Recalibrating fractured ties

During the last one month, a few major changes have taken place in the Indo-China relationship which deserves a detailed analysis. It may be recalled that the Millennium Post has consistently argued for long-term peaceful relations with China. Recently, it argued that in the wake of the rising relevance of the Shanghai Cooperation Organisation (SCO), India should avoid distancing itself away from the grouping under Western influence, and respond positively to the initiatives aimed at reviving eastern trade links and maintaining peace, security and stability in the region. After 18 months of China not having an Ambassador in India, senior diplomat Xu Feihong arrived in Delhi to assume office as the 17th Ambassador to India on May 10.

Indo-China relations in recent years

Indo-China diplomatic relations have hit a low after the Chinese intrusion in the Galwan border in June 2020. Since then, a traders’ body, Confederation of All India Traders (CAIT), has urged traders to boycott Chinese goods. In June 2020, a representation was also received from a Member of Parliament calling for banning/boycotting of all Chinese goods in light of developments at the Line of Actual Control (LAC) in Ladakh. Following these tensions, India has banned over 200 Chinese mobile apps like TikTok, WeChat, and Alibaba’s UC browser. The country has also rejected a major investment proposal from electric vehicle maker BYD.

According to CAIT, the core sectors where Chinese goods have been replaced by Indian goods are FMCG goods, consumer durables, toys, consumer electronics, electrical appliances, kitchen articles and accessories, gift items, personal consumables, confectionary items, home furnishing, tapestry, utensils, footwear, watches, furniture and fixtures, garments, fashion apparels, cloth, home decoration goods, Diwali pooja goods including clay diyas, wall hangings, etc.

In response to these calls for the ‘Boycott of Chinese goods’, the Ministry of Commerce and Industry, in a press note dated December 15, 2021, stated that “. To support and expand domestic capacities, Government has implemented policies to promote domestic manufacturing like the production linked incentive (PLI) schemes in line with Atmanirbhar Bharat policy.”

Nonetheless, India’s dependence on China for various goods has not declined. It has been proved beyond doubt that though anti-Chinese sentiments have been whipped during the last one decade, it has failed to cut Chinese imports. Rather, it increased steeply. During 2023-24, China emerged as the largest trading partner of India. Furthermore, one of the latest UNCTAD studies suggests that India’s trade dependence on the EU and China increased 1 per cent and 1.2 per cent, respectively, while that on Saudi Arabia fell 0.5 per cent in the 1st quarter of 2024.

In the fiscal year 2023-24, China overtook the US as India’s largest trading partner, with a total two-way commerce of USD 118.4 billion, as per the data from the economic think tank Global Trade Research Institute (GTRI). India’s exports to China rose by 8.7 per cent to USD 16.67 billion while imports increased by 3.24 per cent to USD 101.7 billion. Conversely, exports to the US dipped slightly to USD 77.5 billion, and imports decreased by about 20 per cent to USD 40.8 billion, reports Economic Times. GTRI has also warned that India may become a dumping ground for Chinese products such as Electric Vehicles (EVs), batteries and other new technology items, with the US raising tariffs on these imports from Beijing.

After the 2019 elections and Prime Minister’s visit to the USA in September, a sudden change in India-China relationship was observed. On November 4, 2019, at the third Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok, India decided to withdraw from one of the world’s largest regional free trade agreements (FTAs). RCEP is an FTA among 15 countries in the Asia-Pacific region, including major economies such as China, Japan, South Korea and members of the Association of Southeast Asian Nations (ASEAN). These countries together represent around 30 per cent of global GDP and population. Nevertheless, India has not yet joined the initiative.

Although India’s China policy under the Modi government has deteriorated, and during the last one decade, India has made its ‘Look East’ policy totally defunct, China consistently tried to involve India in its global strategic plan developed around its Belt and Road Initiative (BRI). In a recent speech, the Chinese President Xi Jinping highlighted the relevance of the Five Principles of Peaceful Coexistence, which gained traction with the Non-Aligned Movement during Jawaharlal Nehru’s era, to end the present-day conflicts, and sought to expand influence in the Global South amid its tussle with the West.

It may be recalled that in the 1950s, the five principles — the Panchsheel — formed part of the legacy of the then Prime Minister Jawaharlal Nehru and his Chinese counterpart Zhou Enlai in their unsuccessful quest to find a solution to the vexed boundary issue. This is a strong signal from China to India for a peaceful co-existence.

“The Five Principles of Peaceful Coexistence, namely, ‘mutual respect for sovereignty and territorial integrity’, ‘mutual non-aggression’, ‘mutual non-interference in each other’s internal affairs’, ‘equality and mutual benefit’, and ‘peaceful coexistence’, answered the call of the times, and its initiation was an inevitable historic development,” Xi said. “They included the Five Principles in the China-India and China-Myanmar joint statements which jointly called for making them basic norms for state-to-state relations,” Xi said at the conference where the invitees included former Sri Lankan President Mahinda Rajapaksa and several political leaders and officials from various countries closely associated with China over the years.

Signs of change

After coming to power for the third time in June 2024, the Modi government’s policy towards China is showing signs of change. Here are a few moves that indicate so:

• Earlier this year, the Competition Commission of India (CCI) cleared JSW Group’s proposed acquisition of a 38 per cent stake in MG Motor India Pvt Ltd. MG Motor India is a wholly-owned subsidiary of Shanghai-headquartered SAIC Motor.
• The Economic Survey for 2023-24 (July 22) surprised everyone by making a strong pitch for Chinese invest­ments in India, indicating a turn from the government’s anti-Chi­na stance of the past four years during which relations hit a new low. China stands at the 22nd position with only 0.37 per cent share (USD 2.5 billion) in the total FDI equity inflow reported in India from April 2000 to March 2024. The Chief Economic Adviser (CEA) V Anantha Nageswaran said, New Delhi should focus on Foreign Direct Investments from China to boost India’s exports to the US and other Western countries, and help keep India’s growing trade deficit with Beijing in check. India’s Finance Minister has backed her economic adviser’s suggestion to allow more Chinese investment in the country, after flows were disrupted by New Delhi’s increasingly strained ties with Beijing since 2020.
• The CEA makes three arguments in favour of attracting FDI from China. First, he argues that FDI in­flows “from China can help in increasing India’s global supply chain participation along with a push to exports”. Second, he says that relying on Chinese FDI “seems more promising for boosting India’s ex­ports to the US, similar to how East Asian economies did in the past”. Finally, the Survey opines that “as the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets, rather than importing from China, adding minimal value, and then re-exporting them”. Thus, in just four years, the official senti­ment seems to have deviated from the nar­rative of an Atmanirbhar Bharat becom­ing a global manufacturing hub on its own strength to one that will be partly depend­ent on Chinese capital for global engage­ments, writes Biswajit Dhar.
• India and China, on August 1, held the 30th meeting of the Working Mechanism for Consultation and Coordination on India-China Border Affairs (WMCC) in New Delhi during which the discussion was “in-depth, constructive and forward-looking”, and both sides agreed to maintain the momentum through established diplomatic and military channels, the Ministry of External Affairs (MEA) said. “Restoration of peace and tranquillity, and respect for the LAC are an essential basis for restoration of normalcy in bilateral relations,” it added.
• Responding to a pitch made by the CEA in the pre-budget Economic Survey on July 22 for seeking foreign direct investment (FDI) from China to boost local manufacturing and tap the export market, NITI Aayog member Arvind Virmani also reiterated that it is better for India to get Chinese firms to invest and produce goods here to boost local manufacturing than to keep importing goods from the neighbouring country. The survey noted that India faces two choices to benefit from the ‘China plus one strategy’ — it can integrate into China’s supply chain or promote FDI from China. “It is the trade-off...instead of keeping on import from them (China). We should allow it,” Virmani opined. According to him, “Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past.
• However, commenting on the proposal for speeding up of approvals for Foreign Direct Investment (FDI) from China, which is in the interest of domestic manufacturing Commerce and Industry, Minister Piyush Goyal on July 30 said there was no rethinking in the government to support foreign direct investments (FDI) from China, as was pitched by the Economic Survey recently.
• Corroborating the Commerce Minister’s views, the Secretary to the Department for Promotion of Industry and Internal Trade (DPIIT) said, currently there is no proposal to amend the Press Note 3 (PN3). To curb opportunistic takeovers of Indian companies due to the COVID-19 pandemic, the government had amended the FDI policy under PN3 in 2020, which meant that the neighbouring countries, particularly China, could invest in India only after the government’s approval.
• Meanwhile, the Union government has introduced a streamlined, time-bound process for granting business visas to Chinese technicians involved in manufacturing projects. The new guidelines from the Ministry of Home Affairs, effective from August 1, aim to expedite visa approvals for nationals from China and other countries sharing land borders with India, said a senior government official. This initiative is anticipated to ease challenges faced by firms investing in 14 strategic sectors covered under the production-linked incentive (PLI) schemes — the government’s flagship scheme designed to bolster manufacturing in India.

Drivers of change

The current strategies to limit Chinese imports have not shown any positive result. China was India’s largest trading partner in FY24, and has been New Delhi’s largest import partner for the last 18 years. Data released by the commerce department on August 14 showed that India’s exports to China declined by 9.4 per cent to USD 1.05 billion, and imports from the neighbouring country rose by 13 per cent to USD 10.28 billion in July. The viable alternative to limit this growing trade deficit could be to invite China to produce goods meant for the Indian market in India itself. This will also encourage Chinese FDI and the transfer of required technology. With China facing a negative population growth in two successive years, and India with a huge number of unemployed youth, Indo-China joint venture is expected to be a win-win proposition for both the countries.

It is reported that in addition to approved pharmaceutical inputs (API), a growing number of Indian companies are striking licensing and technology transfer agreements with China’s leading lithium-ion suppliers, in a sign that the country’s drive to domestically produce electric vehicle (EV) battery cells is increasingly dependent on Chinese expertise and technology.

Despite India’s recent lithium discoveries and the government’s push through a production-linked incentive (PLI) scheme for advanced chemistry cells, Indian battery manufacturers are turning to China for essential know-how and materials needed to kick-start domestically produced electric vehicles (EVs).

‘Make in India’ project has failed to attract foreign direct investment despite liberal disbursement of funds under the PLI scheme. Currently, the share of FDI equity inflows is a mere 0.01 per cent of the total inflows. As per the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2024, there was a 43 per cent decrease in FDI in India in 2023.

An IMF working paper published in July reveals India’s PPP-adjusted labour productivity is only 12.2 percent of the median productivity in advanced economies, and 42.6 percent of the median productivity in emerging markets. Without infusion of new technology, labour productivity is unlikely to improve, reports Moneycontrol. Along with Chinese FDI, Chinese technology is expected to be transferred. It is reported that China is attracting more foreign investment in advanced manufacturing. During January-June 2024, investment in manufacturing increased by 2.4 percentage points, totalling 141.86 billion yuan during the period and accounting for 28.4 percent of all FDI in the first half of the year. In particular, FDI in hi-tech manufacturing reached 63.75 billion yuan – also a 2.4 percentage point increase from the same period a year prior. It is very likely that China would prefer to transfer its standardised technology and production system to countries like India.

The ‘State of Food Security and Nutrition in the World’ (SOFI) report, released on July 24, 2024, reveals that India is home to 194.6 million (19.5 crore) undernourished people – the highest in any country in the world. The report prepared by the UN’s Food and Agriculture Organisation (FAO) and jointly published with four other UN agencies, including the UN and UNICEF, also discloses that more than half the country’s population is unable to afford a ‘healthy diet’. India ranks first in the world in wasting in children and low birth weight among babies, and first in South Asia in anaemia in women. To break this vicious cycle, large scale domestic manufacturing is a must. Chinese technology and FDI in labour intensive manufacturing could be an ideal solution.

Observations

Political change in Bangladesh in August has put India in a difficult situation. India, which used its influence with Hasina’s government to hold down Chinese involvement in Bangladesh, may have the most to lose. China, on the contrary, may have an opportunity to strengthen its presence on the Bay of Bengal. India cannot afford to constantly fight with its big neighbour.

The Indo-China joint venture is expected to be a win-win proposition for both the countries. But before finalising such a deal, Indian negotiators must ensure that such Chinese ventures in India do not become the extended ‘sweat shops’ of mainland China.

Views expressed are personal