by Beohar Adwait Sinha
The recent border standoff between Indian and Chinese armed forces has triggered aggression amongst Indian citizens. People have started to boycott Chinese goods with the intention of hurting its economy. The government has levied certain bans and restrictions on import of goods from China. The common man is driven by sentiments but economists have the technical knowhow to weigh the inherent consequences vis-a-vis our economy and its revival potential post politico-economic deadlock. This article aims at analysing the aftermath of such policies on the Indian economy.
In order to understand the impact on our economy, analyses of bilateral trade between both nations will have to be carried out. China has been one of the leading trade partners of India. In fact, India’s dependence on Chinese goods has increased over time. As of F.Y. 2019-20, Indian exports to China accounted for 9% and imports for 18%. The pattern of trade between India and China is such, that India exports raw materials to China’s manufacturing sector and imports final goods from the latter.
One sector which uses these final goods as essential components in the production process is the automobile sector. Production of such components within India would require hefty investment, subsidies and tax incentives – which are not immediately feasible due to the obvious shift in priorities towards pandemic management. Additionally, the automobile sector has been beaten down heavily due to the NBFC crisis. As such, the continuing trade issues with China, if tightened, might have enough real potential to paralyze the entire industry.
Another aspect of the Chinese economy which plays a crucial role in the development and growth of the Indian economy is investment. Chinese money to the tune of $6.2 billion funds Indian start-ups, tech companies, smartphones and apps. Investment giants from China like Alibaba group, Tencent, etc dominate investments in over 18 of the 30 unicorn companies in India: Swiggy ($500 million), Paytm ($400 million), Policy Bazaar ($150 million) and others.
The recent ban on Chinese apps may pave the way to a possible short-term unease in the Indian economy. The Indian Government had already taken the decision of restricting certain FDI under the automatic route, from countries sharing land borders with India. This was akin to a blanket ban which depressed Chinese FDI. Chinese apps were the only source of FDI left in the economy. And now, they have been removed too.
FDI in India has often proved to be a game changer in many core sectors like automobiles, pharmaceuticals, aviation, etc. It has helped provide employment, transmit technology and add value to the economy. In view of very poor domestic investment, FDI is crucial for the Indian economy to revive and bounce back in the post-Covid19 world. The pandemic has presented a unique situation inasmuch as supply chains have shattered and market demand has fallen. Under the ongoing global economic uncertainties, there are serious doubts whether the Indian economy will be able to attract significant FDI from other countries. Furthermore, ban on Chinese FDI has enough potential to hamper growth in the near future. All factors combined; short-term economic slowdown seems almost inevitable.
Despite all odds, we can be hopeful and optimistic. The condition can be improved and further damages can be mitigated. By re-negotiating trade deals with her northeast neighbor, India can ensure a reliable supply of essential components for various sectors. Adding to the same, trade must be based on comparative advantage. As per a report by MVIRDC World Trade Centre Mumbai, India can explore an annual $82 billion export potential in 20 products through exports to China which also happens to be the world’s second largest economy. Moreover, we stand with a comparative advantage in these products. This will help not only in reducing India’s trade deficit with China, but will also enhance India’s market share of these products there.