Hostile Relationship Between Two Countries Has Little To Do With Trade In Globalised Era, China Proves

We always see a rise in our swadeshi sentiments during festive seasons like Raskhabandhan, Diwali etc. and it has become sort of an annual affair. This time around too social media is flooded with messages related to a boycott of China-made goods. Various social organisations are taking out marches to organise protest against Chinese goods and create awareness among people. The Dokalam issue, where both Indian Army and People’s Liberation Army (PLA) of China are facing each other is fueling nationalism and people on both sides want to evoke patriotic sentiments.

Various leaders are giving a call for using India-made goods only (i.e. Swadeshi goods) and there is nothing wrong in the idea. Swadeshi is the synonyms of self-sufficiency and we can achieve economic independence only when we are self-reliant. If we want to achieve sustainable economic growth then it can be achieved only when we make ourselves self-sustainable and the way to self-sustainability goes through swadeshi. None of the major powers in the world have achieved economic progress without increasing manufacturing capabilities. If swadeshi has to succeed then we must promote manufacturing India. Make in India is a good initiative but it will take considerable time to yield tangible results and till that time our decisions should not be driven only by emotion.

Concern over a broadening trade imbalance with China is not new and we have been seeing these kinds of protests earlier too. However, despite all these efforts we are yet to see any positive result and trade deficit is increasing continuously (except for a marginal decrease in FY 2016-17, refer table 1).

Table 1 - Indo-China trade imbalance

Source- Ministry of Commerce and Industry

From the above table it can be clearly concluded that our efforts to check the dragon is futile. We are concerned about “China-Pakistan Economic Corridor (CPEC)” but if we see the volume of deficit then it can argument can be made that we made enough resources available to China for funding this project. We have to understand the nature and volume of trade pattern with China which is our largest trading partner.

Table 2 - Items which constitute significant part of trade basket with China

Source- Ministry of Commerce and Industry

If we really wish to check the dragon then we need to improve the manufacturing capabilities. We must shift focus from raw materials to value added products. We export raw material to China which generates relatively low revenue for us while we import machinery and the like from China. The very nature of items traded between these two countries creates the imbalance. Evoking patriotism for boycotting China-made goods can only be a short term solution because consumables and durables form only insignificant part of imports from China. Imposing a blanket ban on Chinese goods is not possible due to WTO laws. And even for the sake of that argument if we say that we will stop trade rwith China then a question arises:  Where we will start sourcing our capex requirements from? Infrastructure equipment (e.g. used in power sector) imported from China is priced heavily by US or European countries and if we stop importing it from China then it is going to increase our power generation cost. Similarly, our telecom and IT industry is dependent on hardware equipment imported from China to feed their demand.

Hostility or an uneasy relationship between the countries has little to do with trade in this globalised era and volume of trade between US-China (~400 USD billion), Japan-China (~150 USD billion) is enough to demonstrate that we can’t isolate our neighboring nation by merely giving a call to boycott. The government is silent on this boycott move because officials understand the repercussion of any counter move by China. Any similar move by China will impact us also because we are dependent on Chinese items which are used in infrastructure sector. At a time when we expect our citizen to ignore the monetary/financial aspects and take the decision in the interest of the nation, awarding government contracts to Chinese firms can’t be taken in good light.

Secondly, we will have to explore new markets as our export destination. The Chinese “One Belt One Road (OBOR)” initiative is aimed to gain significant control in the export markets. We need to be aggressively explore the untapped markets and should reach them.

There is another aspect which hasn’t got due attention while discussing Indo-China trade. In September 2014 India and China signed a non-binding agreement with regard to achieving bilateral trade balance by 2019. Next month would mark third anniversary of this agreement but we have achieved very little to check the one-way trade with China. Smt. Nirmala Sitaraman (Minister of Commerce & Industry) in a written answer in Lok Sabha said that India will endeavour to increase bilateral trade in services particularly Information Technology (IT) & Information Technology Enabled Services (ITES). In nutshell it can be said that we are aware of the problem and we know the solution but we are unable to unlock it for variety of reasons. We have a huge workforce in the IT sector and in the wake of a protectionism wave in the US and western countries, we should explore the Chinese market. Despite “Make in India” , we can’t increase our manufacturing capabilities in a short span and therefore we should focus on service exports as an interim measure.

Shashank Saurav is a Chartered Accountant and Anti Money-Laundering Specialist