Updated: June 28, 2020 10:49:06 am
Following the recent clashes with Chinese troops in Ladakh in which 20 Indian soldiers were killed, there has been a growing clamour in the country to boycott goods from the neighbouring country. However, the development has caused an alarm among various industry bodies that are concerned about the adverse impact in the event of a blanket ban on exports in several sectors.
Industry associations, from pharmaceuticals to telecommunications and automobiles, are of the view that a “knee-jerk” offensive against China till alternative vendors are finalised or domestic capacities are built will hurt the economy, including the country’s exports.
How dependent is India on Chinese imports?
China accounts for a sizable portion of India’s top imports, especially where intermediate products or components and raw materials are concerned. It has also been the top exporter of products like electrical machinery, equipment and their parts, nuclear reactors, organic and inorganic chemicals, fertilisers as well as vehicles, their parts and accessories. In several cases, China’s contribution is much higher than the second-largest exporter countries of these products to India.
The neighbouring country also accounts for 45 per cent of India’s total electronics imports. A third of machinery and almost two-fifths of organic chemicals that India purchases from the world comes from China, according to the Confederation of Indian Industry. Automotive parts and fertilisers are other items where China’s share in India’s import is more than 25 per cent.
Several of these products are used by Indian manufacturers in the production of finished goods, thus thoroughly integrating China in India’s manufacturing supply chain. For instance India sources close to 90 per cent of certain mobile phone parts from China.
Even as an export market, China is a major partner for India. At $15.5 billion, it is the third largest destination for Indian shipments. At the same time, India only accounts for a little over two per cent of China’s total exports, according to the Federation of Indian Export Organisation (FIEO).
How could a blanket ban on Chinese imports hit India’s exports?
Across sectors from pharmaceuticals to telecommunications and automobiles, industry associations have been speaking up against a complete boycott of Chinese imports. FIEO president Sharad Kumar Saraf, and Director General Ajay Sahai said that a “blanket ban” may not be feasible because of India’s dependence on the country for crucial raw materials.
“Banning the imports of raw materials from China without which products over here cannot be manufactured will make things difficult,” said Saraf. “If they take retaliatory measures, it would impact us more negatively.”
The India Cellular and Electronics Association and the Automotive Component Manufacturers Association are among other trade and industry associations that are on the edge.
“There are strategic… and key inputs that we use from China (raw materials) due to which our exports are more competitive,” said Sahai.
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For instance, of the nearly $3.6 billion worth of ingredients that Indian drug-makers import to manufacture several essential medicines, China catered to around 68 per cent. India is considered one of the largest pharma industries in the world, and accounts for a considerable portion of imports of finished formulations by other large economies like the US.
While pharma consignments from China have unofficially been stopped at ports in India, and are expected to be cleared after thorough checks, a ban could create shortages of medicines both for India’s domestic and export markets.
Most large pharmaceutical firms in India currently have sufficient stock of ingredients to last them until September, according to RC Juneja, Chairman of Delhi-headquartered Mankind Pharma. “We will start seeing a major impact by December if the issue is not resolved by then. Several countries and regions depend on India for formulations like paracetamol,” he said.
What are the alternatives in this situation?
According to FIEO’s Saraf, the decision to boycott non-essential products made in China can be left to the individual, while trade-related measures like raising duties on cheaper raw materials imported from China would be better than an outright embargo. This would still allow access to crucial ingredients in the short-term while India looks to build self-reliance or maybe switch to alternate trade partners.
“It would be better to maybe raise duties on cheaper raw materials instead of going in for a blanket ban,” he said.
An analysis by CII shows that countries like the US, Vietnam, Japan, Mexico and certain European countries could be tapped as alternate import sources for some critical electronic, vehicular and pharmaceutical components as well.
It is likely that the costs of the raw materials from these alternate sources will be higher and may get passed on to consumers if the manufacturers cannot absorb them.
India will need to look into the totality of its trade with China and Hong Kong and implement certain short- to long-term plans to reduce its dependence on them, according to FIEO.
The government’s “Atmanirbhar” focus is expected to help ministries handhold industries where self-reliance needs to be built. Some measures, like the decision to push bulk drug parks in India, have to be executed.
India has been able to reduce its import dependence in the mobile sector through a long-term focus on building self-reliance in manufacturing some of the crucial components required to make them. According to FIEO, this approach can be replicated in other sectors like electronic and telecommunication where there is a need to encourage Indian investments as well as Foreign Direct Investments through fiscal incentives.
“While an increase in tariff can be one way to achieve it (import substitution), the more effective strategy would be to provide an ecosystem that addresses the cost disability of Indian manufacturing leading to such imports. Import substitution manufacturing should attract interest subvention on credit, offsetting inland freight disadvantage besides equalization of import tariff from free trade areas,” said FIEO.
Exporters will also have to minimise their impact through strategies that involve a focus on other advanced and emerging markets and by also exploring countries that are currently experiencing a high anti-China sentiment, according to FIEO.
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