept, it envisages global linkages.
>> Arun Maira
Ten years ago, India’s then ambassador to China pointed out that while the volume of India-China trade was growing no doubt, the pattern of trade was worrying. China’s exports to India were many times India’s to China. Also, while India was exporting more raw material, China was exporting finished goods, and many high-tech ones. This, he said, was the trade pattern between a colonial power and its colony.
In 1990, India’s industrial capacity was the same as China’s and, in some sectors, India was ahead — in machine tools and power equipment, for example. By 2010, India was importing not only sophisticated power equipment, machine tools and electronic items from China but also toys, footwear and other simple, easy-to-manufacture products.
China has built strong industrial capabilities since the 1990s; India’s industrial policy, if it had one, clearly failed. Our trade policy, industrial policy and foreign policy have to be interlinked. What has been done over the past 30 years cannot be undone. China holds stronger cards than does India on the industry and trade fronts. India’s economy will be vulnerable in a trade war. However, India’s consumers and industries must be prepared to tighten their belts, just as our soldiers are along the border. India needs jobs to provide incomes to its citizens, it needs industries to provide these jobs, and it needs to balance the trade with China to make it a trade between equals. Atmanirbhar Bharat is essential, otherwise ‘interdependence’ will be a colonial interdependence, as our ambassador astutely pointed out.