There’s been a lot of outrage and demand for India to boycott and ban Chinese products, and while this may assuage hurt sentiments, it would be hugely detrimental for India economically.
China accounts for 5% of India’s exports and 14% of India’s imports. India’s imports from China (that is, China’s exports) are just 3% of China’s total exports. More importantly, China’s imports from India are less than 1% of its total imports.
The point is, that if India and China stop trading then China would lose only 3% of its exports and less than 1% of its imports, while India will lose 5% of its exports and 14% of its imports, and this would impact India more than China.
Chinese imports don’t just comprise final finished goods, several businesses in India import intermediate goods and raw materials, which, in turn, are used to create final goods, both for the domestic Indian market as well as the global market. Contrary to popular belief, an overwhelming proportion of Chinese imports are in the form of intermediate goods such as electrical machinery, nuclear reactors, fertilisers, optical and photographic measuring equipment organic chemicals etc. Such imports are used to produce final goods which are then either sold in India or exported.
A blanket ban on Chinese imports will hurt all these businesses at a time when they are already struggling to survive, apart from hitting India’s ability to produce finished goods. Because in the short to medium term, it would be both difficult and costly to replace Chinese products. Imagine diverting all our imports from China to Japan and Germany. We will only increase our total trade deficit.
If on the other hand, we decide to use Indian products, that too would cost us much more than their Chinese counterparts — albeit just internally.
In a trade ban of this sorts, the poorest consumers would be the worst-hit because they are the most price-sensitive. For instance, if Chinese AC’s were replaced by either costlier Japanese ones or less efficient Indian ones, richer Indians may still survive this ban by buying the costlier option but a number of poor, who could have otherwise afforded an AC, would either have to forgo buying one because it is now too costly (say a Japanese or European firm) or suffer (as a consumer) by buying a less efficient Indian one.
There are Chinese products in India that are already paid for and by banning their sale or avoiding them, Indians will be hurting fellow Indian retailers. Again, this hit would be proportionately more on the poorest retailers because of their relative inability to cope with the unexpected losses.
Moreover, if one takes the notion of not letting China profit from the Indian purchasing power, then Indians should also avoid buying all products that use Chinese goods and labour. So, forget the several obvious Chinese brands and products, Indian consumers would have to go about figuring out if China gains any money from, say, the iPhones that are sold in India. Or if the steel used in a European machine is Chinese or not.
It has been suggested that India should renege on existing contracts with China, this would be hugely detrimental for a country such as India which has been trying to attract foreign investment. One of the first things an investor tracks, is the policy credibility and certainty. And if policies can be changed overnight and taxes can be slapped with retrospective effect, or if the government itself reneges on contracts, no investor will want to invest, and even if they do, they will a demand higher interest for the increased risk.
It has also been argued that India should just slap higher import duties on Chinese goods. Others have suggested that India can allow primary and intermediate goods from China at zero duty, but apply prohibitive tariffs on final goods, this would violate several rules of the World Trade Organisation, which is obviously something a trade dependent country like India wouldn’t want to do.
There’s also a huge possibility of China blocking all its private investments into India as a retaliatory move.
Of course, India would survive, but at a huge cost by depriving many Indian businesses (the startups with billion-dollar valuations) of Chinese funding.
The Indian economy is heavily dependent on Chinese investment. (Chinese investments are deep-rooted in the Indian economy with $6.2 billion of Chinese money in the Indian economy including FDI into India at around $4.14 billion and of March 2020, 18 of India’s 30 Unicorn companies are Chinese-funded)
We obviously cannot completely ban Chinese goods, firstly, because India is a member of WTO and doing so without a justifiable reason is illegal, and even if we find a loophole, getting rid of Chinese goods in the absence of a viable alternative and proper strategy will affect India more than China, it will also be very poorly timed since India is facing a recession, with the Indian economy being at its weakest point in 42 years.
It is therefore impossible, in the short run, for India to be a ‘China free’ economy but we can certainly hope that in the distant future, this becomes a reality, because there is no denying that India would be much better off sustaining ourselves without China, but in our current economic state, banning them completely is not an option. In simpler words, China is like a movie on a plane. You know it’s not great, but it’s something to watch.
We can, however, take steps to achieve balance of trade by trying to reduce our dependence on Chinese imports by improving our infrastructure, increasing manufacturing power, attracting foreign investors, getting foreign companies to set up their factories in India by offering them concessions and subsidies, investing in other countries.
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