India’s capacity now fulfils 97% of the domestic demand for handsets, plus earned $15 billion in exports last year. Electronic exports will touch $50 billion in the next two years. Notably, this production and export success is riding on imported Chinese components. For solar energy, India imports cells, glass, frames and encapsulants from China.
To reach 500 gigawatts of renewable capacity, weaning away from Chinese imports won’t be easy. And imposing punitive import tariffs just makes the sector expensive and uncompetitive in India. In electronics too, the growth of the domestic base depends on rising imports of printed circuit boards, micro assembly, semiconductor devices, LEDs, integrated circuits and capacitors. Overall imports from China have grown 31% last year, and the share of China in electronic devices and components has only gone up.
This story extends to other critical sectors. In the last 15 years, China’s share of India’s industrial product imports has increased to 30% from 21%. Chinese imports grew faster than overall imports. It is largely intermediate goods that are imported from China, not end products or even raw materials (at the other end).
These are organic chemicals, active pharmaceutical ingredients, capital goods and machinery. These inputs are critical for domestic markets and exports. It’s a classic case of supply-chain dependence.
India-China trade in the last four years has been at $88 billion, $126 billion, $136 billion and $119 billion, respectively. China is India’s biggest trading partner. The asymmetry in the bilateral deficit continues. Chinese imports don’t just feed India’s domestic ambitions, but also help with disinflation.
These trade statistics only serve to highlight the dilemma of what India’s China strategy should be. Until the betrayal at Galwan, the relationship was firmly compartmentalized. Trade, commerce and investment were in one compartment, and border issues in another. Despite India slapping anti-dumping duties, non-tariff barriers and investment restrictions, trade and commerce were growing.
Indian exporters must realize and exploit the fact that China represents a $6 trillion consumer economy, where even a 1% market share is a tremendous opportunity. More than 100 countries export to China. Despite trade war-like tariffs imposed on Chinese goods by America, China-US trade has grown to nearly $800 billion. India’s efforts at increasing exports to China must intensify and reduce the trade deficit.
The size of the deficit is less than 1% of China’s pile of foreign exchange. Beijing is keen on diversifying away from dollar assets as it fears American confiscation, or severe devaluation. There is scope for substantial Chinese capital inflows into India, which we have discouraged.
Yet, surely, in areas such as automobile manufacturing, Chinese capital cannot pose a national security threat. We need a strategically nuanced approach to our restrictions on inflows of Chinese capital. If it is in form of risk capital, for example, it does not add to our foreign debt obligations.
As for border issues, more dialogue is the only way to go forward. The Chinese betrayal at Galwan was in unilaterally trying to change the status quo on the Line of Actual Control. The framework that had worked for nearly five decades stands discarded because of Beijing’s treachery.
The Chinese betrayal might be a result of President Xi Jinping’s stance, or an assertion of China’s growing economic, military and technology clout. Or it could be on account of the influence of social media in China, which can be like riding a tiger for policymakers. India is no more immune to the corrosive effect of social media in influencing international relations.
Besides, there is the increasing role of ‘grey zone’ warfare and non-state actors, of cyber-attacks and disinformation, apart from many low-level irritants like renaming Arunachal Pradesh regions in Chinese, all of which are further complicating the scope for meaningful dialogue. However, this should not obscure certain stylized certainties.
First, that China has nothing to gain from a full-fledged military confrontation with India. Second, the India-China gap will remain significant for at least a decade. Third, India’s strong deterrence on the border is equal in measure to the Chinese build-up.
Fourth, China is facing very big domestic macroeconomic and demographic challenges, as well as thorny border issues with multiple neighbours, which will engage policymakers much more than anything else. Fifth, India and China account for 40% of humanity, are neighbours, ancient civilizations and have more common interests on global issues than are popularly acknowledged.
Sixth, one has to make distinctions between states, governments, people and societies when it comes to dialogue between India and China. There is much scope for increasing people-to-people links despite border hostilities.
The near-term approach, as also recently articulated by former foreign secretary and a leading China specialist Vijay Gokhale, should be to engage China more through political dialogue and a deeper understanding of bilateral issues.