Modi-ji! your frowning at China in Independence Day celebration “from LOC to LAC”, your strong determination for Atma Nirbhar and your challenge against China’s tactical spiking concern on India’s decoupling from it for supply chain, shook China. It quickly responded through its Foreign Ministry spokesperson, who said, “we are close neighbours. So, the sound development of bilateral ties, not only serve the interests of two peoples, but also stability, peace and prosperity in the region.”
Paradoxically, this is the same Mr Narendra Modi, who chanted “China is not a foe, but a friend” in his first term as Prime Minister.
With bitterness growing due to repeated face offs in Ladakh border and China losing its rhetoric as a supply chain due to COVID 19, India is on a big hunt for alternatives to China. RIS – a government think tank – identified 327 items of imports from China which were to be procured from alternative sources. They included mostly telecommunication equipments, cell phones, electrical apparatus, integrated circuits and drugs intermediates. However, the report was silent on alternative sources.
Till 2018-19 China was the second biggest trading partner of India. The main characteristic of the trade was that substantial imports from China ballooned the trade between the two countries. The major items which were responsible for large imports, were electronic and electrical items. About 30 percent of total imports from China was accounted by electrical and electronic items. This reflects India’s over-dependence on China for electrical and electronic items. Nearly, 39 percent of India’s global imports of electrical and electronic was from China in 2019-20. Similar is the situation with imports of drug intermediates. Bulk drugs or the active pharmaceutical ingredients (API) are the items for which India is over dependent on China. India imports 80 percent of API requirement from China.
The over-dependence raised concerns over the Indian economic sovereignty, particularly when both countries were at loggerheads due to repeated border disputes at Ladakh. The government of India put some barriers to the economic engagement with China, spiking a threat of security. It blocked 59 Chinese Apps, imposed stricter regulations for Government procurement, restricted the import of color TVs. It shifted FDI approval for China through Government route – a stricter route – from Automatic route.
Paradoxically, concerns were raised over the fate of electrical and electronic industries. These industries made galloping growth since India and China became economically closer, despite the border dispute remained pending.
Against these backdrops, there are two ways, which can India help to reduce import dependence on China. Either to find alternatives to China or develop domestic supply chain by increasing production, or both in conjunction. While, development of domestic supply chain is not possible in near term, procurement from alternative sources is considered more viable.
To this, many suggested Vietnam a potent challenge for alternative to China. The rational behind this is Vietnam’s significance as one of the major sources of imports of electronic and electrical items. Vietnam is the third biggest import source for Indian electronic and electrical items, after China and Germany. Practically, if the imports of biggest items in this group are taken into consideration, such as telecom equipment, including cellular phones and parts, Vietnam is second biggest source of imports for India. In 2019-20, Vietnam was the second biggest source for imports of telecom equipment, including cellular phones and parts. It accounted for 15 percent in total imports of these items, against 42 percent from China. Hence, a substantial part of import dependence on China can be reduced, with the diversification of imports from Vietnam.
Ever since the US- China trade war spurred, many importers in America and elsewhere were examining their supply chains to move to other countries. Vietnam emerged as an important alternative to China. According to US Census Bureau, US imports from Vietnam jumped by 33 percent in the first half of 2019. The factors, which attributed to snowballing Vietnam’s significance, were low labour cost. It is almost 50 percent lower than in China. Vietnam’s biggest specializations are production of electronics, textiles and furniture. Eventually, electrical machinery, including electronics, are the biggest items of Vietnam’s exports.
This translates into Vietnam as an appropriate alternative to China in the case of India. Even though Vietnam cannot catch up with China in terms of large volume and better logistics, one can likely meet subset of their requirement. India – Vietnam bonhomie perked up with the visits of Vietnam Prime Minister Nguyen Xuan in January 2018, followed by Vietnam President Tran Dai Quang within three months in March 2018. These were back-to-back visits to the visit of Indian Prime Minister Narendra Modi in September 2016 – the first visit of an Indian Prime Minister in 15 years. These visits marked a strong bond for strategic economic and defence relations between the two countries. India committed US$500 million line of credit for procurement of defence equipment and MOUs were signed for coastal guard collaboration in the wake of China’s aggressive claim in South China Sea.
The green shoot was visible. Trade surged between the two countries. Within three years of the visits, total trade between the two countries increased by over 17 percent. The significance of this was the spurt in imports by India. Factors attributing to this surge were large scale imports electronic and electrical items. Import of these items leapfrogged four times – from US$1,595.7 million in 2017-18 to US$4,010.1 million in 2019-20.
This manifests the onset of India’s diversification to Vietnam for procurement of electronic and electrical items, even before the China debacle due to trade war and the outbreak of Covid 19. Given this, India should find a policy strategy to have a closer bond in trade with Vietnam. One of the ways is to have an FTA with Vietnam. Second, India should promote Indian investment in Vietnam. After the outbreak of COVID 19, many foreign investors are considering to shift their manufacturing units from China. Japan is one of such cases in point.