The death of 20 Indian soldiers at the hands of Chinese troops in the Galwan Valley in Ladakh on the night of June 15-16 dealt a body blow to a carefully-crafted bilateral relationship that moved on in other areas such as trade and business while managing boundary differences.

Union telecom and IT minister Ravi Shankar Prasad, on 2 July, said New Delhi’s decision to ban 59 China-linked apps days after violent brawl between Indian and Chinese soldiers in Ladakh’s Galwan Valley was a “digital strike”. He said, “We banned Chinese apps to protect data of countrymen; it was a digital strike.”

Backdoors Suspected

Indian intelligence agencies had been pushing for restrictions on the mobile applications on grounds that the apps were designed to extract data and park them outside the country where they could be used to intrude into the privacy of citizens.

Chinese companies have long been suspected of building backdoors in their hardware and software, one reason why many governments across the world have been uneasy at the prospect of deploying Chinese-made 5G networking equipment.

A statement from the information technology ministry said the decision was taken as these applications were “engaged in activities prejudicial to sovereignty and integrity of India, defence of India, security of state and public order”.

Prasad said the ban on Chinese mobile apps is a great opportunity to help Indians come up with good apps of their own and end foreign dependence for such things.

Srikanth Kondapalli, who has published in the world’s leading news outlets, including Xinhua and China Daily, points out that no Indian company has been allowed to be listed at the Shanghai Stock Exchange, despite best efforts of firms like TCS.

Tik Tok and some other Chinese apps, which had about 100-150 million downloads or so, store a lot of advertisements and back channel communications. They would be a great source of information as far as the Chinese are concerned and so India’s security concerns, after what happened at Ladakh, should be considered legitimate, he said.

Beijing’s Reaction

Beijing said, on 2 July, it was “strongly concerned” about New Delhi’s decision to ban Chinese mobile applications. It stressed on cooperation between the two countries and underlined that the ban would go against “India’s interests”.

Chinese mouthpiece Global Times tweeted quoting China’s commerce ministry spokesperson Gao Feng saying, “To date, China has not adopted any restrictive or discriminatory measures targeting India’s products and services.”

On the contrary, China has refused to comply with WTO regulations on free trade that includes banking, telecom and intellectual property rights, among others. The only place where they have agreed to accommodate Indian interests are in agriculture.

New Delhi has a long list of Chinese discrimination against trade and investments with certain countries, including India. India has shown caution so far even as it has a long list of Beijing indulging in restrictive trade and investment practices such as the imposition of internet censorship through ‘Great Firewall’, restrictions on long-term visa and non-tariff barriers on investments.

According to the economic ministry China was indulging in illegal and unfair trade practices as such routing its goods through a third country with which India has preferential trade arrangements to avoid paying higher duty, and dumping of cheaper Chinese products in India to harm Indian industries. Data suggests significant indirect inflow of Chinese goods and investments through locations with which India has free trade agreements (FTAs), preferential trade agreements (PTAs) or other bilateral commercial arrangements.

China has repeatedly blocked Indian investment abroad. Take energy. ONGC has been kept out at multiple places: at Kazakhstan, Venezuela, Sudan, Nigeria, Angola and Iran, even though with the latter, it was also the question of American sanctions.

China’s also imposed restrictions on access to Indian newspapers and media websites. India threw out three journalists of the Chinese official news agency, Xinhua, for un-journalistic activities by refusing to renew their visas to work in the country.

Bilateral Trade

China accounts for 5% of India’s exports and 14% of India’s imports — in US$ value terms — 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.

On the bilateral trade front, while India-China trade has grown exponentially (from $3 billion in 2000 to $95.54 billion in 2018), it has, from India’s perspective, resulted in the biggest single trade deficit that New Delhi runs with any country.

In 2018, the trade deficit was pegged at $57.86 billion. India was the seventh largest export destination for Chinese products in that year, and the 27th largest exporter to China.

The government has already moved in the direction with a plan to revive state-owned drug companies to domestically produce APIs.

The latest official data shows foreign direct investment from China between April 2000 and March 2020 was $2.378.71 billion, which is 0.51% of the total FDI inflow into the country in the two decades.

According to the Federation of Indian Export Organisations (FIEO), while India’s trade deficit with China narrowed by $6.05 billion to $51.25 billion in 2019, the gap with Hong Kong widened sharply by $5.8 billion in 2019, nullifying almost all the gains.

Chinese Stakes in Indian Tech

While India’s DPIIT pegs FDI inflows from China to India at a paltry $2.38 billion, or just 0.51 per cent of total FDI inflows into India between April 2000 and March 2020, a Brookings report in March estimates that Chinese investments in India as having risen sharply since 2014 until when net investment was just $1.5 billion. The Brookings report uses Chinese Ministry of Commerce numbers to record that net investments have risen from $1.5 billion to $8 billion over the three years since 2014.

In purely FDI terms, China figures way down at 18th place on India’s FDI charts below Hong Kong, the UAE and Cyprus. But over the last five years, Alibaba, Tencent, Barings Asia and few other Chinese investors, have emerged as one of the biggest funding blocs for start-ups in India, joining well-established investors like Japan’s SoftBank and the US-based Sequoia.

Shunwei Capital and Morningside Ventures are among other active funds, having invested in start-ups that include Bangalore-based Rapido and ShareChat respectively.

Over 2015-19, Chinese investors including Alibaba, Tencent, TR Capital and Hillhouse Capital, have invested over $5.5 billion in Indian start-ups, according to Venture Intelligence that tracks private equity, venture capital, M&A transactions and valuations, in India.

In fact, Venture Intelligence data shows that at least 16 of the 29 unicorns (start-ups valued at more than $1billion now) have at least one Chinese investor.

China has entered the Indian market through venture investments in start-ups and penetrated the online ecosystem with its popular smartphones and their apps. Chinese tech investors have put an estimated $4 billion into Indian start-ups and such is their success that over the five years ending March 2020, 18 of India’s 30 unicorns are now Chinese-funded.

Chinese smartphones like Oppo and Xiaomi lead the Indian market with an over 70 per cent share, way ahead of Samsung and Apple in the branded cellphone market.

Also, while the number of cellphone and accessories manufacturing units has gone up from just two in 2014 to over 260 in 2019, turning India into a major manufacturer and assembler of cellphone, this industry has only now started to diversify into component manufacturing.

Power Equipment

Power Minister RK Singh said, on 3 July,  that India would not import power equipment from China, amid the border standoff with China. He also asserted that the equipment import from China and Pakistan would not be permitted especially on the basis of inspection. He further said State discoms should not give orders for supply of equipment to Chinese firms.

Singh further said, “We will not give permission for import from Prior Reference countries. We are affected. There could be malware or Trojan Horse in those (imports from China) which they can activate remotely (to cripple our power systems).”

India imported Rs 71,000 crore worth power equipment including Rs 21,000 crore from China.

Digital Market

Some may express concern that the ban and restrictions on dealing with China may hurt India. These concerns evaporated when Google came calling to India to invest $10-billion in info-tech plan. India reminded China that the South Asian nation was already the largest digital space market.

Through the Google for India Digitization Fund, Google will invest Rs 75,000 crore, or approximately $10 billion, into India over the next five to seven years. It will be a mix of equity investments, partnerships, and operational, infrastructure and ecosystem investments.

Reliance on China

India remains reliant on Chinese products in several critical and strategically sensitive sectors, from semiconductors and active pharmaceutical ingredients to the telecom sector, where Chinese vendors are involved not only in India’s 4G network but in on-going 5G trials as well.

In a video message posted on the embassy’s YouTube channel, Chinese ambassador Sun Weidong said: “Some people have been trumpeting the so-called ‘decoupling’ of China-India economic and trade relations with an attempt to completely exclude ‘Made in China’. One basic fact they ignore is that the current global industrial and supply chains are formed in a process of natural selection by market optimisation over the past decades.

“The business community and people of India are beneficiaries of China-India economic and trade cooperation. Any self-protection, non-tariff barriers and restrictive measures against China are unfair to Chinese enterprises, unfair to Indian employees who lost their jobs as a result, and unfair to Indian consumers who cannot get access to the products and services they deserve. It will only harm others without benefit to oneself, and it will eventually hurt oneself as well.”

Many Indian exports, even that of textiles and pharmaceuticals, depend on Chinese intermediate products and capital goods.

We should raise duties and even restrict imports from China in sectors where India has manufacturing capabilities.

Other sectors like tyres that have been hollowed out by Chinese imports have to be protected now even if that means that the Indian consumer must pay a higher price. We have to build our manufacturing capabilities. This will be expensive but will add to the Indian economy.

Forced “Atamnirbharta”

A thorough mapping  of Chinese involvement in all our trade on a real-time basis is required. The Centre has already asked industry to prepare a detailed list of all purchases from China and flag those critical to operations so that the government can identify non-essential imports that can be substituted with local products.

Atamnirbharta is also important since China may decided to abruptly ban all trade and forbid all private investment via any route into India? Of course, India would survive, but Indian businesses will need to be shielded.

At any other time reneging on existing contracts would have hurt sentiments and consequently be detrimental to the country’s credibility and economic interests. But under the present conditions, with sentiments building against China’s aggressive behaviour  and the call for de-coupling China gaining traction, India will not lose policy credibility.

Comments

The ban on Chinese apps was a message to China amid the tensions along the border. It showed that the government was taking China on. The tensions on the border, as well as the COVID-19 pandemic, have ignited a much-needed debate on India’s economic dependencies on China.

The government must put in place policies and create the infrastructure that raises competitiveness. If the poorest consumers who are the most price-sensitive, are not to be hit hard, incentives will have to be given to domestic manufacturing. That includes incentives to manufacturers who import intermediate goods and raw materials, which, in turn, are used to create final goods. The ability to produce finished goods has to improve. Caliberating import duties on Chinese goods should result in negligible duties on primary and intermediate goods from China but prohibitive tariffs on final goods.

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Retail and Strategic Value of the Indian Market

TikTok’s 300 million subscribers have overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the US penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72 percent share, leaving Samsung and Apple behind.

One of the major Chinese apps TikTok is set to lose huge revenues worth Rs 45,000 cr as a result of the ban and its parent company ByteDance is even contemplating relocating its headquarters outside China.

There are no major Indian venture investors for start-ups. China has taken early advantage of this gap. Alibaba’s 2015 investment in 40% of Paytm, a digital payments platform, paid off barely a year later when in November 2016, India demonetised its large currency notes and simultaneously promoted a move to a cashless economy.

China provides the patient capital needed to support the Indian start-ups, which like any other, are loss-making. The trade-off for market share is worthwhile.

For China, the huge Indian market has both retail and strategic value. Therefore, companies like Alibaba and Tencent have different considerations and horizons for their investments.

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The “interesting times” continued for a couple of decades after his passing and they included two world wars, hundreds of millions of casualties and a completely new social system, whose inefficiency to a large degree contributed to the casualties. Following that was a very quiet period, which, however, marked the time of the greatest gains and advances in science and technology that humankind has known. The doctrine of the open economies advanced extensively the existing fragile commercial relationships and that was one of the major factors, which allowed for growth in many economies across the globe.

Fast forward to recent times and we see a very different picture. Local conflicts are waged by traditional warfare, while competition among superpowers is far more strategic and involves economic measures to influence the trade of each market agent, which would then affect its economy and the likelihood to alter its diplomatic and military policy. The economic wars are nothing new and they involve any kind of government interference in the market, which would change the equilibrium price and consumed quantity.

Most often, it is achieved via tariffs or quotas, but sometimes they could be disguised as regulation, such as health standards, where the targeted side would have to incur time and effort, effectively increasing the average cost, to reach compliance. Of all, tariffs are the most straightforward and easy to implement as they require just a decision to impose tax on the imports from a specified destination. They effectively either increase the price for the local consumers or the cost of the importers if they can shift costs back down the supply chain.

Quotas are harder to implement, because they allow imports up to a specified amount. Easier said than done, this requires careful analysis to establish the amounts and later monitor and enforce it. Government bureaucracy in any country throughout history has proved that it is far less effective than markets in determining the consumed amounts and appropriate prices and the most obvious examples are all the communist countries in history.

Even though these instruments are part of protectionist policies, where the aim is to support the local economy, their use usually yields negative results. These markets get higher prices, less consumption and in the case of quotas – far stronger local monopolistic structures. One thing is certain though – when the imports structure is changed, opportunities are created for additional outside market agents.

According to data from the World Bank, the total imports of the US for 2018 were $2.41T (trillion) and China’s share of them was $499B (billion) or 20.7%. India’s share of that was nearly $52B or 2.16%. It is obvious that countries with the same population and comparatively equally open to the largest import market in the world share two very different fates. Strikingly, even though China is ideologically far more distant to the US, compared to India, it is enjoying 10 times greater market for its surplus than India. The benefits of this surplus could then be used to increase their military and diplomatic influence in the long term.

The composition of the US imports from both trading partners shows very interesting patterns and we can estimate relative dependence on each side, which is a crucial factor in trade and diplomatic influence. The USA’s share of exports for both countries is relatively similar – 16% for India and 19.3% for China. Out of India’s, three categories make up for a third of the total amount and 37 categories for 2/3rd. China, on the other hand, has seven categories that make up a third of its exports to the US and 50 for 2/3rd of them. This shows that China has noticeably better diversification in sectors and is less dependent. Out of US imports, China’s share is 20.7%, while India’s is just 2.16%.

The area of striking difference and source of greatest influence, however, is elsewhere. When we analyse the 15 largest categories of trade for both countries, we see that they have practically no overlap (competing only in vehicle parts, where China’s share is again 10x India’s, but their overall share is minimal). However, the imports from China are within the top categories for the US and their share is on average over 54%, while India’s dispersion is towards the middle and they make up on average less than 14% of each category.

This is easily illustrated in Figure 1. Column X (first column) shows the number of the category in terms of size from all US imports. For example Valves is the 22nd largest import category for the US, where India’s share of that is 2.73%. India’s rows are in blue, while China’s are in gray. The last column shows concentration based on 25% benchmark, i.e., a share of above 25% is considered high and important for the importer.

If we take a more qualitative look in the categories, we can see that those that China has concentrated in, have far greater importance for the US economy, thus, creating more systemic risk opportunities. Even though India’s largest export to the US is diamonds and it makes for 43.62% of the total imports in that category, it has zero importance towards future scientific advancement, information flow, R&D, allows for data collection or anything that pushes the boundaries of knowledge. This cannot be said for broadcasting equipment (networks), computers, office machine parts for a service based economy, video displays, electrical transformers and other electrical machinery.

The trade war so far has had detrimental effects on the US-China trade, but other countries benefitted from the vacuum created. India’s benefits so far were in the range of $1.2B and it might sound significant, but when we bring the other players in the picture, we see that there are, perhaps, many missed opportunities. Markets look for inefficiencies and alternatives are sought almost immediately. As a result Vietnam’s surplus was $2.8B, Taiwan’s $4.5B practically almost everything due to the disrupted supply chains in computers and network equipment, European Union $7B, Mexico $6.8B, Korea $4B, Japan $2.3B and Canada $2.5B.

The overview shows that China has positioned itself significantly better from a strategic point of view and can exert greater influence. The US has no choice at this point but to cater for it’s largest trading partner. After years of leniency and looking to the side from the Clinton, GW Bush and Obama administrations, this risk has finally been acknowledged by the Trump administration and the US took steps for future diversification and decrease of its dependency on China. The trade wars and the aftermath of the Huawei ban directly address many of the issues.

Significant change, however, requires long term effort. The good news for India is that it can start taking steps to become a preferred trading partner in the future in some of the affected categories. The US is taking not only economic steps to change the status quo. On 25 June 2020, while speaking at the Virtual Brussels Forum, Mike Pompeo, the US secretary of state, said that US troops are being moved to face Chinese threats to India and South-East Asia countries like Vietnam, Indonesia, Malaysia, Philippines and the South China Sea. He further stated that the US military was “postured appropriately” to meet these “challenges of our time.” Bear in mind that Germany has the largest US base in Europe and is fundamental for its influence in the region.

Additional indication about the direction of the future US policy is his former statement of the formation of a US-European dialogue on China so that the Atlantic alliance (NATO) could have a “common understanding of the threat posed by China”.

It is clear that the US is shifting its policy and it is up to India to utilise the upcoming opportunities. It is in the US’s best interest to support everybody besides China in the South China Sea conflict. It is important for the supply chains feeding the US economy and they will be looking for allies on the economic and diplomatic fronts. India can adjust its foreign and economic policy for that. The diverted amounts from the China trade could increase significantly India’s macroeconomic policy, thus, affecting its entire economy. However, it has to concentrate in sectors requiring larger amounts of R&D and technological advances, because those sectors, in the long run, have significantly higher added value.

Ideologically and even culturally, India is closer to the US. It does not have such an expansionary doctrine and its economy, far more open to market principles, rather than lead by central planning by populist nationalists, and based on population twice that of the US and EU combined, can become far more appealing to the White House administrations in the future.

We live in interesting times and the economic, diplomatic and military relationships between the key powers of the world are changing. Whether the words by Joseph Chamberlain turn out to be a curse or a blessing is yet to be seen and it is up to the policymakers to use the created opportunities.

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