Saumyen's Pages
At least 20 Indian army personnel have been martyred in a violent face-off with the Chinese forces in a major escalation at the LOC in June 2020. We will not hear of the casualties from the Chinese side – we never had in the past as well – even the true figures of the Covid crisis is not transparent and has been doubted. Post this skirmish at the international border last month, the Prime Minister Mr. Modi, in a bold and perhaps direct message to China, said “the age of expansionism” was over and the current world was now focusing on the development agenda.
The conflict has, naturally driven anguish and emotions among the Indians and the sentiments have been echoed in different political, citizen and media circles. There have been two major inter-related demands – First to boycott Chinese products AND second plan for Indian production to stop/minimize Chinese imports. While the first is primarily emotional and political in nature, the second has major economic implications.
India has a hot and cold, (more recently a colder) geo-political relationship with China which is more deep-rooted and goes beyond the age-old border dispute. Without digging into the history of multiple military conflicts including the recent one, this problem also has an economic side. On the one hand, this is related to China’s clever play of its huge economic power to capture markets of the emerging economies of Asia and beyond. On the other hand, India’s ability to establish itself as the fast-growing nation and to position itself in the international forums accordingly – challenges the singular economic dominance of China in this region – may be in a smaller way today but with a potential of growing bigger.
Lets first understand where we stand…
India has grown over the years in many economic parameters – but the growth is faster and more pronounced in this neighboring country. If a country’s broad economic indicators and the mutual economic dependency or trade are indicators – and clearly, they are for maintaining a balanced (and equal) relationship in the modern world – India would need to work harder and in a smarter way. Moreover, China has an unequal advantage of being 2.9 times bigger than India! Where do we stand in these economic parameters?
First, during the last 20 years (2000-19), India’s per capita GDP increased 4.7 times vis-à-vis 10.7 times for China. Overall, per capita GDP of China which was 2x of India in 2000 has grown to 3.6x in 2019 – showing a divergence in the average standard of living between the two countries over the years. Needless to say, the development has been faster in China and today, its economy is 5x bigger than India and stands at USD 15 trillion. India has been deliberating the time period of reaching USD 5 Trillion mark!
Secondly, with focused attention, China has arrested the population growth. Over the last 2 decades, it has grown by 10% while India’s population grew by 30%. While this potentially may have an adverse effect on the resource accumulation and allocation, a positive corollary of the same though is that India has a younger population with average age of 28.1 (2018 estimate) compared to 37.7 years. This advantage – over a long term - can be leveraged for higher production and productivity - if properly utilized from now.
Thirdly, India’s trade balance with China has been negative over the years – meaning India’s import from China far exceeds the export from here. In fact, India’s imports from China accounts for 11% (2019 data) of our total imports while China’s import from India contributes <1% of its total imports. What it means is that China’s dependence on Indian trade is minimal but India is significantly dependent on China today, especially in some critical sectors like machinery & electronics and pharmaceuticals.
Fourthly, China is the most dominant player in export market in the world – and contributes 13% of the world import (2018 data). India remains a marginal player with 1.7% of the world imports. Recently, the political and emotional intent in a few dominant world economies is to reduce their dependence on imports from China. However, it is difficult to reduce this large dependence in the short-run even when it is a huge potential market for India to plan for - now.
The fact that our neighboring country is economically much better off with very less dependency on India (i.e. a game of inequals) would hit us more than China if we adopt products substitution as the immediate strategy. On the other hand, our focus is possibly to play now on our strength and focus on the areas that China has been successfully exporting to other countries and not necessarily to India. We should not have the myopic political agenda of import substitution; on the contrary, focus on products that China is exporting in bulk to other countries and we have strength but have a smaller share today.
Drive inequality today … be equal tomorrow
We may promote a deliberate strategy of inequal growth of select sectors with a focus on making them competitive in the world market. Taking analogy from the “Green Revolution” where the Government provided policy impetus to grow regions that were better in infrastructure in agriculture so that the higher productivity could be achieved with less investment. This was a deliberate strategy to utilize the limited resources better for overall gain (surplus foodstock) even at the cost of widening inequality for a temporary period. Of course, the fruits of the same were planned to be distributed through the public distribution system across India. So, how and where do we provide the impetus?
The Modi government, new to power in 2014, announced “Make-in-India” – the much-hyped initiative to increase the share of manufacturing to 25% by 2022 by providing various policy incentives, simplifying procedures and creating a conducive environment in investment in the manufacturing sector. The program is also too aspirational to target 12-14% year-on-year growth in this sector – that India has never experienced and to generate 100 million additional manufacturing jobs in 2022. Apart from that the policy approach was to open up new sectors for foreign capital as this was the key source of investment to pull the initiative through.
While directionally this was a right move to focus on the manufacturing, the initiative brought in too many sectors into its fold. And the focus was diluted if not lost. Moreover, the policy makers have not anticipated or ignored the current economic situation – like low domestic private capital investment, declining manufacturing output trend, lower consumer demand etc. The momentum is therefore, inadequate to achieve the target. Manufacturing value add as % of GDP has been, in fact, declining from 2016 and stands at 13.7% in 2019.
Without getting into the academic debate of export oriented growth vs domestic focused one for India - as we had in the past (we had a large economic discussion literature on Far-East Asia growth model), the need of the hour is to convert the political agenda into economic reality through focused attention to select planned export sectors.
While the paper does not intend to identify the sectors that would need the policy impetus, the current export-import data of the world (and major countries) provides an indication. India has a huge potential export market to focus in the already exporting products as our share is currently small and can be grown further – especially in this favorable geo-political scenario.
To substantiate this point, when we look at the top 10 categories of export (by value) from India, together they contribute 2% of the total world imports and the same for China is 16% (Ref Table 1). This, in a way helps India to specialize and drive volume (and in turn would make the country more competitive through economies of scale). We should leverage the existing policy framework of “Make-in-India” to support these sectors. The recent liquidity support measures by the Government of India (to recover from Covid-19 shock) for the industry may be channelized to the sectors on special preference.
Let’s take an example. “Make-in-India” focuses on the Leather industry where India contributes 2% of world imports when China, the biggest competition, captures 39% of the world imports of USD 62 Bn. There is definitely an impetus needed more for this already doing-well sector with technology, fashion design, pricing etc. Similarly, of the USD 700 Bn of world imports in textiles & clothing, India and China contributes 5% and 39% respectively.
The growth of manufacturing through “Make-in-India” may succeed and the time is ripe if we target select sectors to get additional impetus from export perspective. Given that the domestic market demand is low and the global environment is receptive to alternative source outside China, the export-oriented strategy should bring more attention of international investment. The industries where we have presence with significantly lower share than China – are apparently the preferred targets now.
Recently, the government announced the new initiative of “Self-Reliant India” where ‘the package has been devised to give a thrust to local manufacturing, local markets and local supply-chains - thus propagating the vision of ‘vocal for local’. The entire scheme focuses on providing impetus to the “Make-in-India” initiative and transforming local Indian companies into global brands. This is indeed an impetus to the analysis that we referred to above. However, while we focus on the local production and supply-chain, it is imperative to significantly incentivise the industry/ companies with export orientation – not only for attracting more foreign investment and better trade balance but also to take on the economic competition from China– that we are politically trying to deal with - globally. The field is economic and we need to play a global game.
(The views are personal)
Rethink
India-China conflict: An economic Play and a Global Game
(July 2020)