Can India Inc extricate themselves from China?
cHINA AND India is not on the friendliest of terms. In 2020 their troops clashed on their disputed border in the deadliest conflict between the two since 1967 – then they clashed again in 2021 and 2022. That has made trade between the Asian giants a tight tie. Strict but, especially for India, still necessary. Indian consumers depend on cheap Chinese goods, and Indian companies depend on cheap Chinese inputs, especially in future industries. While India sells products of the old economy to China – crustaceans, cotton, granite, diamonds, petroleum – China sends India memory chips, integrated circuits and ingredients medicine. As a result, trade is getting worse. Of the $117bn in goods flowing between the two countries in 2022, 87% came from China (see chart).
India’s Prime Minister, Narendra Modi, wants to reduce this Sino-dependence. One reason is strategic – risks depend on a mercurial opponent for urgent imports. Another is commercial – Mr Modi is trying to replicate China’s nationalistic, export-led growth model, which means taking some business from China. In recent months his government’s efforts to isolate parts of the Indian economy from their larger neighbors have increased. On August 3, India announced new licensing restrictions for imported laptops and personal computers – devices that come primarily from China. A week later it was reported that similar measures were being considered for cameras and printers.
Officially, India is open to Chinese business, as long as this is in accordance with Indian laws. In practice, the Indian government uses various tools to make the life of Chinese companies in India difficult or impossible. The worst of these are outright bans on Chinese products, often on grounds related to national security. As a result of the border hostility in 2020, for example, the government banned 118 Chinese applications, including TikTok (short video sensation), WeChat (super app), Shein (fast fashion seller) and almost everything. another service that captured data about Indian users. Hundreds more apps were banned for similar reasons through 2022 and this year. Telecom gear makers, such as Huawei and ZTEreceived the same treatment, fearing that their hardware could allow Chinese pirates to spy on Indian citizens.
Tariffs are another popular tactic. In 2018, in an attempt to stop the decline of the Indian mobile phone assembly at the hands of Chinese competitors, the government imposed a tax of 20% on imported devices. In 2020 he tripled tariffs on toy imports, most of which come from China, to 60%; then, at the beginning of this year, they raised them to 70%. India’s toy imports have declined by about three-quarters since 2019.
Sometimes the Indian government eschews official functions for more subtle ones. A common tactic is to introduce bureaucratic friction. India’s red tape makes it easy for officials to find fault with businesses that are out of favor. Non-compliance with tax regulations, so intractable that it is almost impossible to comply with them all, is a favorite accusation. Two smartphone manufacturers, Xiaomi and BBK Electronics (which has three popular brands, Oppo/OnePlus, Realme and Vivo), is being investigated for allegedly embezzling $1.1bn from the Indian taxpayer. On August 2 news outlets cited anonymous government officials as saying that the Indian branch of BYDa Chinese car maker, under investigation over allegations that it paid $9m less in taxes on parts imported from abroad.
A complex licensing system gives Indian authorities more ways to interfere with Chinese business. In April 2020 India announced that investments from countries that share a border with it must obtain a special permit. No neighbor was named, but China was clearly the target. Since then India has approved less than a quarter of the 435 applications for foreign direct investment from the country. according to Business Today, a local institution, only three received the hammer in the last fiscal year in India, which ended in March. In July reports emerged that there was a joint venture between BYD and Megha Engineering, an Indian company, was not allowed to build electric vehicles and batteries for security reasons.
Luxshare, a major Chinese device manufacturer for Apple, among others, has yet to open a factory in Tamil Nadu, despite signing an agreement with the state in 2021. It is believed that the ban widely without word the reason for the delay. central government in Delhi on new facilities owned by Chinese companies. In early August, India’s slow-moving parliament passed a new law easing the approval process for new lithium mines after a large deposit of the metal, used in batteries, was discovered earlier in the year. Miners are welcome to submit bids, but Chinese bidders are expected to be viewed unfavorably.
At the same time, India is using a policy to dislodge China as a leader in several markets. India’s $33bn program of “production-linked incentives” (cash payments linked to sales, investment and output) has identified 14 areas of interest, many of which are controlled by Chinese companies.
One example is pharmaceutical ingredients, which Indian drug makers have sourced from China for years. In February the Indian government began handing out handouts worth $2bn over six years to companies that agree to produce 41 of these products at home. Major pharmaceutical companies such as Aurobindo, Biocon, Dr Reddy’s and Strides are participating. Another example is electronics. Contract manufacturers of Apple’s iPhones, such as Foxconn and Pegatron of Taiwan and Tata, an Indian conglomerate, are allowed to buy Chinese-made parts for assembly in India while also trying to nurture local suppliers.
Some Chinese companies, tired of jumping through all these hoops, are saying they are quitting. In July 2022, after two years of efforts including the promise of a $1bn investment in India, Great Wall Motors closed its Indian car manufacturing operation, unable to obtain local approval. Others are trying to change it. Xiaomi has said that it will localize all production and expand exports from India, which today only go to neighboring countries, to Western markets. Shein will re-enter the Indian market through a joint venture with Reliance, India’s most valuable listed company, known for its ability to navigate Indian bureaucracy and politics. ZTE it is said to be trying to arrange a licensing agreement with a domestic manufacturer to make its network equipment. So far he has not found any takers. Given India’s growing suspicions about China, that may take a while. ■
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