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India is busy ramping up its endeavours to achieve total self-sustenance, in the short term it opens up a $ 82.2 billion opportunity for others to step in.
The Sino-India relationship that has taken an adverse turn in the last 6 months could potentially end up benefitting India's trade ties with the US, Japan, South Korea, Germany and France. The coronavirus pandemic that originated in China and has brought the global economy down to its knees followed by heightened tensions at the high-altitude northern frontier border between India and China, has forced India's hands to retrace its steps with the dragon.
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A slew of policy level interventions including putting curbs on FDI from China, reverting to the need for licensing in key components and increasing import duties on some others, and an outright ban of over 200 Chinese software applications, have been undertaken. More such actions are expected as India seeks to substantially bring down its imports from across the border.
Mainland China and Hong Kong are together by far the biggest importers for India.
Mainland China and Hong Kong are together by far the biggest importers for India. In 2019-20, India imported merchandise worth $ 82.2 billion from the combined region which towered above the imports from the next biggest destination--the US at $ 35.8 billion. India's yawning trade deficit with China and Hong Kong at nearly $ 55 billion was always a matter of concern. The worsening of relations has only made its reversal a priority issue.
Experts say India can potentially reduce this deficit by $8.4 billion in the current fiscal alone by focusing on low hanging fruits. The top items that India sources from China are electronic and mechanical equipment, organic chemical and plastic together accounting for nearly half of the overall imports.
An analysis done by Acuite Ratings and Research says the potential to reduce imports by at least a quarter in 40 sub-sectors like chemicals, automotive components, bicycles parts, agro based items, handicrafts, drug formulations, cosmetics, consumer electronics and leather-based goods is high. It would also not require any significant additional investments by the domestic industry.
Experts say India can potentially reduce this deficit by $8.4 billion in the current fiscal alone by focusing on low hanging fruits.
"Collectively, these sectors contribute to $33.6 billion worth of imports. Without any significant additional investments, the domestic manufacturing sector can substitute 25 per cent of the total imports from these specified sectors under consideration in the first phase, thereby enabling India to reduce $8.4 billion worth of trade deficit in a single year," said Suman Chowdhury, chief analytical officer, Acuite Ratings and Research.
"While the imports from China have moderately declined by 15 per cent since FY18 due to imposition of anti-dumping duties on some products, the dependence of the domestic economy on Chinese imports remains high with direct contribution to over 30 per cent of India′s aggregate trade deficit," Chowdhury added. "Over the past three decades, India′s exports to China grew at a CAGR of 30 per cent, but its imports expanded at 47 per cent."
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An analysis says the potential to reduce imports by at least a quarter in 40 sub-sectors like chemicals, automotive components, bicycles parts, agro based items, handicrafts, drug formulations, cosmetics, consumer electronics and leather-based goods is high.
In the chemical industry for example, India stands to save an import bill of nearly $3 billion by opting for locally made chemicals even after excluding specialised chemicals where manufacturing capability is yet to develop. India is the world′s sixth largest chemical manufacturer, but the annual chemical and polymer imports are still substantial in the vicinity of over $12 billion.
Similarly, the agency said the once fledgling domestic cycle and cycle parts industry needs to be revived to bring down import worth $100 million every year from China.
Yet, even in the most optimistic scenario, the domestic industry would not be able to complete localise all of the imports from China. In specific sectors like electronics and chemicals for example, there is not enough scale for it to do so. This opens up opportunities for other countries like Japan, Korea, US, Germany and France.
“In many sectors especially in new-age industries like solar cells and lithium ion batteries the domestic industry has told us there is not enough scale in India and it will take a few years before we can be fully self reliant,” says a senior official with the ministry of heavy industries. “But importing from China is not an option any more. We would rather import from other friendly countries instead in the interim.”
There will be a cost element to this as few can match the prices quoted by Chinese suppliers. But China hawks that are leading the boycott Chinese goods movement in India say it's a trade-off the country is willing to make.
“There maybe some pain in the near term as we may have to import slightly more expensive goods from other countries in Europe or South East Asia. But we should be able to take it on our chin,” says Praveen Khandelwal, secretary general, Confederation of All India Traders. “Maybe we have overestimated their pricing as well. They maybe eager to give us a discount for greater market access as well.”
Either way, there is only one loser in antagonising a country that is poised to become world's third-largest consumer market by the end of this decade. A market as big as India is there for the taking.