Building a bulwark

Even as the relations between India and China are strained today because of repeated aggressions by China in Doklam (2017), in Galwan Valley (2020), and in Tawang Sector (2022), paradoxically, China continues to be the biggest trading partner of India after the US. The tragedy is, it is to the disadvantage of India, causing a huge trade deficit of USD 73.31 bn, unlike the Indo-US trade where India gained trade surplus of USD 32.85 bn in 2020-21. China accounts for 14 per cent of India’s total imports but the lion's share of India's trade deficit, about 33 per cent, is from trade with China; it hit the USD 100-bn mark in 2022. India's imports from China went up from USD 2 billion in 2001-02 to USD 94,57 bn in 2021 whereas India's exports to China only increased from USD 1 bn to USD 21 bn. Although the patriotic emotion calls for a total boycott of Chinese goods, the complex economic forces behind trade are too challenging to be tamed by mere sentiments alone.

The alarming magnitude of imports from China forebodes disastrous consequences. Firstly, the current account deficit (CAD) drains out foreign exchange reserves and creates a credit risk. Credibility of the economy suffers, which may dissuade the foreign investors. Secondly, the trade deficit reduces the value of the rupee and makes exports expensive. Thirdly, dumping of cheap Chinese goods in India will adversely affect the demand for Indian products, forcing domestic MSMEs and SSIs, which contribute to around 40 per cent of manufacturing, to work below their capacities. The Standing Committee on Commerce, chaired by Naresh Gujral (2018), observed that India was a major exporter of solar products until 2011, before China began dumping in India. Now, the exports have come to a standstill, resulting in a loss of nearly two lakh jobs. Fourthly, the scenario has created consumerism, fueled by aggressive commercial publicity, leading to an increase in spending and decrease in savings. In the final analysis, increasing dependence of a country's industries, businesses and markets on imports from another country will only mean undoing of self-reliance — the Atmanirbhar concept.

There are a host of reasons, both official and unofficial, for the dumping of cheap and poor-quality Chinese goods in India. Officially, China provides its companies with huge infrastructure, logistics, access to low-interest financing (at 6 per cent compared to 11 per cent in India), and economy in scale. Its export policy focuses on integration with the global value chain, control on supply of raw materials, and skill development of the workforce. China gives export rebates up to 17 per cent which makes Chinese goods cheaper by 5-6 per cent vis-à-vis their Indian counterparts. The unofficial part is, allegedly, China resorts to currency manipulation, provides subsidies violating WTO norms, and colludes with unscrupulous firms of importing nations in countervailing anti-subsidy duties and circumventing anti-dumping laws. China also re-routes goods through countries with whom India has Free Trade Agreement (FTA), and operates from Less Developed Countries (LDCs) for dumping goods in Indian markets, which deprives India of huge revenues. The committee expressed displeasure that though 75-80 per cent of Chinese steel products are covered under anti-dumping duty, the imports of such steel rose by 8 per cent (a clear hint at collusion).

Boycotting Chinese goods is not a lasting solution to the problem. After the Uri attack in 2016, a boycott campaign was successful, as the sale of Chinese goods fell by 40 per cent. Similarly, after Galwan Valley attack in 2020, the government banned 59 apps including TikTok, WeChat, Helo and UC Browser. Nevertheless, it made little difference, as Chinese goods are still in demand. Xiaomi, OnePlus, Realme, Oppo, and Vivo account for approximately two thirds of smartphone sales in India today. Moreover, boycotting Chinese goods for now will have other consequences: a) companies depending on Chinese raw material may face production crisis, b) boycott will mean violation of WTO rule of non-discrimination, c) Indian exports which depend on Chinese raw material may suffer, and d) it may create unemployment in sectors sustaining on Chinese imports.

Similarly, corrections in trade policy might appeal as an instant solution for a trade deficit, just as changes in fiscal policy do for fiscal deficit; but the results are not guaranteed since consumers’ behaviour is governed by ‘value for money' concerns in a free market. Economists suggest three ways to deal with trade deficit: a) reduction in consumption in order to reduce imports and increase savings, b) devaluation of rupee to make imports more expensive and exports cheaper, and c) tax on (non-FDI) capital inflow in order to reduce borrowings. But it’s a double-edged sword syndrome, with side effects like inflation and fall in demand.

Ensuring the stability of domestic currency, increasing the flow of foreign investment, and encouraging exports are more popular ways followed by nations. Alongside, diversification of the import base and increasing quality domestic production through self-reliance are equally important. Some policy initiatives are already in place, which include Interest Equalisation Scheme on pre- and post-shipment rupee export credit, Trade Infrastructure for Export Scheme (TIES), Market Access Initiatives (MAI) Scheme, Rebate of State and Central Levies and Taxes (RoSCTL) Scheme to promote labour-oriented textile export, Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme etc. However, these measures will yield results only when they are supported by proper enforcement of laws against illegal imports, dumping and smuggling activities.

Directorate of Revenue Intelligence (DRI), customs preventive formations and other customs enforcement wings need to be proactive in performance to ensure a deterrent effect. Trade remedial measures, which include anti-dumping duty (to neutralise the subsidy effect on the price of export country), and safeguards such as 'grace period' to increase competition among domestic producers and also quantitative restrictions on imports need strict enforcement. For example, the committee expressed that the Anti-Dumping Duty (ADD) cases against Chinese products are relatively few in comparison to the actual magnitude of dumping. The introduction of Single Window Interface for Facilitating Trade (SWIFT), which provides a platform to facilitate hassle-free trade, is a good reform. Alongside, ensuring adequate logistic support and infrastructure for the enforcement machinery, especially the Risk Management System (RMS), is no less a priority.

Banning trade with a country or boycotting its goods are obsolete ideas in today's global economy. Rather, it would be prudent to play tactfully and defeat the opponents in their own game. Ensuring strict enforcement of laws guaranteeing protection to domestic manufacturers against any illegitimate, protectionist or unfair trade practices by China is extremely necessary. Similarly, support to local industries, particularly MSMEs and SSIs, will encourage competition in quality and pricing. High rates of taxes on import of finished goods, and lower rates on raw materials, capital subsidies and tax holidays etc. can work as real incentives. For example, 50 per cent of imports are raw materials like Active Pharmaceutical Ingredients (APIs) and electronic components, which can be covered under production-linked incentive (PLI) schemes. Similarly, though ‘Make in India' is linked to public procurement since 2017 with a view to counter the imports, compliance from all PSUs and government establishments is yet to be fully ensured. Last but not the least, there is a need to enhance cooperation from party countries to Free trade Agreement with India and LDCs.

The writer is a former Addl. Chief Secretary of Chhattisgarh. Views expressed are personal