Editorial 1: India's China Challenge
Context:
Recently PM Modi visited China for the SCO summit, where he is likely to meet his Chinese counterpart for a bilateral summit. This comes against the backdrop of US imposing 50% tariffs on the Indian exports to US.
Reasons for increasing closeness with China:
- India has been reluctant of cheap Chinese import may flood the Indian market and Indian industries may face the reduced demand for their product. Because of this reason India has pulled out of China-led Regional Comprehensive Economic Partnership (RCEP) with 15 Asia-Pacific region, namely ASEAN countries, Japan, Australia etc.
- After the Galwan clashes, government had banned several Chinese app and Foreign Direct Investment from China.
- These tariff imposed by US has made India look for alternative trade relationship. It has pushed India closer to China.
- However, this is fraught with many challenges, mainly regarding closer trade relations with China.
India’s trade deficit with China:
- India has favorable trade surplus of about $40 billion with US. This make it vulnerable to US pressures as it may be used to coerce India to open its market for American products.
- India has trade deficit of $100 billion with China. Chinese imports continue to increase since2014, despite the political narrative of banning trade with China.
- China’s share in global merchandise exports stood at more than 14% according to WTO. This is very high compared to the share of US and China, which stood at 8% and 2% respectively.
- In fact, Chinese share of global merchandise trade is more than next 10 countries combined together.
- The gross value added, which is a measure of sector’s economic growth, for that manufacturing sector has grown at the annual average rate of 4% since 2019-20.This is less compared to that of agriculture which has grown by 4.7%.
- Currently, when China has high manufacturing prowess and capacity, India is struggling with its stagnant manufacturing sector.
Problem with increased closeness to China:
- After COVID, India has presented itself as an alternative to China for Industries who were looking to de-risk from China by decreasing their over reliance on it. Aligning with china, may reduce the confidence of such companies as they may not see India as viable Chinese alternative for their investments.
- US may also force its allies to raise trade barriers against China. It may follow similar policy for India. Recently, Mexico has raised tariffs on imports from China. If New Delhi is seen closer to China, US and it allies may follow similar trade policy for India.
- These trade barriers will worsen the overcapacity problem of China. It is facing deflationary conditions in domestic market. There are both the reduced demand and supply in the domestic market.
- As a result of this overcapacity problem, India may face increased pressure to absorb its cheaper goods. These Cheaper Chinese goods may replace domestic products in the Indian markets, negatively affecting its domestic manufacturing capacity.
- India is a private-sector led market economy having transparent rules and vibrant democracy. China is a communist country, with no clear rules and trade restrictions for private sector. Thus, they are not the natural allies as they have less shared values.
- China is an all-weather ally of Pakistan. The challenge of Pakistan’s state sponsored terrorism may hinder in building a credible and stable close relationship with China.
Way Forward:
Whether its trade tariffs imposed by US, or fear of Chinese imports flooding the domestic market, India has always been reluctant to open up for free global trade. This is due to deep structural weakness that plagues its domestic manufacturing capacity. So, it must focus on increasing its manufacturing prowess. At the same time, it must proceed with caution when it deals with China.