Growing calls in India to reduce supply chain dependence on China following recent tensions have cast Vietnam as a possible alternative source for Indian industries
Since the face-off between India and China fuelled up in Ladakh, the chorus for decoupling from China erupted, resulting in the boycott of Chinese products. The Government has already put some barriers to economic engagement with China, spiking security concerns. It restricted Chinese FDI approval through Government route from the automatic route. It blocked 59 Chinese apps, imposed stricter regulations for Government procurement, restricted import of colour TV( since China is the biggest exporter of it to India) and many more are in the offing.
Debates and counter-arguments sparked against the decoupling from China. This is because India is over-dependent on imports from China for the development of its new industries, like electronics and telecommunication. Nearly, 38-39 per cent of total imports of electronic and telecommunication equipment and parts are from China. Of these, 42 per cent were accounted for by telecommunication equipment and parts, such as mobile phones.
Given these, concerns were raised over the fate of these industries. These industries made galloping growth since India and China became closer economically, leaving behind the border dispute unsettled. China was the biggest trading partner of India till 2018-19. It turned a major catalyst to boost India's new industries. In 2014, India had a few mobile manufacturers. In 2019, India became the second-largest manufacturer of mobile phones in the world, with 200 units, according to Minister Ravi Shankar for the Ministry of Electronics and Information Technology. The industry provided big employment and woo global honchos in electronic contract manufacturing – such as Foxconn, a Taiwanese giant.
India is one of the global leaders for manufacturing and exporting pharmaceutical products. One of the reasons for its growth was large imports from China. Bulk drugs or active pharmaceutical ingredients (API) are raw materials for making formulations and medicines. These are used to manufacture at least twelve essentials drugs, such as paracetamol, ranitidine, ciprofloxacin, metformin, acetylsalicylic acid, ofloxacin, metronidazole, ampicillin and ascorbic acid. India imports 80 per cent of API from China, according to Dr Saktivel Sevaraj, Director, Health Economics. Chinese APIs are 20 – 30 per cent cheaper than India
Notwithstanding, does it advocate the continuation of overdependence on China, particularly when the country reels under political uncertainty. Despite the manifold rise in economic engagement, political relation remains thorny? China is facing two major headwinds for its economic revival. Trade war with the USA — the biggest destination for China's exports and the exodus of foreign investors from China, after the outbreak of COVID-19. FDI in China declined by 6.2 per cent during the first five months of 2020. Japan is the first nation to inspire its investors to shift their investment from China to other low-cost countries, like in Vietnam and other ASEAN nations and India. The USA followed suit by raging tariff war. It discouraged American investors to invest in China and export to the USA.
Against these backdrops, there are two ways, which can India help to reduce import dependence on China. That is, either to find alternatives to China or develop a domestic supply chain by increasing production, or both in conjunction.
Vietnam can be a challenge for an alternative to China. Ever since the US-China trade war heightened, many importers in America and elsewhere were examining their supply chain to move to other countries. According to the US Census Bureau, imports from Vietnam into the USA jumped by 33 per cent in the first of 2019. Low labour cost is one of the attractions for investment in Vietnam. It is almost 50 per cent lower than in China. Vietnam's biggest specialisations are in the production of electronics, textiles and furniture. Eventually, electrical machinery, including electronics, are the biggest items of Vietnam's exports. This translates Vietnam as an appropriate alternative to China in case of India for its overdependence on electronics. Even though Vietnam cannot catch up with China in terms of large volume and better logistics, one can likely meet a subset of their requirement.
FDI played an important role in the development of the supply chain industry in Vietnam. Nearly 65 per cent of FDI flowed into the manufacturing and processing industries. Incidentally, FDI infused items are the major exports of Vietnam. This placed the nation an important alternative to China for the supply chain.
Notwithstanding, finding alternative sources for the supply chain is not enough to tide over the overdependence in imports. Domestic production, say import substitution, is equally important to abate the overdependence on imports. Import substitution should be an important lever to self-reliance. It has two benefits for a nation like India. First, it encourages foreign investors to produce in the consuming country, given the large domestic demand. Second, it may give new lease of life to the domestic investors to join hands with foreign investors in the lure of technology transfer and ebbing the capital investment risks. Domestic investors were almost dormant after the demonetisation.
Another challenge to tide over the supply chain crisis is to encourage Indian investors to invest abroad. Alongside the development of domestic industry, investment abroad will supplement the supply chain production. In other words, integrating the countries with domestic production should pitch for a stable supply chain for production. Asian car policy by Toyota Motor Company could be a lesson. With the aim of cost-cutting, the Japanese company invested in Thailand, Philippines, Malaysia, Indonesia and India to build up a new supply chain. It set up production facilities for diesel engine, press parts, axle in Thailand, manual transmission (middle type) in the Philippines, engine computer in Malaysia, gasoline engine and door lock in Indonesia and manual transmission (large type) in India.
Given the new dynamism in the global supply chain, after China is losing predominance, India's dependence on imports should adhere to the new dynamism. India- Vietnam bonhomie sparked when both became the victims of China in the South China Sea. The turning point in the relation cropped up when Indian Prime Minister Narendra Modi visited Vietnam in September 2016 — the first visit of an Indian Prime Minister in 15 years, and back to back visit by newly elected Vietnam President Tran Dai Quang.
The writer is an Adviser, Japan External Trade Organisation, New Delhi. Views expressed are personal