India needs a coherent economic policy framework for dealing with China

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Of course, Cong Je, a Global Times editor who wrote this article, should not be taken as the voice of Chinese officialdom. But China often uses its state-owned media to convey what it really wants to say in non-diplomatic language and to release test threat balloons.

Cong’s diatribe came after earlier tax raids in India against Chinese telecoms maker Xiaomi and telecoms equipment maker ZTE. It would be interesting to see what Chinese state media think of the latest round of crackdowns by Indian authorities on Monday. This time, enforcement agencies raided Chinese phone maker Vivo in connection with an alleged money laundering case. Vivo had already been searched by the income tax authority last year.

The raids came just a day after news broke of another major Chinese exit from India: Chinese automaker Great Wall Motor’s proposed $1 billion investment in India is the latest to come along with India’s tough stance on Chinese companies after Galwan came into conflict. Deciding there was no longer any point in waiting, Great Wall closed its India store after failing to obtain necessary regulatory approvals within the twice-extended deadline imposed by its agreement with US automaker General Motors, GM. to purchase its mothballed manufacturing facility in Talegaon, Pune. The GM plant would form Great Wall’s manufacturing base in India. GM closed its operations in India in 2017 and put the Talegaon plant on the block.

On paper, Great Wall’s exit does not change the scenario of the automotive industry in India in any measurable way. The Chinese automaker only had 11 employees in its Indian office, who have now been laid off. The potential $1 billion investment in capacity and market building was just that – potential. With all the major US, European, Japanese and Korean brands already having a presence in India – not to mention the newly resurgent ‘Made in India’ Tata Motors – one could also argue that the lack of Chinese brands doesn’t significantly reduce the choices for Indians influences car buyers.

That may be true of the auto consumer market, but any further collapse in the increasingly thorny relationship between the two Asian giants would spell disaster for manufacturers in several sectors of the economy, including the auto industry, which depends on China for many key components.

India is a major importer of Chinese Telecom Products, Computer Hardware & Peripherals, Fertilizers, Electronic Components/Instruments, Project Goods, Organic Chemicals, Drug Intermediates, All Kinds of Consumer Electronics, Electrical Machinery and All Kinds of Heavy Machinery & Equipment.

In the first quarter of 2022, the top four Chinese mobile phone brands alone – Xiaomi, Realme, Oppo and Vivo – had more than 64% market share and together accounted for more than two-thirds of the Indian mobile phone market by value. In the pharmaceutical sector, India’s generics business is heavily dependent on Chinese ingredients, as are many high-value drug formulations.

Aside from consumer goods, China is also a major supplier to India’s main agricultural sector. It is a major exporter of fertilizers and crop protection products to India. Syngenta, the world’s largest producer of agrochemicals, which has a strong presence in India, is owned by ChemChina.

China may or may not be India’s biggest trading partner — the Commerce Department said in May that the US is contesting China with $119.42 billion in bilateral trade, which the Chinese say bilateral trade between China and India will increase in 2021 totaled US$125.66 billion, making it India’s largest trading partner.

In fact, 2021 was a record year for India-China trade. Bilateral trade grew nearly 61% in the first half of 2021 as pent-up demand returned following the easing of Covid restrictions. In the first quarter of 2022, bilateral trade has already grown by over 15%. This is despite the fact that India has banned more than 270 Chinese apps, refused to approve investment proposals worth over $1.63 billion and banned Chinese devices from India’s 5G trials.

With decoupling not really possible in the foreseeable future given China’s manufacturing prowess and its key role in global supply chains – whatever the political rhetoric – India needs to calibrate its China policy with more nuance and keep its long-term economic interests in mind. Political certainty and coherence are important.

The ban on Chinese apps, while Chinese phones account for two-thirds of the market, sends mixed signals and betrays a lack of policy coherence. For example, it would have been worth considering whether allowing a Chinese automaker to gain a foothold in India would have encouraged other global competitors to make larger investments here. Raids are blunt instruments that must be used with care.

While India has joined the US-led Indo-Pacific Economic Framework, the IPEF, it is still some time away from translating the new multilateral engagement into outcomes that will lead to a meaningful shift in the trade imbalance between India and China. The same applies to long-pending reforms that can unleash the Make In India potential to correct the trade imbalance with China.

In the meantime, India really has no choice but to manage increasingly complicated relations with its troubled neighbor, which is both a key economic trading partner and a serious threat to the country’s territorial integrity. The challenge for policymakers is to move beyond the inherent conflict of these two realities and create a predictable and stable policy ecosystem for businesses and investors. It’s an almost impossible task. But one where India cannot afford to go wrong.

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