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Can India economically decouple itself from China?

Boycotts of Chinese goods echo fight for economic independence from UK

Is India's move toward greater self-reliance a wise step or not? It seems to be conducting an economic experiment on a grand scale.   © Reuters

BANGKOK -- The upwelling of nationalism in India set off by a recent border clash with China has subsided somewhat, but Indians remain fearful of being too economically dependent on their powerful neighbor.

Nearly two months have passed since Indian and Chinese troops skirmished along their Himalayan border in mid-June. That incident killed 20 Indian soldiers and was the first deadly fighting between the two Asian giants in 45 years. After negotiations between top military commanders, the two sides' forces eased military tensions in July.

Economics is a different story. The Indian government is taking a flurry of tough measures against China that can only be described as sanctions.

India has banned the use of more than 100 Chinese apps, including the TikTok video-sharing platform and the WeChat messaging app. It has also barred gear from telecommunications equipment makers Huawei and ZTE. The government has tightened screening of foreign investment and bidding on public projects by "countries bordering on India."

Critics say India is shooting itself in the foot. According to The Economic Times, an Indian newspaper, the country relies on Chinese products, including those manufactured in India, for 90% of its solar panels, 70% of its smartphones and 60% of its raw materials for drugs.

An Indian Army convoy moves along a highway leading to Ladakh, at Gagangeer in Kashmir's Ganderbal district on June 18.   © Reuters

China accounted for more than 13% of India's imports in 2019, but only 3% of China's exports went to India that year. This means that if India rejects Chinese products, Indians are likely to suffer more.

So why is Prime Minister Narendra Modi's government so tough on China? In part Modi is responding to popular demand. In a survey of 32,000 Indians nationwide conducted in June by Business Standard, another local newspaper, 97% of respondents said they are boycotting Chinese products.

But nationalist feeling is fickle. The structural weaknesses of the Indian economy are more important.

Last November, India conveyed its decision to pull out of talks for the Regional Comprehensive Economic Partnership, a proposed Asian free trade zone that includes China. India's withdrawal from the group after around six years of negotiations was spurred by fears that RCEP, which calls for lowering tariffs among members, would trigger a flood of imports from China. India's trade deficit reached $161.8 billion last year, with China accounting for 30% of the total. Cutting it has been a headache for New Delhi.

In May, the government unveiled a $273 billion emergency economic package aimed at combating the effects of the novel coronavirus outbreak. Modi's team has been touting the virtues of economic self-sufficiency. As in other countries, the pandemic is fueling protectionism in India. The desire to reduce its economic reliance on China, in particular, reflects concerns that India's national security is threatened by its neighbor.

The confrontation between the U.S. and China and the growth of the digital economy are cases in point. India's effort to decouple from China is not simply the result of a one-off border clash, but should be viewed in a broader context.

China and India, which between them once accounted for half the world's output, opted for closed, planned economies after World War II, partly in response to bitter memories of colonization by world powers in the 19th and 20th centuries. But their economies failed to develop under autarky. Only after they opened up economically did growth take off.

China, which adopted a "reform and opening up policy" in 1978 under the leadership of Deng Xiaoping, became the "world's factory" by making the most of its low-wage labor force. India followed China's lead in 1991, with Prime Minister Narashima Rao slashing economic regulations. That, along with the country's strengths in science education, has helped India's information technology, software and outsourcing industries to flourish.

Where it has lagged is in the sort of labor-intensive manufacturing that China long specialized in -- and that India needs to help absorb the 10 million people entering the workforce every year. Recognizing the problem, Modi, who took office in 2014, announced his "Make in India" campaign.

Six years on, however, Make in India has failed to deliver much. Critics say it lacks focus on key sectors and concrete policies, such as tax incentives. Then came the coronavirus and the border clash with China. The Modi government appears to be using these crises to push ahead with drastic changes aimed at reducing the trade imbalance with China.

"Nothing can be done overnight but a lot can be done in the short term. ... We must strike now as the iron is hot," A.M. Naik, group chairman of conglomerate Larsen & Toubro told local media. He echoed the hopes of Modi's government, saying: "Anti-China sentiment can be a game-changer in terms of fast tracking and giving new impetus to government initiatives like Make in India. Indian companies and consumers may face higher costs in the short term, but with government support, Indian manufacturing can quickly achieve economies of scale."

Chinese President Xi Jinping, right, and Indian Prime Minister Narendra Modi talk as they visit the Hubei Provincial Museum in Wuhan, China, in April 2018.   © Reuters

Pie in the sky? Perhaps not. The country has two important advantages.

One is the size of its domestic market. The United Nations predicts India will overtake China in 2027 to become the most populous nation on earth. By 2030, it is expected to have more than 1.5 billion people. India's middle class is forecast to double from 300 million to 600 million over the next five years, although the pandemic may set that back.

Unlike China 40 years ago, which was still poor, and unlike most emerging nations today, India's growing middle class may be large enough to give its companies the economies of scale Naik envisions. Typically, emerging economies must plug into international supply chains through free trade agreements with foreign countries to find large markets. That is not necessarily true for India.

India's other big advantage is its industrial base. While that may seem at odds with the idea that the country's manufacturing is underdeveloped, India does have an array of industries turning out everything from match boxes to nuclear bombs -- a remnant of its closed-economy past.

Despite the economic contraction brought about by the raging coronavirus, Google announced plans to invest $10 billion in the country. Fellow U.S. tech giant Apple has begun making its latest-model iPhone 11 handsets in India, drawn by the huge domestic market.

The economic ideology of Modi's ruling Bharatiya Janata Party is based on Swadeshi -- the promotion of homegrown manufacturing. The Swadeshi movement began during India's struggle for independence in the mid-20th century. Activists called for boycotts of goods from Britain, then India's colonial master, promoting India's own products instead.

"There is no doubt that Make in India and [the creation of a] self-reliant economic bloc is a form of Swadeshi," said Hiroshi Sugaya, a senior research fellow at the Institute for Indian Economic Studies, a Tokyo think tank.

These days, China has replaced the U.K. as the adversary. Is the move toward greater self-reliance a wise, proactive decision as protectionist sentiment spreads around the world or a shortsighted stunt based on an outdated import substitution strategy? India, soon to be the most populous country in human history, is conducting an economic experiment on a grand scale.

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