India’s Trade-relationship with China: The New Imperialism | B P Mathur

Chinese import have thrown a spanner in the wheel of India’s economic progress per se and industrial manufacturing in particular. The Chinese import is so hard hitting on Indian industry that many manufacturers have become traders. 

The impact of Chinese goods has been such that India is threatened to become a country of importers and traders with domestic factories either cutting down production or shutting down completely...The country can ill afford its industry including MSMEs to get annihilated. 

—  Parliamentary Standing Committee on Commerce (July 2018 )

Seven decades after Independence the economic relations between India and the developed countries of the West and newly industrialised countries of East Asia, continue to be ‘colonial’, India a huge importer of manufactured and capital goods and its exports consisting mainly agricultural, mineral and ‘primary manufactures’, resulting in huge trade deficits and draining of its wealth abroad. It was promotion of trading and commercial interest that gave Britain initial impulse to subjugate India. Two hundred years of British rule was largely responsible for India’s abject poverty at the time of Independence, as a good part of her wealth was exported to Britain without any return, of what was known as Drain Theory, graphically portrayed by Dadabhai Naoroji and other leaders of freedom movement. India embraced a New Liberalised Economic Policy in 1991, with free-markets and globalisation as its mantra, without first building a strong and competitive industrial base. This has resulted in easy access by foreign goods, services and capital to our markets, choking domestic manufacturing and is largely responsible for our current economic woes.

Contrary to what trade theorists propound, the economic history of developed countries demonstrates that only through protectionist policies and State support they have built their industrial muscle and export prowess. Britain was the most protective country during much of its economic rise from 1720s to 1850s. Britain adopted free trade only in the 1860s, when its industrial dominance was absolute. Academician Michael Barratt Brown [1] points out, ‘ Britain’s industries were reared behind protective walls, nourished on imperial tributes and encouraged by destruction of competition from the East. But once established they no more needed protection, plunder and protected markets.’ Protection became a drag on industrial development. ‘ Free trade was the instrument of Britain’s industrial supremacy holding back development elsewhere’. Two early industrial powers, Germany and USA strongly resisted Britain’s pressure for a free-trading regime. USA was one of the most protective countries in the world during its industrial ascendency from 1830s to 1940s. In late nineteenth century American tariffs were five to ten times higher as compared to European and that was the fastest economic growth in American history. Distinguished scholar Noam Chomsky [2] observes, ‘there is not a single case on record in history of any country that has developed successfully through adherence to “ free-market” principles : none. Certainly not the United States... And the same thing runs right up to today: like we would not have successful high-tech industry in the United State today if it wasn’t for a huge public subsidy to advanced industry...’ Cambridge economist Ha-Joon Chang [3] elaborates that today’s rich countries, ranging from Japan, France, Austria to Korea, Taiwan and Singapore used protectionism, subsidies and state-supported measures to promote industrialisation and asserts , ‘ few countries have become rich through free trade, free market policies and few ever will.’

 Sadly, India has learnt nothing from two hundred years of global history of industrialisation and its own bitter experience of British imperialism. Today China has become world’s manufacturing hub and an export super-power, and has replaced Britain as a new imperialist power, flexing muscle and holding back industrial development all over the world and enriching itself at the cost of other nations. India is the biggest victim of current trade relationship with China, as it is obstructing her industrial development, as the following write-up explains, and calls for countervailing measures to protect her vital economic interest. 

  India’s Foreign-trade Scenario 

Post independence, India is having continuous trade deficit- imports far exceeding exports, with severe adverse effect on the economy. The launching of Five Year Plans in 1950s resulted in heavy demand for industrial machinery and capital goods, in order to build a strong industrial base. But the country was unable to build an efficient industrial economy which could compete globally and exports lagged dynamism. The liberalisation of the economy in the 1990s has compounded the problem, as liberal import of goods and capital has given further push to trade deficit without corresponding rise in exports of value added goods. Table 1 below shows huge export- import imbalance, exports able to finance only around 65 to 70 % of our import bill. For almost a decade our exports have been stagnating around $ 300 billion annually , while imports are in the range of $ 450 to $ 500 billion resulting in heavy trade deficit. A redeeming feature of India’s external front is the Services sector with IT exports and NRI Remittances giving a measure of stability to our foreign exchange front. Table I gives the position.

Table I : Export- Import Imbalance, IT Earnings & NRI Remittance

Source: RBI Handbook of Statistics on Indian Economy & DGCIS

India is having continuous Current Account Deficit for many years, as a result value of rupee is declining in relation to dollar and other hard currencies. Current Account Deficit ( CAD) is the deficit a country incurs in its overall balance of trade and services. India’s CAD was between 1 to 3 % of GDP in the first decade of this century, but during 2010-11 and 2011-12 the foreign exchange position worsened and it jumped to 4.3 % and 4.8% of GDP. This resulted in steep decline in the value of rupee by about 25 %, from Rs 45 to dollar to around Rs 60 in the year 2013-14. India’s CAD was 1.7 % in 2013-14 , averaged 1.2 % between 2014-15 to 2017-18 and was 2.1 % of GDP in 2018-19 and has declined to 0.9 % in year 2019-20. This has resulted in continuous slipping in the value of rupee which reached a level of Rs 70 to a dollar in 2018-19 and has slipped to around Rs 75 currently (July 2020 ).

  Burgeoning Imports 

Indian exports have been stagnating for a considerable period of time due to adverse international economic conditions and our inability to build a competitive industrial sector. Our policy makers believe in open market and free-trade regime and do not seem to be worried about the adverse impact of heavy trade deficit on the economy.Crude oil imports account for 30 % of our import bill ( $ 141 bill — 9,86,000 cr, in 2018-19 and $ 129.5 bill — Rs 9,17,000 cr in 2019-20) and calls for complete reorientation of our energy policy, such as use of flexi-fuel and reliance on renewable energy sources- solar, wind etc for which we have the technology.There is considerable scope to reduce imports of many items such as gold, coal, steel and fertiliser etc, which account for huge foreign exchange outgo, by taking suitable policy measures. Much of the gold imported ( annual import $ 33 billion , Rs 2,30,000 cr in 2018-19) in the country is used for parking black money and need to be discouraged. Bulk of coal imported ($ 26 billion- Rs 1,83000 cr in 2018-19 ) is due to thermal plants logistics and transport advantage of being located near ports, although the country has huge reserve of coal and capacity to produce all the coal needed. Country’s steel industry can meet all the requirement and is crying foul against influx of cheap imports which is destroying their economic viability (import $ 18 billion- Rs 1,25,000 cr ,2018-19). All the indigenous requirement of fertiliser (import $ 7.5 billion- Rs 52,000 cr in 2018-19) can be met through strategic planning, enhancing production capacity and suitable incentive to the existing plants operating in this sector both public and private.

India a largely agriculture country, is importing huge quantity of farm products which has a devastating impact on farming community. India imports 60 to 70 % of its vegetable oil requirement, forking out around Rs 70,000 to 75,000 cr annually in foreign exchange. India was almost self-sufficient in edible oil production in mid-1990s but low duty on edible oil, has resulted in flooding of cheap imports ( mainly palm oil) resulting in farmers of oil-seed such as groundnut , mustard and til (sesame) getting squeezed out of cultivation. The continued import of pulses- arhrar, tur, chana, despite good and at times bumper crop, resulting in price slump is a classic case of government playing with the life of farmers (import Rs 19,000 cr in 2017-18 and Rs 8000 cr in 2018-19). The country imports large quantity of fruits and vegetables which includes apples, walnut, pistachio and esoteric fruits such as kiwi, cherry and avocado ( Rs 13,500 cr in 2017-18 and Rs 15,000 cr in 2018-19). Such imports, meant to pamper rich urban class, results in depressing prices and adds to distress of farming community.

  As a result of economic reform, India has reduced tariff on wide variety of industrial products [4], supposedly with an idea of exposing domestic industry to international competition and enhancing efficiency. India has very low duty on most engineering goods and industrial products. India has entered Free-Trade Agreements ( FTA ) with ASEAN, South Korea and Japan which enjoins import of goods at low or zero duty. India voluntarily joined Information Technology Agreement in 1997, which committed it to reduce duty and bring it to zero, on wide range of electronic and telecommunication products. Consequently the country is flooded with cheap imports of electronics and other manufactured products against which domestic industry cannot compete. Electronic goods import is the second largest contributor to India’s merchandise imports which was $ 51.50 billion in 2017-18 and $ 55.50 billion in 2018-19 next only to petroleum and accounts for almost half the domestic market ( $ 120 billion). Electronics is fundamental to a country’s technological and industrial development. The market for hardware electronics is expected to be $ 400 billion by 2025. There is an urgent need to develop indigenous electronic industry which should encompass trade, investment, technology, taxation, education and skill development in a comprehensive policy-framework.

       The desire to please vociferous urban consumer and powerful import lobbies combined with neo-liberal economic model, has resulted in India’s markets flooded with imported stuff and has played havoc with our economy. 

         India — China Trade

China is one of India’s biggest trading partner, but India suffers from huge adverse balance of trade with her. During last decade, while Indian exports to China have marginally increased from around $ 10 to 16 billion annually, import from China has leapfrogged from $ 30 billion to $ 70 billion resulting in huge trade deficit as given in table II below. China accounts for 30 to 40 % of India’s overall trade deficit during last few years.

               Table II - India’s Export and Import from China

  Source: RBI & Parliament Standing Committee Report, Ministry of Commerce, 2018

       Dumping of Chinese Goods 

 India imports from China not only machinery, capital goods and high tech products but vast range of consumers and daily use items. If you visit any market in India or online retail site, you will find cheap Chinese products such as electronic gadgets, toys, crackers, decoration items, items of daily consumables, even needles and plastic bottles, you will find a cheaper Chinese version for almost everything. Though they are of very inferior quality, they are 10 to 70 % cheaper than domestic products and therefore Indian consumer being very price conscious buys them [5]. Such cheap import has a devastating impact on handicrafts , small and medium enterprises many of which are forced to close down causing loss of thousands of livelihood. A Report by Nikkei Asian Review ( 2013) says that, ‘a flood of counterfeits and knockoffs from China, alongside legitimate goods, are drowning Indian industry’ [6]. Chinese companies are ripping away chunks of India’s low-end market causing local disgruntlement and loss of job. Shanzhai cellphones, called "China mobile" in India, have captured massive market share in the country, as Chinese manufacturers have a competitive advantage because they evade tax, regulatory fees and safety checks at home. Chinese companies have captured smartphone, electrical appliances and many other low end product market. Gujarat’s ceramic industry, which makes tiles and sanitary-ware, local small and midsize players face a severe crisis as low-priced ceramic imports from China are growing at dizzy annual rates, pricing them out. Another report from ASSOCHAM notes that more than 50 % of toy companies have shut down unable to face competition and many others are on the verge of closure. In UP, hundreds of small handicraft units making Terracotta toys and images- murti  of Ganesh-Lakshmi at Gorakhpur, cord -manjha for kite flying at Bareilly, glass beads at Firozabad for zari sari work at Rampur and scissor fabrication units at Meerut, unable to compete with synthetic, shoddy and under- priced Chinese goods, have shut down or on verge of closure, resulting in huge unemployment.

Some unscrupulous Indian importers in league with Chinese companies are undervaluing goods and manipulated invoices are produced before customs. An investigation spanning six months by Directorate of Revenue Intelligence [7] (DRI) for over 3600 items brought from China found that the importers are declaring 1 to 9 % of actual value of the goods. Customs duty is about 31 % of the value of the good. The declared value of an MP3 player is Rs 1.83, when it sells in the market for Rs 230, of an LED torch Rs 8 when it sells for Rs 150 to 200, an emergency light for Rs 16, when it sells for Rs 620, a 4GB memory is Rs 400 but sells for Rs 4299. These transactions are facilitated by covert black money operations involving smuggling and tax evasion. Another study [8] of the unbranded mobile phone accessories, found that the declared price was between Rs 0.8 to Rs 9.9, the minimum sale price in the market was Rs 100 for hands-free and for hands-free with Bluetooth Rs 295.

There is massive surge in import of furniture, bulk of which is from China facilitated by under-invoicing, coupled with illegal channels for payments [9]. During 2018-19 out of furniture import of $1.8 billion ( Rs 12,500 cr) China accounted for $ 1 billion and during 2019-20 (April-November) out of import of $1.1 billion China’s share was $637 million. Huge import of new pneumatic tyre and re-treaded tyres from Thailand and China has played havoc with the economic viability of domestic tyre manufacturers ( during 2018-19 pneumatic tyre import was for $ 430 million out of which $ 127 was from Thailand and $ 92 million from China). A Times of India report says that Government has identified 350 items ranging from toys, electronics, footwear to textile goods which are non-essential but are able to gain entry in Indian market due to price-cutting and other under-hand dealings .

It is not only in consumers goods sector that Chinese goods have played havoc with the domestic industries but also in capital goods sector. Fueled by cheap credit and aggressive marketing Chinese power equipment manufacturers have captured a good part of India’s vast power generating equipment market, displacing efficient producers such as BHEL —a PSU, and Larsen & Tubro, who are crying foul. A high level committee headed by a member of the Planning Commission ( 2010) recommended imposition of duty on Chinese equipment due to domestic industries suffering price disadvantage, but the Ministry of Finance shot it down on the ground that it will result in project cost going up. [10] With such unhelpful attitude on the part of government how can domestic power industry come up.

China under state patronage follows an aggressive policy of import substitution and export promotion, combined with price-cutting and various unfair trade practices completely dominates India’s electronic market. Half of India’s electronics goods import currently of the order of $ 60 billion annually, is sourced from China. They include telecommunication products, computer hardware, consumer electronics, laptops, semiconductor devices, LEDs etc.

       Parliamentary Committee - Adverse Impact on Industries 

The Standing Parliamentary Committee on Ministry of Commerce [11] (July 2018) headed by Naresh Gujral MP, made a depth study of Chinese imports in India and found that it has a devastating impact on Indian industries, resulting in many of them closing down or on the verge of closure [12]. It underlined the fact that China has been able to make deep penetration in Indian market through highly questionable and unfair trade practices. It observed,

The deluge of Chinese imports in the Indian market is wiping out many domestic industries and is a cause of serious concern. The common thread in these deliberations has been the under-invoicing of Chinese goods, dumping of cheap Chinese goods in the Indian markets, entry of prohibited Chinese goods by mis-declaration and outright smuggling. 

While examining the issue of China capturing large chunk of Indian market the Parliamentary Committee highlighted the following points: 1) A large number of companies in China which are dominant player in exports are government controlled and given special favours. China is not recognised as a market economy and lacks transparency in trade policy. China has been giving huge export subsidies which makes its goods cheaper. 2) China has been manipulating its currency to maintain export competitiveness. 3) The banks lending rates in China are very industry friendly- industry gets loan at cheap rates while Indian industry has to borrow at much higher rates. Indian industry suffers a cost disadvantage of almost 9 % on account of finance, energy and logistics, when compared to Chinese counterpart.

The Parliamentary Committee which had widespread deliberation with the industry, found that large number of industries have been adversely impacted by indiscriminate import from China.

Pharmaceutical Industry: India is a major producer of drug formulations but key ingredients for their production, Active Pharmaceutical Ingredient ( API) and Key Standing Material ( KSMs) come from China. China today supplies 70 % of India’s key ingredients and in some cases of life saving drug the dependence is 90%. India imported bulk drug and drug intermediates worth $ 1826 million ( Rs 12,000 cr) in 2016-17 and $ 2056 million ( RS 14.000 cr ) in 2017-18. Three decades back China was no where in picture. India possessed the technology and knowhow and there were 7-8 Indian manufacturing plants, producing as many as 20 ingredients such as penicillin G, erythromycin, rifamycin, tetracycline, citric acid and vitamin B 12. In course of time they were forced to shut down due to cheaper Chinese imports and dumping. Government also closed down public sector drug companies Hindustan Antibiotics ( HAL ) and Indian Drugs and Pharmaceuticals ( IDPL) without considering that they are critical to national self-reliance. Having established a monopoly on Indian market, China has been swinging the price of bulk drugs, jacking up the prices sometimes by as much as 1200%. In the wake of corona-virus, supply from China has been disrupted severally impacting production of critical drugs [13]. Government is now taking initiative to produce basic drugs domestically. There is an urgent need to revive the PSUs and erstwhile bulk drug manufacturers by giving necessary incentive so that we become self-reliant in this critical sector.

Solar Industry: Solar energy is critical to India’s energy security and clean energy drive. Presently 85 % of our solar equipment requirement comes from China. India imported solar cells and modules worth Rs 17,000 cr during 2017-18. India has a nascent solar industry, but it is getting wiped out due to cheap imports from China. The installed capacity of solar modules is 8.8 GW but its utilisation is only 3 GW and solar cell 3.1 GW against which utilisation is 1.5 GW. India is an efficient producer of solar products and was exporting to countries such as France, Germany and Italy between 2006 to 2011. But the dumping of Chinese products is threatening the very existence of the industry. The Director General of Safeguards had recommended imposition of 70% safeguard duty, but the government did not accept the proposal. The argument given is that it will make the final price of solar power higher. The logic is specious. India can fulfil the ambitious target of generating solar energy under National Solar Mission only when we have a strong domestic base. The Parliamentary Committee observed that, over-dependence of imports from China will lead the country to a precarious situation and wanted strong action against Chinese dumping. The Committee has recommended that capital subsidy be given to the eligible manufacturers, so that cost of plant and equipment is reduced and Indian manufacturers could compete with cheaper imports.

Textile Industry: Textile is one of the most labour intensive industry employing large work-force. But due to cheap import of manmade fibre (polyester, viscose and blends) a large number of power looms in places such as Surat and Bhiwandi have closed down or threatened with closure. The problem is compounded by the fact that Chinese linen fabric is converted into garments in Bangladesh and arrives duty free in India as she enjoys LDC ( Least Developed Country) status. Similarly Yarn & Fabrics is imported from China into Bangladesh, Myanmar and Sri Lanka, converted into fabrics in these countries and exported to India at nil duty under bilateral agreements with them. Thus they escape trade-defence measures and anti-dumping duty cannot be imposed. The Parliamentary Committee has recommended that customs duty on garment imports should be raised and all zero -duty imports should be subject to condition that raw material has been sourced from India.

Steel Industry: India is an efficient producer of steel and with production of crude steel of 106.5 metric tonnes in 2018, it has emerged as the second largest producer in the world , overtaking Japan ( 104 mt) and USA ( 87 mt). However, China, produces half of global steel production- 928ml tonne out of 1808 metric tonnes (2018). With oversupply, China is dumping steel all over the world, disrupting markets. India has a very liberal import regime due to which cheap steel is being allowed to be imported- not only from China, but also from Japan and South Korea with which India has a free-trade agreement. The import of cheap steel has a adverse impact on domestic steel industry threatening its survival. India imported 7.8 mt steel ( $ 17,666 million ) in 2018-19 and 7.5 mt ($14617 mllion ) in 2017-18. The Steel Industry in India, which is of world class standard, has been demanding higher duty to protect it against unfair competition. While Government has levied duty , it does not give adequate protection against flood of cheap imports, threatening the viability of domestic industry. The Committee noted with great concern, that India’s robust stainless steel industry, mostly in small enterprise sector, has been virtually wiped out due to cheap imports from China.

Bicycle Industry: India is world’s second largest producer of bicycle accounting for 10 % of global production. There are 4000 manufacturing units and provide jobs to around one million people. Lately there is spurt of import of bicycles from China - $ 175 million ( Rs 1200 cr) in 2016-17 and $ 204 million(Rs 1400 cr) in 2017-18, which accounted for 50 % of all imports. There is rampant under invoicing of imports which is injuring the domestic bicycle manufacturers and threatens their economic viability.

Quality & Standards: A large number of low priced shoddy and spurious products are coming from China, many of which are health hazard. The Indian market is flooded with Chinese toys which are toxic and dangerous for children. Similar is the case with firecracker industry which contains explosive chemical. After public outcry, it has been placed under restricted category and no licences have been issued lately, but huge smuggling of fire crackers is taking place. The Committee observed, ‘ In addition to revenue and employment, low quality of Chinese imports have also an adverse impact on environment. For instance, import of impure chemicals affects the environment and results in low quality agro-chemicals (pesticides) thus affecting Indian farmers. Poor quality toys, colours, firecrackers, statues of gods and goddesses etc from China are health hazards in Indian household.’

Sub-standard and spurious Chinese products are able to gain entry due to weak and ineffective quality control framework in India. The Bureau of Indian Standards ( BIS ) is the body which establishes standards and ensures conformity. But BIS product certification scheme is primarily voluntary and very few products require compulsory certification. The Committee noted with great concern, that BIS goes out of the way to certify/ register Chinese products, while the Indian exports face numerous hurdles and obstacles 

     Anti- dumping Measures

Although China is now a member of WTO it violates its norms with impunity. Under WTO rules a country can impose anti-dumping duty if it finds that the country exporting a product is underselling, and can cause serious injury to domestic product. The Director General of Anti-dumping and Allied Duties (DGAD) investigates dumping and subsidisation of goods. From January 1997 to December 2017, DGAD has initiated anti-dumping investigation in case of 375 products in which China is involved in 214 products. On the basis of DGAD investigation anti-dumping duty has been imposed on 144 products out of which 102 relate to China i.e more than 70 % cases, which shows systematic undervaluation of goods. The Parliamentary Committee found that anti-dumping investigations are proving ineffective, as under-priced goods are still coming, due to unscrupulous importers committing various mal-practices, such as mis-classification of products . The Committee found the working of DGAD very lax and unsatisfactory and desired it to play a more active role to prevent malpractices in Chinese imports. 

The anti-dumping and countervailing duties safeguard cannot be used if supplies from China are re-routed from countries with which India has a free -trade agreement or enjoy LDC ( Least Developed Countries) status. Chinese manufacturers have set-up operations in LDC to avail such benefits, which glut the Indian market. The Committee recommended that Rules of Origin clause should be applied and unless there is genuine value-addition in partner countries, the entry of Chinese goods should be blocked.

After extensive deliberation the Parliamentary Committee made a forceful plea to protect domestic manufacturing from onslaught of Chinese goods. It suggested that Government procurement may be used to boost domestic manufacturing and in the tender process , price preference should be given to indigenous firms, which is permissible under WTO guidelines.

     Chinese Investment- Deep Penetration in the Indian Digital Market

India’s open door economic policy has enabled Chinese firms to not only acquire equity stakes in large number of companies but controlling stakes in certain critical sectors of the economy such as IT and digital technology. Hitherto most FDI ( Foreign Direct Investment) flow to India has been under automatic route, which means no approval is needed for acquiring shares of the companies listed in stock exchange. Chinese portfolio investment has been growing over last few years - but it sent shock waves when Public Bank of China acquired 1.01 % stake in HDFC Bank between January to March 2020, when stock-market had crashed due to corona- crisis . (the value of Foreign Portfolio Investment from China which stood at RS 774 cr at December 2019, suddenly jumped to RS 3258 cr by March 2020 [14]— holding in excess of 1 % for which disclosure is required ). In order to prevent opportunistic take- over by Chinese entities of Indian companies whose valuation has been badly hit by the pandemic, Government has revised its existing FDI norm and requires that countries which share border with India which implies China will have to seek prior government approval before buying stakes in Indian firms. ( It may be mentioned that several countries such as Germany, Italy, Spain, and Australia have placed similar barriers, so that predatory Chinese capital do not acquire shares in their domestic companies, who are facing slump due to covid crisis).

Chinese companies today completely dominate the digital technologies space in India- both hardware and software, with active support of Chinese establishment.  [15] They control 75 to 80 percent smart phone market in India with Xiaomi and Vivo together accounting for more than 50 % share. India launched a domestic manufacture of electronic policy in 2017, and large number of electronic units have come up in the country. However, due to open door investment policy, most of them have been set up in collaboration with Chinese companies such as Huawei and ZTE and these smart phone units are simply assembly units with high value components such as printed circuit boards, memory devices, storage units, processors continue to be imported from China leading to huge foreign exchange outgo as well as technological dependence. Some years back, Indian firms Micromax and Intex had over 50 % market share, but unable to face unfair competition from Chinese firms and their market share has fallen to around 10 %.

After acquiring control over digital hardware market in India, Chinese companies have captured software intensive starts-up known as unicorns ( worth more than $ 1 billion). Out of 30 unicorns more than half of them such as Ola cabs, Paytm, Snapdeal , Byju’s Classes, Big Basket and Zomato have controlling stakes from Chinese firms such as Alibaba and Tencent.

Today a huge strategic economy is developing around the ecosystem of digital consumers , internet and smart phones and India is developing into one of the world’s biggest tech consumer market. China through a well planned strategy has penetrated deep into this market. There is an urgent need to develop self-reliance in this critical sector of the economy. In the wake of Chinese aggression in Ladakh serious concerns have been raised about cyber security and India has banned 59 Chinese Apps which include Tik Tok and WetChat. This is a step in the right direction as Chinese companies are obliged to share data with their government, which poses serious threat to individual privacy as well as national security.

Regulating Imports : In the Budget presented to Parliament in February 2020, the Finance Minister admitted that the import surge in the country is having an adverse impact on manufacturing and announced certain policy measures to rectify the situation. It was recognised that Imports under FTA are posing a threat to domestic industry. Customs duty on some products, particularly those produced by SME, such as furniture and footwear was raised. These measures are welcome, but it needs to be understood that normal tariff measures may not be able to arrest the flood of imports from China, because of the country’s policy of capturing markets abroad at any cost and resorting to unfair trade practices. Unless, India takes recourse to strong non-tariff measures, it would be very difficult to prevent deluge of Chinese imports.

    Indian Exports to China

Indian exports to China are mainly primary products such as iron ore, cotton and cotton yarn, minerals and ore, copper, granite, castor oil, spices and have remained stagnant between $ 10 to $ 16 billion during last one decade. Exporters have to face numerous hurdles in exporting to China. China uses a complex set of inspection, product testing and quality certification requirements to stifle imports from India. There are excessive customs and other levies with frequent rate changes, complex customs valuation procedure and differentiated testing norms for imported and domestic products. The Chinese authorities create numerous problems in registering and giving product certification to Indian goods. Chinese experts inspect Indian factories, while the cost is borne by Indian side, the clearance seldom comes. Only Chinese labs do the product testing, and no appeal is allowed on their decisions. India exports large variety of agriculture products, generic medicine, polished diamonds, cars and other goods all over the world including US and EU, but China does not allow import of most of those products. China does not accept Indian basmati rice but imports the same from Pakistan. Punitive product testing ensures that India cannot export buffalo meat though it is exported to large number of countries in middle-east. India cannot export fruits and vegetables to China which demands quarantine certificate which does not easily come by. Indian IT firms cannot take part if tender size is more than $100 million. The list of such restrictive practices is long. Ajay Srivastava [16]a trade expert says, ‘ China uses NTB (Non-tariff barrier) to maim India’s exports without anyone realising what is happening’.

Free-trading - R E C P 

India has decided to opt out of Regional Comprehensive Economic Partnership ( RECP ) in November 2019 for which negotiations have been taking place for last several years and were initiated far back in 2012. RECP is a proposed free-trade and economic cooperation agreement between ten member States of the ASEAN and China, Japan, South Korea, Australia, New Zealand and Japan. USA and India were also part of trans-Pacific regional cooperation but USA opted out of the negotiations after Trump came to power. India’s decision to opt out was due to fear that it may lead to import surge of wide variety of products such as industrial and electronic goods, steel, textile, garments and food items and will not be in country’s interest. Various trade and industry associations stoutly opposed India joining the RECP and was the key factor in government’s decision to opt out. The countries with which India has free trade agreements shows that it is disadvantageous to her, as with each one of them, she has been incurring trade deficit. During 2018-19 trade deficit was: ASEAN - $ 21.8 billion ( import $ 59.3 bill export $ 37.3 bill), Japan- $ 7.9 billion ( import $ 12.8 bill export $4.9 bill ) and South Korea- $12.1 billion ( import $ 16.8 bill- export $ 4.7 bill ). Joining RECP would have meant reduction and elimination of tariff on wide variety of items and would have been seriously detrimental to India’s economic interest, already reeling under flood of imports from China and other countries in the Pacific region.

Indian policy makers need to very carefully calibrate its foreign trade policy and not fall victim to doctrinaire belief in an open -trading system. India has vast domestic market, continent size and is not so dependent on foreign markets, unlike smaller countries who have necessarily to find foreign outlets because of economies of scale. A high proportion of India’s exports are agriculture products such as rice, spices , tea, marine products, meat where terms of trade are tilted unfavourably. India has not been able to build an efficient heavy machinery, engineering and electronic sector and therefore not able to take advantage of value added manufacturing exports in a growing global market, unlike countries of East Asia. India has no doubt done well in some high technology sectors such automobile and automobile parts, pharmaceuticals and textiles etc, but its overall export performance is disappointing.

China- Policy of Economic Domination

China is today, the second largest economy in the world, next only to United States and with its economic strength changing the global economic and political landscape. China opened up its economy during 1980s under the leadership of Xiaoping and has made remarkable progress. It has pulled vast section of population out of poverty, built modern infrastructure of rail and road network all over the country and achieved prowess in wide variety of industrial and manufactured products including high tech areas such as computer hardware and artificial intelligence. Much of China’s progress was facilitated by USA whose multinationals looking for vast market set up production facility and transferred technology. But China soon ‘outsmarted’ USA and also Western industrialised countries and became a manufacturing hub of the world, exporting them and generating huge foreign exchange reserves.

A China expert Elizabeth Economy [17] says, ‘With its growing economic and political power, China increasingly takes advantage of the political and economic openness of other countries while not providing these countries with the same opportunities to engage within China. Even as its SOEs ( State Owned Enterprises ) take majority control in mines, ports, oil fields and electric grid across the world, it prohibits other countries multinationals from doing the same in China.’ China adopts highly aggressive method to protect supply chain of industries of special interest to her. She blocked the merger of Anglo-Australian firm BHP Billiton with Rio Tinto, which it feared would lead to control of one-third of world’s iron-ore and drive up the prices and manoeuvred the Chinese state -owned firm Chinalco to take a substantial stake in Rio Tinto. While the deal was done at a loss, in the long run it paid-off, as the iron ore prices of which China is a huge consumer could be controlled. A key US Senate Sub-committee on Foreign Relations [18] found China’s predatory economic practices when it grants access to its markets, such as forced technology transfer, forced local production, theft of intellectual property, and manipulation of technology standards. Once Chinese enterprises get hold of often illegally acquired technology, those entities receive grand subsidies, protections, and benefits from the Chinese government. The next step is export subsidies and benefits to overtake global markets and industries. The committee found that the brunt of Chinese malpractice has been felt most by American workers as it has driven down labour value, pushed jobs overseas, and deprived the American people of their economic security. USA, under Trump’s Presidentship, has now realised, belatedly though, the damage trade with China is causing to its economy and wants to rectify it by restricting imports, imposing punitive tariff and other measures.

With its huge industrial and financial strength, China is today investing in infrastructure and development projects all over the world, particularly in Africa and South Asia , which not only guarantees orders for its industries which has huge surplus capacity, but also buys economic and political clout. China has significant economic presence in India’s neighbouring countries, trying to bring them under its sphere of influence. Chinese investment in Pakistan, known as China Pakistan Economic Corridor has great deal of strategic and security dimension. As part of CPEC, investment has been made not only in transportation, electric projects, and economic zone but also in Gwadar port which gives assess to Arabian sea to transport Chinese goods. Pakistan is finding it difficult to service the onerous debt burden and now falls heavily in China’s orbit of influence. China has invested heavily in a number of infrastructure projects in Sri Lanka, which unable to service its debt has handed over Hambantota port to China on a 99 year lease in December 2017. In India’s eastern neighbourhood Myanmar, Malaysia and Bangladesh, China has invested in large number of projects, though in Myanmar and Malaysia some projects in pipe line are being rolled back, as they realised huge financial burden they will impose. Nepal has signed a deal ( 2017) with China for rail connectivity from Lhasa to Kathmandu, though the cost of the project is well beyond its capability. China has launched a highly ambitious Belt and Road Initiative (BRI) in 2017, which is a mega construction project comprising roads, ports and bridges, and as a grand connectivity plan integrating physical territory, cyberspace and financial arena covering several countries with China at its heart. BRI two main components are : the land component, China’s Silk Road Economic Belt (SREB) and the Maritime Silk Road (MSR) that proposes to link China’s coast with South East Asia, the Indian Ocean, the Arabian Sea, Africa extending to Europe. India has very wisely decided not to join the BRI. Experts point out that the idea behind BRI is for China to emerge as a world power and challenge USA and the post second-world-war Western liberal order, which has great appeal to all the democratic countries of the world.

It is obvious that massive investment in South Asian countries and the BRI is a Chinese attempt to seek hegemony over the Indian Ocean Region and represents much more than China’s ambition to emerge as an economic leader. The extension of Railways from Lhasa to Nepal border and eventually to Kathmandu, the increasing presence of Chinese military in the South China Sea, the Indian Ocean, ports of Gwadar and the military applicability of the roads and railway network in Himalaya and Tibet will obviously threaten India’s security. The road construction, port building and other investment initiatives in countries in India’s neighbourhood are obviously meant for India’s strategic encirclement with significant diplomatic and military repercussions.

Abhijit Bhattacharyya a China expert in his book China In India , graphically portrays its nefarious design to entrap India and thwart her economic rise and observes,

Successive ruling class of India appear to be failing to take note of our country gradually falling into China’s long-term game of entrapment, slow and steady usurpation of territory, decline of industry and manufacturing, loss of revenue, harming macro economics with rise of unemployment and permanent damage being implemented to its sovereignty and ultimately erosion of its unity and integrity in near future!

 [19]

Pradip Baijal a distinguished civil servant in his recent book Containing The China Onslaught, [20] says that China’s imperialist ambition to dominate the world should be recognised and India, Japan and USA should collaborate to checkmate her. China deceptively positions herself as ‘champion of globalisation’ but does not adopt Bretton Wood reform model of market-led growth, ‘ but cleverly subverted it using the attraction of their cheap source of disciplined labour to become mass producer of goods for American companies focused on global profits.’ Baijal presents a scenario in which, USA decouples herself economically from China and encourages India to become a manufacturing hub.

       Chinese Perfidy 

Sino-Indian relations have been marked by Chinese perfidy from the time we attained political independence and Chinese attained liberation in 1949. Barely had the Chinese achieved political freedom they attacked and annexed Tibet and subsequently forced Dalai Lama to flee the country and take refuge in India. China backstabbed India in 1962, when it attacked, defeated and humiliated her, despite signing the treaty of Peaceful-co-existence- Panchsheel and India’s Prime Minister Pt Jawaharlal Nehru supporting China, an international pariah at that time, in every world forum. China has illegally occupied thousands of kilometres of Indian territory in Aksai Chin. China has secretly supplied nuclear technology to Pakistan and has become its close military ally so that she could challenge India and has become permanent headache for her. China lays claim to the Indian territory of Arunachal and whenever an Indian dignitary visits the State, it issues a statement of objection, challenging India’s sovereignty. China made surreptitious efforts to gain strategic control in Chumbi Valley and tried to build a road at Doklam in 2017 , which could threaten Siliguri corridor, but Indian military called off the bluff. The latest Chinese perfidy is encroaching on Indian territory in Galwan Valley and Eastern Ladakh in June 2020, which lead to clashes between the army of two countries and the tragic death of large number of Indian soldiers. Today an uneasy peace exists along the LAC at the border of two countries.

 Since independence, China’s track record towards India, is of hostility and enmity and acting against her interest in every possible way . Apparently China does not want India, a beacon of democracy, to develop, as it feels threatened that if India becomes prosperous, her entire totalitarian structure would loose appeal to her people and collapse. 

The Bankruptcy of India’s Economic Policy Makers

In view of the above background, it is difficult to understand why India has developed such deep commercial and trade engagement with China, which is totally one-sided and disadvantageous to her. The possible explanation is gullibility and ignorance of Indian economic policy makers of the hard ground reality . For last two decades, both under previous UPA and present NDA regime, our top policy advisers who work in Planning Commission/ Niti Ayog, Ministry of Finance and Commerce and other policy making bodies and Think Tanks are adherents of neo- liberal model of economic development and advocate an open and free trading system with minimum barriers. Many of these advisers are drawn from World bank and IMF or West’s academic institutions and are under intellectual influence of their ideology, live in ivory towers away from the reality of practical world of business and industry. The problem is compounded when a generalist bureaucracy dominated by IAS, with no specialisation or domain knowledge, runs the key economic policy making ministries of government of India. Abhijit Bhattacharyya [21], a top Customs Officer points out that senior officers of Indian Revenue Service, who have intimate knowledge of import and export systems and procedure are kept out of policy making. Every ministry in government work in silos, often at cross-purpose to each other, unable to take decision in broader national interest. This results in a situation where our policy makers are unable to protect and promote national interest and the country looses out in international commercial dealings and incurs huge trade deficit year after year.

Current Jingoism against Chinese Goods

The recent Chinese aggression in Eastern Ladakh ( June 2020) and clashes with Indian troops resulting in tragic loss of life of Indian soldiers has shocked and angered the whole nation. There is a country wide movement to boycott Chinese goods and minimise commercial engagement with her. Government has decided to bar Chinese firms from participation in its major projects in sectors such as road construction, railways , telecom etc as well as investment in MSMEs ( micro, small and medium enterprises). The use of Chinese Apps has also been barred as they pose security threat.

While there is need to severely restrict China’s huge economic presence in India, it cannot be done through emotional outburst or anti-China rhetoric. To prevent China’s deep penetration in our economy we need to build a sound and dynamic technological and industrial foundation based on our domestic resource endowment. This can be secured through well thought out policy frame-work, which should take into account two hundred years of global history of industrialisation and the current international economic, political and strategic reality.

A Self- reliant India

I worked in the Ministry of Foreign Trade ( now Commerce) in the earlier part of my career and got first hand experience of play of international economic forces and discovered how every nation promotes its vital economic interest by using all kinds of subterfuges- fair and unfair. I realised that the doctrine of free-trade and open trading system, as taught in university text books, is simply a myth and has no relation to real world of trade and business. In order to explore this area further, I enrolled myself a research scholar in international economics at the University of Allahabad, for which I was awarded post-doctoral degree ( D.Litt). The study was later published as two books , Foreign Money in India (Macmillan 1989) and Industrial Exports and Developing Countries ( Ajanta, 1985). One of the significant findings of the study was the damage cheap import of food grains had done to the country, which prevented the country in becoming self-sufficient in one of the most basic necessities of life. Right from the time of Independence, for next 20 years, India was dependent on import of food grains and was going round the world with a begging bowl, facing national humiliation. From mid-1950s onwards for the next ten years huge quantity of cheap wheat under US PL 480 Aid programme was flooding the country. While export of surplus food grains gave a boost to American economy, it had disastrous consequences for India, it glutted the market, causing severe price repression and farmers of wheat loosing interest in its cultivation. Things came to a head at the time of Indo-Pakistan war of 1965 when President Johnson stopped US supplies as a diplomatic offensive. This placed the country in precarious position, of what was known as ‘ship to mouth existence’. The government under Prime Minister Lal Bahadur Shastri quickly responded by giving a call for national self-sufficiency and motivating the famer with the slogan ‘Jai Jawan Jai Kisan’. Several key policy measures such as minimum support price for wheat and rice were initiated and this coupled with development of high yielding variety of wheat and subsequently rice ushered in green revolution and within a few years India became self-sufficient in food grains. Today India’s granaries are full and she is not only able to feed her vast population but has become one of the largest exporter of rice in the world.

Can we convert the recent Chinese aggression into a 1965 moment and initiate policies which will make us industrially and technologically self-reliant. 

Prime Minister Modi has given a call for atma nirbhar Bharat. This can be achieved only if we put in place a supportive policy frame-work. He had earlier given a call for ‘make in India’. Unfortunately, the country could not become manufacturing hub as all the efforts of domestic business and industry were thwarted by flood of imports from abroad, particularly China.

Safeguarding India’s Economic Sovereignty 

Looking at the overall economic and political development between India and China, one cannot help concluding that China is deliberately stifling India’s industrial and economic development as it views her as its rival and adversary. The flood of cheap Chinese products in the market is a well thought out ploy to destroy Indian industrial capability and is akin to injection of fake currency notes to wreck the economy of a rival country during war time. India should therefore take strong countervailing measures to protect her economy. The best course is to drastically reduce, if not stop import of Chinese products. This can be done through a well thought out strategic policy framework. A great deal of ingenuity, intelligence and enterprise would be needed for this. India should make use of all tariff and non-tariff measures available, to bar influx of Chinese goods. All Chinese products should be put through compulsory quality control under the aegis of BIS, and rigorous standards and specifications should be prescribed. Lot of stuff coming from China is spurious, dangerous for health and environment unfriendly such as toys, cord for kite, plastic goods and numerous industrial products. They should be completely banned. Government is a major purchaser of plant, equipment and other material and need to ban Chinese origin products in all its procurement programme, on the ground that she is indulging in unfair and illegal trade practices. (post Ladakh incursion, certain departments like Telecom, Power and Railways have taken initiative in this regard). Even otherwise, in all its major procurement programmes where foreign firms are eligible to bid, government should have a policy of price preference to domestic firms, with a view to encourage domestic manufacturing (the World Bank financed tenders permit such provision). China has set up numerous industrial units in ASEAN, Bangladesh and some other countries which gives them a platform to export electronics, textile and other products to India at low duty or duty-free. India should insist that, unless substantial value addition is added by these countries concessional or zero duty benefit will not be granted. India should also re-negotiate and walk out of free trade agreements which she has entered with Japan, South Korea and ASEAN, as they are adverse to our interest. 

 Today India’s annual exports to China are around $ 15 billion while imports are between around $ 65 to 70 billion. Thus if India stops buying $ 50 billion worth of Chinese goods , it will seriously hurt its economy, already reeling under American pressure and put in a damper in its ambition of global economic domination. Imagine the boost to the economy if Rs 3,50, 000 cr ($ 50 billion) worth of orders for industrial products are placed on domestic producers. 

The current Corona Virus pandemics, which originated from China and has caused tragic loss of thousands of life all over the world and brought industry and trade to a grinding halt and loss of millions of livelihood, has shown the dark side of excessive engagement and interdependence between nations. We need to abandon the current model of development, whose foundation rests on twin pillar of globalisation and consumerism with greed, selfishness and survival of the fittest as the main motive force. India should strive to become economically self-reliant and rely on domestic resource endowment for its development. Swami Vivekananda had said ‘ Nations like individuals must help themselves’. Mahatma Gandhi had given his clarion call for swadeshi  which freed us from foreign tutelage. This does not mean autarky or closed door economic model, but international economic relations on the basis of reciprocity and mutual benefit. Self-reliance implies economic sovereignty and freedom to take decisions which safeguard nations vital economic interests. Our policy makers should understand that the current engagement allows Chinese business to thrive at the cost of Indian industry and economy and take steps to safeguard country’s vital interests.

Author: B P Mathur is former Director National Institute of Financial Management and served as Deputy Comptroller & Auditor General; Additional Secretary, Ministry of Steel & Mines and Deputy Secretary, Ministry of Foreign Trade (now Commerce), Government of India. He holds Ph.D and D.Litt in Economics from University of Allahabad and has authored books on governance, public finance and economy related. Email: drbpmathur at gmail.com