There is a very high anti-China sentiment not merely in India but across the world, and this has been the case for quite some time. I am not merely saying this in the context of what has happened at our borders. A lot of discussions are taking place across the world in the context of China- specifically, various strategies to reorient and reduce the exposure of their countries to a single supply chain.
Prior to these developments, one of the strategies by other countries has been to look at a China-Plus-One. We know that globalization of world trade has been on for centuries and it is not easy to reverse this trend overnight. However, this is not completely impossible. Global supply chains will get disrupted for one reason or the other at some point- these could be positive, or negative factors. Today, global supply chains have been disrupted because of COVID-19 and this will, and already has compelled people to look for alternate supply chains.
It is true that India does have a wide trade imbalance with China but one has to understand where this stems from primarily. This imbalance arises predominantly out of 5 key sectors – Electronics, Machinery, Organic Chemicals, Plastics and Fertilizers. Except Machinery, the other sectors produce mostly low-value goods which are intermediate in nature, or are finished goods which sell as cheap consumer goods. These can be very well manufactured within India and the technology to manufacture them here already exists. If we look at why China has been able to derive a cost advantage, it is primarily due to the size and scale effect – economies of scale.
In order to address this, the Government of India has come up with a number of schemes. In electronics, for instance, we have come up with the modified electronics manufacturing cluster scheme (EMC), scheme for promotion of manufacturing of electronics and semiconductors and a production-linked incentive schemes for the manufacturing of electronics and mobile phones. These have all been approved by the Cabinet. These schemes, taken together, cover a wide spectrum of very high value and low value electrical and electronic products and are designed to attract investment in the whole of the electrical and electronic value chain. Therefore, we can expect that the investment in infrastructure through the Production Linked Incentive EMC scheme will incentivize setting up of large manufacturing centers in India. There were already players like Apple and Samsung which were partly manufacturing in India, but these schemes will lead to a tremendous shift.
Given the sweeping coverage of these three schemes, one can expect India to become a major manufacturer and exporter. The spillover from this will also be felt across the plastic and machinery sectors and will reduce our overall dependence on China for imports.
In the Organic Chemicals sector, India is currently a huge importer of APIs or Active Pharmaceutical Ingredients from China. In fact, we consume 15% of China’s exports of organic chemicals. The APIs are critical inputs for the crucial $36 billion Indian pharma industry. In order to provide a boost for the domestic manufacturing capacity within India, the government has just announced a production-linked incentive scheme in this sector. This production-linked incentive scheme will be a game-changer and as the domestic manufacturing of APIs goes up, our dependence on China will automatically reduce.
If you really want to break our dependence on China, we need to create an enabling ecosystem in our country. We cannot have labour laws which encourage informality and discourage size and scale. Therefore we need reforms here. We have made mammoth leaps in terms of the ease of doing business but we need to do even better. We must strive to promote large scale of manufacturing and we need to have quick, smart and strategic decision making to ensure the success of these schemes and to reduce our overall import dependence on China. Government has already taken action on several of these fronts under the Atmanirbhar Bharat initiative.
The images of people boycotting Chinese products or some of them burning Chinese-made goods should not frighten us at all. In fact, we should use this opportunity to make ourselves even more efficient and become the world’s most favored destination for manufacturing. We must understand which intermediate goods have made us dependent and improve our capabilities in those sectors. The aim should be to have a single-minded pursuit of growth, a single-minded pursuit of reforms and a single-minded pursuit of becoming the global champions in ten-twelve identifiable areas. We must set an example for the world as we move forward!
(As told to Satish Padmanabhan)