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Decoupling from Chinese Manufacturing - An Assessment - I

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June 20, 2020

What is the issue?

  • The border clashes with China and the COVID-19 pandemic has given way to concerns on India’s dependence on Chinese manufacturing.
  • In this context, here is an assessment if India could really decouple itself from Chinese manufacturing and the options before it.

How dependent is India on Chinese manufacturing?

  • India’s imports from China in 2019-2020 reached $65 billion.
  • This is out of the $81 billion two-way trade.
  • Currently, India is exporting a lot of raw materials and intermediate products.
  • On the other hand, it is importing finished products from China.
  • It is also importing certain key intermediates such as active pharmaceutical ingredients from China.
  • Sectors - In terms of capital goods, Indian manufacturing is highly dependent on supplies from China.
  • This includes a wide variety of machineries, including electrical machinery, semiconductor driven machinery etc.
  • India also imports fertilizers from China.
  • Many limited value consumer goods, to a very large extent, have flooded the Indian market.
  • Whether these are actually required to be imported or not is itself not clear however.

What are the challenges in addressing the imports concern?

  • Alternatives - For a variety of reasons, India’s dependence on imports is localised.
  • In other words, there is no wide diversification of countries from which India is sourcing its imports.
  • E.g. Most of the critical medical supplies imported for frontline healthcare workers in the COVID-19 situation comes from China
  • This essentially means that apart from China, there are probably 3 or 4 countries on which India's dependence is increasing.
  • So it would be a difficult choice for India to get out of Chinese dependence and search for alternative partners.
  • Essentials - Concern arises not with imports that are not really a matter of choice but with those products that are crucial and essential.
  • E.g. the humidifiers, medical masks, liquid soap being utilised in the COVID-19 battle
  • For these and other such essentials, China remains the main source.

What should India's approach be?

  • India's approach has to go much deeper and has to develop sector specific strategies.
  • It should prioritise in terms of the areas in which it can, relatively, more easily move back away from the Chinese dependency.
  • India should now probably replicate what China did in the 1990s.
  • However, the global environment and global value chains are much different from how they were 30 years back when China was opening up.

How different are the global value chains now?

  • Policymakers suggest that India is set to become more open and that there is going to be more reliance on the global markets.
  • Unfortunately, that possibility is far from reality.
  • China's strategy in 1990s was a global market-driven industrialisation strategy, an export-driven strategy.
  • Global value chains are now in fact becoming more local.
  • Countries are depending more on their own economies rather than on global markets.
  • This is perhaps an impact of the great recession of 2008.
  • So China's strategy in 1990s may not work for India now.

What gives China its central place in global manufacturing?

  • China is so central to a very large number of global and regional supply chains.
  • One is because China offers the capacity to businesses to develop the supply chains by considerable lengths within itself.
  • Not just the geography, China also has a broad-base that it has developed over different sectors, and by and large in most products.
  • China’s biggest value comes as a final stage assembler and that's where China’s proficiency in value chains happens.
  • Importantly, alongside being an exporter of assembled final products, China has also become a major consumer for final products.
  • In the post COVID-19 situation, the businesses' emphasis is to make value chains shorter, resilient and durable, and locate them closer to the final demand markets.
  • In this context, undeniably, China is more advantaged.
  • China continues to remain a major source of the final demand market.
  • China's geography offers tremendous agglomeration advantages of moving back and forth across borders and integrated facilities.

So, is relocation possible?

  • Given the above factors, shifting supply chains physically out of the Chinese geography and it’s connected arms (such as Hong Kong and Taiwan) would be hard.
  • Whatever relocation was possible has already happened after the onset of the U.S-China trade war driven by tariffs.
  • So, seeing that kind of relocation is unlikely anymore.
  • Nevertheless, companies have moved out and are moving mainly to South-East Asia.
  • This offers scope for limited relocations, and India should see ways of attracting these.

Did Make in India succeed in this regard?

  • Make in India initiative was a good opportunity for India to get the manufacturing sector back on track.
  • But the country has not taken advantage of what it had actually planned for.
  • In the past 5 years, with Make in India programme in place, the dependency on China has actually gone up. 
  • The Make in India strategy talked about FDI into manufacturing.
  • But data reveal that foreign investors had preferred service sectors.
  • And many of these sectors are those where India does not need any investment. E.g. IT services

What is to be done?

  • Despite being one of the most open economies and offering attractive terms to foreign investors, India has attracted little investments.
  • India should now analyse the gulf between FDI inflows into China and into India.
  • The policies should look at the wholesome picture to address the varied factors (Click here for Part II) that go into making 'attracting investments' work.

 

Source: The Hindu

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