Bengaluru: The complex history of India and China has shaped their economic relationship. Despite several conflicts and disagreements, China continues to remain a key trading partner of India.
India’s heavy reliance on Chinese imports for a wide range of products, including smartphones, semiconductors, and pharmaceuticals, is a major challenge for India to reduce its dependence on China.
Many goods that are manufactured domestically in India depend on Chinese imports for raw material and components. For instance, semiconductor chips, which are crucial in making electronic products, are imported from China and then used in the production of finished goods within India.
The Union government has launched several initiatives, like Make in India and production-linked incentive (PLI) scheme, to boost domestic manufacturing and address its excessive reliance on China. However, these programmes haven’t yet had any substantial effect on reducing the country’s reliance on Chinese imports.
For instance, Prime Minister Narendra Modi announced in December 2021 a $10 billion incentive plan to boost semiconductor manufacturing in the country. However, it remains to be seen whether this initiative and other efforts will effectively reduce India’s reliance on Chinese imports and develop a sustainable domestic manufacturing ecosystem.
India’s excessive reliance on Chinese imports
India’s dependence on raw materials from China is substantial. For instance, in 2022, India imported approximately $1.98 billion worth of iron and steel. An example highlighting this dependence is the construction of The Statue of Unity, where 553 bronze panels used on its surface were made in China.
Interestingly, even small merchandise items such as buttons are imported from China because they are cheaper than Indian goods.
A significant portion of these Chinese imports is directed towards fulfilling the demands of fast-growing sectors such as telecom, power, and electronics.
For the pharmaceutical industry, India is heavily dependent on bulk drugs and intermediate/producer goods from China. These are essential raw materials used by the Indian pharma industry to manufacture finished products for domestic consumption and international trade.
Such a huge reliance on Chinese raw materials poses a challenge to India’s manufacturing capability.
It’s evident that India would face difficulties in boosting its manufacturing sector without alternative trade partners or other domestic alternatives.
Finding substitute sources for these raw materials is crucial for India to reduce its dependency on China. But there’s a catch, as procuring raw materials from alternative sources will be costly.
“China has become the manufacturing hub of the world because it is able to produce things at scale. And having produced things at scale it is able to sell them for cheap. By selling them for cheap, it is able to dominate,” said Arun Kumar, retired professor of economics at the Jawaharlal Nehru University.
But is India not capable of producing the raw materials it imports?
“China has a headstart over technology. So, it is able to produce cheaper goods and then sell them to us including our own cultural symbols such as Ganesh murtis, pichkaris, gulaal and manjhas. India is weak in technology. This can be seen in our trade patterns. We import manufactured products and sell them raw materials and inputs for manufacturing. What China does is import raw materials, converts them into finished products and then sell them in the market. That way they are able to add value to the product which helps them in [increasing] employment and exports,” said professor Arun Kumar.
Is it possible to slow down trade with China?
Nearly 66% of India’s Active Pharmaceutical Ingredients (APIs) came from China in the first nine months of the financial year 2022. APIs, also known as bulk drugs, are the active components that produce the required effect on the body. For example, Paracetamol is an API for Crocin.
However, as part of the PLI scheme, 35 drug raw materials, which were imported before, are now being manufactured in India.
According to Arun Kumar, India cannot completely put a stop to its strategic reliance on the import of certain crucial products.
“Slowing down trade with China will require us to go to alternate sources and they are more expensive than China. Thus, it will increase our production cost. Diversifying our import sources will be inflationary. So, unless we do something about our technology, infrastructure, and production of goods at scale, we will not be able to compete with China,” he said.
Professor Arun Kumar believes India needs to focus on improving its technology.
“We need to have a technology policy. Unless we become more dynamic in terms of our technology development, in terms of our capital mobilisation, we will be dependent on some source or the other. To make our technology more dynamic, we need to do R&D [research and development),” he said.
“India is weak in that [R&D investment]. We are only spending 0.75% of our GDP on R&D whereas China spends 3.5%. The Chinese economy is five times bigger than ours. So, of a five times bigger economy, they are doing five times more R&D, which means they are spending 25 times more than us,” he explained.
“We need to step up our expenditure in critical areas and develop our technology to compete with China. To do R&D, we need to give high priority to education. We are creating a variety of problems in higher education. So even though we have good universities, they are suffering as a result of the fact that there is too much interference from the political and bureaucratic bosses. Thus, an R&D environment is not [being] created.”
Kashvi Sakaria and Srihari Rishabh are editorial interns at The Wire.