Eurasia Review - 28 October 2020
India-China row sets new dimension for India’s economic partnership In Asia, albeit decoupling from RCEP – analysis
By Subrata Majumder
For the first time, India witnessed a paradoxical situation with its large trading partner. It is China who happened to be the top trading partner of India consecutively for four years till 2018-19. But, the trade relation turned sour with the outbreak of COVID 19. It rattled China’s significance as dependable supply chain. Added to this, the repeated face-off in border intensified security concern.
As a result, a trust deficit grew between India and China, which has become detrimental for the furtherance of trade relations. India has been facing a wide trade deficit with China. Notwithstanding, India opened the door for cheap imports from China, without indulging in any trade dispute on the line of US trade practices. But, a bell of concern rang when it found that its trade sovereignty was at stake due to over-dependence on China for some industries, which are related to new and emerging and healthcare industries.
This led the policy makers for a second thought on Chinese hegemony in the trade and growing Chinese investment in the country, even though it is on the background of foreign investment for Make in India. India vowed for an alternative to China as a new strategic trade and investment policy in Asia.
The widening trade deficit with China imparted a major impact on balance of payment. The fallacy of wide trade deficit lies with India importing substantially from China, more than it exports to China. The major factor attributing to this was the large importation of electronic and telecommunication equipment and parts. About 30 percent of total import from China was accounted by electronic and telecommunication equipment and parts.
Incidentally, China was the largest supplier of these items. About 39 percent of India’s total imports of electronic and telecommunication equipment and parts are from China. Eventually, this triggered overdependence on China. To nip in the bud the overdependence, India launched a policy for the Atmanirbhar initiative under the umbrella of Make in India and set a motion for decoupling from China
China is also a major supplier of bulk drugs and the active pharmaceutical ingredients (API) . About 80 percent of the imports of bulk drugs and API are from China. Even though India’s dependence on China for API is substantial, it could have little impact on trade deficit. The imports of API in total imports from China was only 2 percent in 2019-20.
This decodes that the overdependence on China is mainly attributed by large imports of electronic and telecommunication equipments. The bane of large scale imports of electronic and telecommunication items remained unnoticed till the domestic industries made rapid growth using them as inputs such as mobile manufacturing industries and digital development. It rang the bell of concern when the supply chain from China was disrupted by COVID-19, causing a large scale shuttering of industries in the country. Added to this, the repeated tiff on the border enlarged the security concern for doing business with China.
India’s decoupling from China led to a number of harsh steps to undermine the trade and investment relations with China, despite the fact that Chinese investment set the turf for mobile phone manufacturing in the country. It restricted Chinese FDI approval through Government routes from Automatic routes. It blocked 59 Chinese Apps, imposed stricter regulations for Government procurement, and restricted the import of color TVs.
India refused to join RCEP, which include ASEAN -10 + 6 (China, India, Japan, Australia, New Zealand and S. Korea). It alleged that several major issues, which it proposed, were not addressed, given the Chinese threat. The aim was to undermine China’s easy accessibility to the Indian market through ASEAN. Incidentally, China has a FTA with ASEAN, which acted as a proxy to China for entering India market. Had India joined RCEP, this could have laid down a further easy access for Chinese goods into the Indian market.
China used BRI (Belt and Road Initiative) to rein the trade power by reconnecting ASEAN and boost the trade links through infrastructure development. “BRI is the most viable platform for advancing China’s neighborhood diplomacy”, according to Dr Jonathan Stromseth of Brooking Institute.
Given India abstained from RCEP, and followed by Japan, RCEP lost its aura. It is unlikely that RCEP will reach the final deal by November 2020. This opens an opportunity for India to engage for a new economic partnership with Asian emerging nations. For an alternative to China, ASEAN emerging nations can be a better bet. India has a FTA with ASEAN. The major trading partners in ASEAN are Singapore, Malaysia, Vietnam, Indonesia and Thailand.
Vietnam and Singapore can be major challenges for alternative to China. Ever since the US- China trade war intensified, many importers in America, EU and Japan were contemplating for alternative supply chain. According to the US Census Bureau, imports from Vietnam into the USA jumped by 33 percent in the first of 2019. Low labour cost is one of the main attractions for shifting investment in Vietnam. It is almost 50 percent lower than China. Vietnam’s biggest specializations are in production of electronics, textiles and furniture. Eventually, both Vietnam and Singapore will be the major suppliers of electrical machinery, including electronics and telecommunication equipments.
Political relations between India and Vietnam shined when Indian Prime Minister Narendra Modi visited Vietnam in September 2016 – the first visit of an Indian Prime Minister in 15 years, and the back-to-back visit by newly elected Vietnam President Tran Dai Quang.
Singapore is the biggest foreign investor in India since 2018-19, outnumbering Mauritius. Singapore plays a key role in India’s Look East policy and is the key driver for ASEAN FTA in services. Singapore is the major off-shore financial hub for many Indian companies due to the presence of large Indian Diaspora. Over 6,000 Indian companies are registered in Singapore.
In summing up, tying a strong knot with Asian tigers can be a better bet to challenge Chinese hegemony, as a new dimension of India’s Act East policy.