The economic challenge in decoupling from China | Opinion
India’s dependence on China, especially for electronic products and active pharma ingredients, is tremendous
China’s most recent incursions into Indian territory are threatening to push the economic relations between the two countries into unchartered territory. Calls for the boycott of Chinese products have persisted for several weeks now, but the question in the minds of most people is the extent to which the Indian economy can decouple from China. Is it possible in the foreseeable future?
A closer look at facts provides a clear picture as to where India stands vis-à-vis its dependence on China. One important point is that China had established itself as India’s largest import source from 2004-05, having accelerated its exports to India from at least a couple of years earlier. Between 2003-04 and 2007-08, the period of rapid expansion of the Indian economy before the “Great Recession” struck, the nation’s imports from China expanded from about $4 billion to over $27 billion, or at a compound growth of nearly 61%. Consequently, China’s share in India’s total imports more than doubled, from 5% to 11%. Over the next decade, China’s expansion in the Indian market continued and by 2017-18, China’s share had expanded to 16.4%. In the two financial years since, this share dropped to 14%. However, there is evidence that China’s presence has certainly not decreased.
These numbers do not give the true picture of India’s dependence on China; imports at the product level do. There are two major sectors in which India’s dependence on China is particularly worrying: Electronic products, including telecommunication equipment, and active pharmaceutical ingredients (APIs), the intermediates for manufacturing pharmaceutical formulations. Both these sectors are immensely significant for India. While the former is critical for the government’s Digital India programme, the latter supports India’s pharmaceutical industry that supplies affordable medicines, to the domestic market and several developed and developing countries.
It is no surprise that a large share of mobile phones that India imports is from China. The question is, how large is this share? In 2017-18, more than 90% of India’s imports of mobile phones and components were sourced from China. Data shows that in the following two financial years, imports from China came down significantly, but the reality is that Hong Kong is acting as a conduit for China’s exports to India. In 2017-18, India’s imports from Hong Kong were nearly $11 billion; the following year it increased to over $18 billion. China has, for long, used Hong Kong strategically to distribute its products to the rest of the world. Thus, when sentiments in India were against China following the Doklam dispute, Hong Kong began to be used to tranship products manufactured in China. Therefore, in effect, there was no real reduction in imports of mobile phones from China.
Other imports of electronic and telecommunications equipment from China were equally significant. Although there is a common perception that large volumes of consumer electronic products are sourced from China, the fact that 82% of colour TV sets imported into the country in 2018-19 were from this country will come as a surprise to many. Further, 80% of optical fibres and 92% of personal computers were imported from China in 2018-19.
The dependence on China is even worse in the case of APIs. Among the medicines whose APIs are imported is paracetamol, an essential medicine in the first aid kit of every household. In 2018-19, the entire stock of imports of this medicine came from China. The same was the case with streptomycin, an antibiotic used for treating several bacterial infections, including tuberculosis. Besides these medicines, China was the source of 95% of imports of APIs for penicillin and 98% for ibuprofen, a common medicine used for treating pain, fever and inflammation of various kinds, including arthritis. The APIs of many other critical medicines are also sourced from China.
The list of industries which depend on China for their essential supplies is fairly long, but there are two that are important. The first is the motorcycle industry, which, in 2018-19, sourced 85% of its imports of parts and components from China. While most motorcycle components are obtained locally, the industry imports critical parts such as wheel rims from China. India is also heavily dependent on China for solar photovoltaic cells, which are expected to be the lifeline of the energy sector as the country seeks greener options.
That India should bring down its dependence on China is a no-brainer. But progress towards reducing this dependence can only be made if the government and businesses make concerted efforts. In some sectors, especially in the production of APIs, the government will have to play a more proactive role by using the public sector units, as three decades of the growth of the Indian pharmaceutical industry has shown that the private sector is not willing to invest in a segment that involves considerable risk-taking. In other words, only a carefully-crafted industrial policy can reduce India’s dependence on China.