Mint Explainer: Why is India struggling to reduce its dependence on China?

China continued to be India’s second largest trading partner with merchandise trade of $113.81 billion, a marginal decline of 1.7% over 2021-22. The decline was due to a decline in goods exports from India to China and not vice versa. Already, India has a sizeable trade deficit with its northern neighbour. Last year, it rose to a record $83.2 billion after more than doubling in a decade from $36.2 billion in 2013-14.

India’s policy makers have put more emphasis on local production, so what is the reason for this deficit? Over the past four years, the central government has raised import duties on several products in an effort to promote local production and make India ‘atmanirbhar’ (self-reliant).

The 2019 budget has raised duty on a range of consumer durables such as air-conditioners, CDs, DVDs, CRT monitors and TV display panels. In 2020, duties were increased on other electrical equipment – ​​including fans, water heaters, ovens, compressors for electric vehicles and refrigerators.

After the Galvan clash in 2020, restrictions on Chinese imports and investments were further tightened. In April 2020, the Department for Promotion of Industry and Internal Trade (DPIIT) of the commerce ministry amended the Foreign Direct Investment (FDI) guidelines to curb investments from China. Aimed at preventing an opportunistic takeover from across the border, the rules required Chinese investors to seek approval from the government.

China has never been a major direct investor in India. It is not even in the list of top 20 investors in the country between 2000-2022 and has accounted for less than 0.5% of FDI inflows during this period. But investment had already begun with Chinese companies such as SUV maker Great Wall Motors poised to enter India – scaring companies away when the sanctions were imposed.

More such measures – such as moving color TVs, car tires and air conditioners from ‘free’ to ‘restricted’ category – have been undertaken over the years, but have not had the desired impact. In 2022-23, imports from China to increase by over 4% to $98.51 billion. In 2019-20, the year in which the trade measures were intensified, imports stood at $65.26 billion.

So why do we love the Chinese stuff so much? Machinery and electrical equipment, which account for half of the total goods imported from China, are imported in large numbers. In 2021-22, machines worth more than $ 50 billion were imported. It fell by just 2.75% to $48.74 billion in 2022-23. But it is still much higher than the imports of $32 billion in 2019-20. China accounts for 40% of all machines imported by India.

If Indians need these machines and electronics so much, why can’t we make them here? There is no easy or quick fix for this. A growing economy like India needs both energy and technology. While the energy bit is taken care of by the Middle East and, increasingly, Russia, the most obvious stop for ready-made technology we don’t have is China – the factory of the world. Across a wide range of industries, no country produces goods as extensively and cheaply as China does. Looking elsewhere or trying to make these products at home would mean higher costs, which would ultimately be borne by consumers.

The good news is that India is trying to change this with a large number of Production Linked Incentive Schemes (PLIs) in various sectors to encourage domestic production. Above Rs 2 lakh crore has been set aside for these schemes.

However, these plans will take time to bear fruit and challenges are inevitable. automobile industry, for example, for which 26,000 crores set aside, interest is starting to wane as the government is yet to release the promised subsidy, suspecting that some companies have violated rules on local sourcing and production.

In electric vehicles, another key area of ​​emphasis, India’s dependence on China is particularly high, and the government has launched a PLI scheme 18,000 crores for advanced battery cell chemistry to counter this.

What is worrying is that there has been no major decline in imports from China in other categories as well. Organic chemicals are India’s third largest import from China. Chemicals worth $13.25 billion were imported in 2022-23, up from just $7.97 billion in 2019-20. Similarly, imports of plastic items more than doubled from $2.72 billion to $5.6 billion during this period.

Meanwhile, the nationalist boycott of Chinese products has disappeared.

So is it a lost cause? As the world at large is realising, it is not easy to distance ourselves from China after being dependent on it for so long. The same is true for India as well. It’s a messy divorce that will require time and patience, especially given India’s relative lack of manufacturing chops.

There may be no lack of political will for India to disengage with China, but giving up old habits is easier said than done. India may have overtaken China as the world’s most populous country this month, but it looks like the dragon will continue to dwarf the elephant for some time to come.