Dear Readers,
On his deathbed, Voltaire was asked by a priest if he’d like to renounce Satan. Voltaire replied: “Now, now my good man, this is no time to be making enemies”.
Border disputes between India and China are not a new thing. However, unlike the 1960s, when the two economies were practically irrelevant in the global order, today, things are completely different. China and India not only account for 2.7 billion people — roughly 40% of the 7.5 billion people on the planet — but are also two of the biggest economies in the world.
It is another matter that at a per capita GDP level, both countries are relatively “poor” when compared to some of the most developed economies. For instance, as of 2018, the per capita GDP of the United States was $54,659 while that of Sweden was even higher at $57,966 (see chart below on per capita GDP). In comparison, China (at $7,752) and India (at $2,100) lag far behind. India, in particular, is the worst of the lot. China's per capita GDP is roughly 4 times India’s; the US and Sweden’s are a whopping 26 and 27 times India's.
This shows how far an average Indian is from an average Chinese or American. That is why economists repeat it ad nauseam that India has to grow rapidly for several decades at a stretch if it wants the average level of lifestyle to reach anywhere close to the developed world.
In this context, the spilling over of the latest border dispute between these two Asian giants into the economic sphere is particularly ill-timed. Hurt by China’s aggression, several Indians, including many in the government, have argued in favour of boycotting the use of Chinese products. However, for a variety of reasons, this strategy, while targeting China, is likely to hurt India far more.
For one, contrary to perception, India imports a lot of intermediate goods from China, and stopping that trade will affect our ability to produce finished goods. The Indian Express found companies across import-dependent sectors such as automobile, pharmaceuticals, electronics, telecommunications, etc. claiming that any move in this direction could be counter-productive, impacting the overall competitiveness of the Indian manufacturing sector and undermining our competitiveness to export.
Many readers have asked if that means India should resign to becoming a “slave” to Chinese imports.
Thankfully, the answer is “No”. But, the path to overcoming our dependence on Chinese goods — or for that matter, imports of any other country — requires Indian policymakers and businesses to put in real hard work and not resort to lazy solutions such as banning trade or raising tariff barriers.
The first thing to understand is that India’s poor share in global trade, especially on goods, is a reflection of our acute lack of competitiveness. This is the harsh truth but far too often, instead of accepting this reality, policymakers have blamed India’s stagnant exports performance on weak global demand.
An analysis by HSBC in late 2016 showed that weak global demand explained only 33% of the slowdown in Indian exports. The biggest culprit were “domestic bottlenecks” — explaining 50% of the slowdown. The remaining 17% was blamed on an overvalued rupee (See chart below on reasons for poor exports).
The impact of domestic bottlenecks (such as poor infrastructure, lack of reliable electricity, logistical delays, regulatory hurdles, problems in enforcing contracts etc.) was higher still — 60% — when one looked at only the trade in goods (that is, by leaving aside the trade in services).
There's little any individual country can do about global growth or demand — that’s a factor which is the same for all nations. What matters then are domestic bottlenecks and rupee exchange rate.
On the exchange rate, the jury is still out. Some argue that a cheaper rupee would make our exports more competitive — and that seems fairly straightforward. Others argue that a stronger rupee will help us import intermediary goods at a cheaper price thus helping our export competitiveness.
The only place there is consensus is on the biggest factor — domestic bottlenecks. The analysis, led by Pranjul Bhandari, further showed that there were a lot of sector-specific factors that can make a meaningful difference. “For instance, India's desire to revive textile exports can be helped by increasing productivity in cotton plantations (by better implementing available technology, for example BT Cotton). Trade negotiations (bilateral, multilateral and plurilateral) to lower tariffs that India's exports face abroad can boost India's exports in textiles and engineering goods”.
Towards fine-tuning a sector-specific strategy to boost exports, the government can just revisit the advice rendered by its Chief Economic Adviser Krishnamurthy V. Subramanian in the latest Economic Survey released in January-end this year. Chapter 5 of Volume I is dedicated to this issue. In it, the Survey makes two key points.
One, India must not harbour “misplaced insecurity on the trade front” lest it misses the opportunity that trade provides. It states, “contrary to recent fears, careful analysis...shows that India has gained from trade agreements: a 0.7 per cent increase per year in trade surplus with partner countries for manufactured products and 2.3 per cent per year for total merchandise”.
Two, its states, “the current environment for international trade presents India an unprecedented opportunity to chart a China-like, labour-intensive, export trajectory and thereby create unparalleled job opportunities for our burgeoning youth”.
According to the Survey, by integrating “Assemble in India for the world” into Make in India, “India can create 4 crore well-paid jobs by 2025 and 8 crore by 2030”. The Survey singled out China as a model for India to emulate. “China’s remarkable export performance vis-à-vis India is driven primarily by deliberate specialization at large scale in labour-intensive activities, especially ‘network products’, where production occurs across Global Value Chains (GVCs) operated by multi-national corporations”.
India must defend its territorial integrity and yes, it must do whatever it can to hit back at China, but, and this cannot be overemphasised, it is critical not to resort to knee-jerk reactions. Sun Tzu wrote: “Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing”.
In the same way, India's trade policy must be an informed choice.
Stay safe!
Udit
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