Atmanirbharata: A Political Gimmick?
By Akash Muhury
Revivalist approach of the incumbent government reminds us of the Jajmani system in the ancient Indian society, making our villages self-reliant and self-sufficient in pure economic terms. Globalisation has integrated the world in such a fashion that regions have developed specialisation in particular product based on comparative advantages of production. Given the protectionist trend in economic pattern across countries, it is today that we realise the way we are embroiled in International Economy. However, jingoism around nationalist ideology, in the wake of recent Galwan faceoff against China, is irrational given the unfavourable trade pattern in Sino-Indian ties. Here we attempt a sectoral analysis of whether India is at all ready for financial retaliation with Swadeshi Andolan 2.0 in 21st Century.
One must be clear about what this parameter indicates. A trade deficit with China means Indians buy more of Chinese products than what Chinese do. This raises concerns on 2 important fronts i.e Forex reserves and quality standards of Indian Products. Are they valid? RBI says forex reserve is more than $500 billion which is way above the comfort level of 7-8 months of import cover. But concern lies in the front of demand for Indian goods in Domestic market as well as in Foreign market in the face competitive pricing and beggar-thy-neighbour policy undertaken by China in its EXIM policy. Moreover, the economies of scale that China has attained over the years by expanding its labour intensive sectors combined with capital investment, has improved the efficiency of production method and brought down the overall cost of production. Hence, trade taking place based on comparative advantage of production. A deeper insight into the statistics points to heavily skewed degree of comparative advantage. This is because, if we read the implication of trade imbalance under the lens of specialisation in product then we find China to be at a net Advantage of 9% in the trade account. It indicates the expected loss on the part of Indian consumer surplus if we "nudge" them to buy Indian products at the moment.
Sectors that may be hit
India's trade with China stands at $87,071.84 million which accounts for 10.31% of India's total trade. But this is a sheer number which is economically insignificant, if we do not dissect them.
It is a strategically important industry, hardest hit, struggling to cope with cheap chinese products. India imports $6.68 billion of Chinese telecom equipments and exports $106 million in exchange. A study by IIT Madras marks 2005-06 as a breakthrough year for Huawei as they won over business with ITI, BSNL, MTNL by using low price tactics and a variety of other methods. Huawei’s credibility became stronger as it managed to enter important government networks and as a result of this credibility, Huawei managed to gain entry into private telecom players rather soon. Huawei’s predatory pricing strategy made the larger private operators in India easy baits as they were reeling under the impact of hyper competition and low average revenue per unit. The growth of Huawei can be easily understood from the fact that it had only $170 million in revenue from its India operations in the year 2005, which has grown at a scorching pace and reached a turnover of $1.3 billion by the end of 2008. This hints at the extent of shock that Indian economy may face for imposing blanket ban. According to the Internet and Mobile Association of India (IAMAI), India not only suffers from cost disadvantages with respect to China but also with nations like Vietnam, South Korea and Taiwan. Such cost inefficiency emanates from limitations like infrastructural bottleneck, high cost of debt, lack of utilities like high quality power and water. China and Vietnam, for instance give incentives to industry to make domestic manufacturing competitive, as per IAMA, which has also been highlighted in the study done by IIT Madras.
Covid-19 pandemic has highlighted the level of dependence that Pharma Companies in India have developed by investing in supply chains that traces to China significantly and disrupting that supply chain would not only adversely affect the competitiveness of companies but also make the health infrastructure in our country vulnerable. We must note that in 1991, India imported only 0.3% of its active ingredients and currently, India imports 70% of its API or bulk drugs from China. At this moment, call for boycotting Chinese products will yield a lose-lose situation for India because given the non-availability of the critical input and the lack of domestic capability to fill in the demand market will ultimately see fall in production of drug formulations. This makes the consequence of any trade war with China at least on Pharma front in this period of health emergency a suicide attempt for Indian economy.
However, not everything in this sector is unfavorable for India. The reason is the expertise of India in manufacturing cost effective generic drugs whose demand is likely to exponent in coming years as number of drugs are losing their patent rights. To cater to increasing demand, which is estimated to be well above 50%, we need to scale up production. But the cause of concern is that R&D cost per molecule has increased substantially owing to technological complexity in drug development and greater specificity in disease targets. Hence, it necessitates incentivising private investment in R&D. This does not require another committee to recommend. One, the Katoch committee, appointed in 2015, had recommended for setting up API parks just like IT parks, providing capex and subsidised loans to boost domestic production of APIs. Unfortunately, these policies are yet to be implemented. Subsequently, another committee was constituted in 2018, but nothing was implemented.
· Electrical and electronics industry
India imports $18 billion, about 29% of India's total import basket, which is the largest by proportion though not significant because India is on its way of outshining China because most of the finished electrical products are now manufactured in India but its components are supplied from their base in China. Hence, though not directly but through regulating the supply of key micro components, Dragon can easily harm the growing competitiveness of Indian products in export market. A major portion of this electronics industry i.e Telecommunication equipments stands witness to the wrath of predatory pricing through its cost effective production technique and dominating the market. For instance, 30%, 17%, 14%, 12% of mobile handset market belongs to Xiaomi, Vivo, Realme, Oppo; which means more than 73% of India's handset market has been grabbed by Chinese firms in Q1 2020 as per Counterpoint Research.
Fertiliser industry, a key component of Agriculture and also one of the core industries in India, accounts for $2 billion imports from China shares 3% of total imports basket. Thus, productivity of Indian agri-land under cultivation is dependent on China which indicates to the fact that Agricultural distress can further be aggravated by trade distorting policy measures, which shall affect the food security, domestic inflation, higher farmer suicides due to their inability to cope up with resource intensive agricultural practises.
· Automobile industry
A report from Indian Express pointed out that automobile sector in India has developed such a broad component supplier base in China over decades that any tariff barrier now will adversely reflect into their export competitiveness, adding to their woes amidst prevailing automobile slowdown.
Any attempt to retaliate financially should be well calculated. All such related measures shows secular inflationary situation that shall be regressive for Indian poor. It will increase the level of absolute poverty further, jeopardising the effort of more than 50 years in alleviating poverty.
Since, 82.8% of the economy is employed in unorganised sector and given the vulnerability to which this sector's supply chain is exposed due to any trade war with China, we are going to witness highest ever unemployment in history of India. The section of street vendors who live their livelihood on these products will starve to death. Retailers will shut down. Small enterprise will be severely affected.
The credit under MUDRA yojana, StandUp India, Startup India will eventually turn into NPAs, generating twin-balance sheet problem in future.
Provided the governments hard work to awaken the animal spirits of investors- foreign and domestic, it calls for credibility and stability in policy. India reneging with China may affect India's policy credibility in foreign market creating adverse expectations, again jeopardising the Govt.'s endeavour to boost investment.
Remember, a key driver in India's "dream run" beginning from this millenium till a decade was telecom sector and other communication services. Given telecom industry's exposure to vulnerability from Chinese shocks, in the backdrop of sharp contraction in this sector's growth will add to woes of the aggregate growth rate, evident even before lockdown was promulgated.
Last and the most important thing to note is that though India-China trade is a major chunk in India's trade basket yet it is a peanut-like diet in comparison to Dragon's appetite. China's export to India stands at 3% of its total exports while China's import from India is only 0.9% of its entire import basket, out of which China extracts a substantial portion of our water-intensive crops, creating virtual water trade(import), when we already suffering from lack of steady water supply and drinking water facilities. So, it is simpler for India to banish Chinese products but statistically it is easier for China to replace India's contribution to its Trade basket.
In a nutshell, to answer nationalist's jingoism around India's Atmanirbhar Bharat Abhiyan with Rs. 1.2 lakh crore package, they must first understand the difference between liquidity infusion and fiscal stimulus. Given the fact that major proportion of this package is liquidity infusion, its success depends on liquidity transmission, which in turn relies on "panglossian" degree of banking sector.
Considering the floccinaucinihilipilificated role of Economists in India, we must atleast realise this fact that border dispute cannot be resolved via trade war, ironically which is supposed to hurt only India's interest. Reverting back to economics; a move to boycott China without building its substitute in the country in the camouflage of self-reliance is an import substituting policy or import biased growth with the obvious and general argument of infant industry protection, evident from the slogan: "vocal for local". Again ban on Chinese apps will find its repercussions on employment data. But at the same time we have to ensure cyber security given the huge Indian cyberspace is concerned and the possible financial security breach due to investments from China in growing digital payment ventures.
Understanding the pulse of countrymen, it is the duty of all stakeholder to not be impulsive in decision making and practise responsible self-restraint, buying time to reverse the statistics of trade pattern which is possible when we build viable, cost effective production techniques, plants gradually replacing, and not overnight blanket ban, the 'dump'ed products. This is when we shall cherish true essence of Atmanirbharata. Self-Reliant India campaign is a step forward in this direction, which shall get shaped in due course of time.
Akash Muhury is an economics honors student at Hindu College. His interests lie in Indian economy and fiscal policy.