Until the outbreak of COVID 19, China was the biggest trade partner of India. Trade increased due to a surge in imports from China. It outsmarted oil rich countries and became the biggest source of imports. Imports from China accounted for over 13 percent of India’s total imports in 2018-19.
Incidentally, the surge in imports was arrested by the outbreak of COVID 19. Imports from China made a somersault in 2019-20. Imports from China declined by 6.6 percent in 2019-20. Pandemic China lost its significance as a stable source for supply chain. Factories were closed and the foreign investors were encouraged to shift their production bases. Electronic and electric items were the major items of imports from China. They accounted for one third of the total imports from China .
There was a close link between imports of electronic items from China and the development of the electronic industry in India. China has been the biggest source for import of electronic items for India. It accounted for 40 percent of total imports of electronic items in India. This manifested in India’s over-dependence on China for the electronic industry.
The outbreak of COVID 19 and eventually the drop in imports led to a drag in the electronic industry in the country. Nevertheless, the situation was treated as a wake up call for India and time for development of its own electronic component industry. Given this reinvention, the government of India prompted a new industrial policy, which focused on the development of MSMEs in the country as core component of Make in India. It unleashed multiple fiscal incentives through liberalization of credit facilities and plunging into a big guarantee for this sector.
Budget 2020-21 also took a proactive approach to India’s self-reliance movement. It lobbed between protectionism and liberalization, focusing on the development of MSMEs as the base for supply chain industry. It toyed between rise and fall of custom duties. It raised custom duties where domestic industries were competitive and lowered the duties for the emerging industries. For example, custom duties were raised on component and parts of mobile phones, electronic motors, home electrical appliances and toys. Conversely, custom duties were reduced on raw materials and component for auto industry ( such as catalytic convertors).
PLI (Production Linked Incentive) in India is one of such measures to woo more investment and boost in the electronic industry. It has enhanced the incentive from 4 percent to 6 percent during COVID 19. Government is hoping for fresh investment from global five, such as Foxcom Wistron (manufacturer of Apple), Flex , Samsung , Oppo, etc.
Apart from COVID 19, the deterioration in the India-China relation due to repeated stand off in the Ladakh border escalated India-China relation. Countrywide slogans are raised for the boycott of Chinese goods. Juxtaposed in the stand-off at the border and Atma Nirbhar Abhijan (self-reliance movement), India is planning to impose stringent quality control measures and high tariffs on Chinese goods. India has also gone one step ahead to decimate China’s notorious attempts for acquisition after it was losing grip in trade. In an amendment in FDI policy, India barred Chinese investment approval through Automatic route.
China is eclipsed by dark days ahead. Before the outbreak, China forecasted “Xiakang Sheui”. In English, it means moderately prosperous society. The epidemic turned pandemic has paralyzed the Chinese economy. Chinese economy contracted by 6.6 percent in the first quarter of 2020. In 2018, China’s manufacturing industry generated US$4 trillion output and accounted for 30 percent of GDP. It was the global hub for manufacturing, accounting for 28 percent of the global manufacturing output. With the outbreak of COVID 19, China’s manufacturing sector faced an economic loss of US $50 billion.
China lost the aura of producing cheap goods. COVID-19 and currency fluctuations dented China’s hegemony for the global hub for manufacturing. China devalued its currency in August 2019 to offset the appreciation of Chinese currency yuan and high tariffs imposed by the USA. The pandemic prompted many companies to shift their manufacturing bases from China. Japan has already earmarked US$2.2 billion to help its manufacturing shift. Japanese car maker Mazda shifted a part of its production from Jiangsu in China to Guancjuato in Mexico. Microsoft and Google are looking for Thailand and Vietnam.
Prior to COVID 19 outbreak, fear was hovering on Chinese proxy entry in India through ASEAN. China is the biggest trading partner of ASEAN. Over one-fourth of ASEAN imports of electronic items are from China. Both China and India have FTAs with ASEAN. Given this situation, there was every likelihood that China would use China-ASEAN FTA turf to dump goods in India. With the outbreak of COVID 19, which shattered Chinese electronic industry, China fear for its backdoor entry has diluted. After the COVID 19 outbreak, Chinese imports surged from ASEAN nations. During the first quarter of 2020, China’s imports from Vietnam and Indonesia rose by 24 percent and 13 percent respectively year-on-year basis.
Cracks are developing in the supply chain in the region. A close look at the trade relation between China and ASEAN reveals that China’s influence in the region is melting. The growth rate of exports to China from the emerging ASEAN countries like Laos, Myanmar Vietnam had outpaced the growth rate of imports from China. With Belt and Road projects currently under hold, these nations are embroiled in new strategies for their overdependence on China. It is not certain whether COVID 19 will further delay finalization of RCEP after India refused to join in.
To sum up, mega incentives to MSMEs in the economic package to develop its own supply chain and curb on overdependence on China is a timely step for India’s Atmanirbhar Abhijan (self reliance movement).