C.P. Chandrasekhar: A soft blow against China
Using economic weapons to temper China’s stand on the border question will not be easy for India. The presence of Chinese firms in a relatively inconsequential area such as mobile apps was an easy and convenient lever for it to use.
IN a surprise move, the Indian government has decided to ban the use of 59 Chinese mobile apps, some of which, such as Tiktok and UC Browser, are extremely popular in India’s consumer digital space. A report in The Wall Street Journal, quoting estimates made by Sensor Tower, said that the banned apps had been the target of 4.9 billion downloads in India since January 2014, including 750 million so far in 2020. The move was widely interpreted as being part of India’s response to the disturbing developments along its border with China, and as a means to pressure China, even as India strengthens its military positions and negotiates for restoration of the status quo.
India, of course, has not presented this as an act of economic retaliation to evidence of incursion by China into its territory. Rather, it has justied it as a means of preventing the companies owning these apps from undermining the sovereignty and integrity of the country, and of “stealing and surreptitiously transmitting users’ data in an unauthorised manner to servers which have locations outside India.” Given the allegations of close links of Chinese companies with the government at home and even the People’s Liberation Army (PLA), the action appears to be part of a larger security response to a perceived threat from a neighbour whose inuence in the region has increased signicantly.
In fact, for some time now, and for what appear to be larger strategic considerations, the government has put China’s economic and trading presence in India under watch. Allegations of dumping by or aggressive behaviour of Chinese investors and contractors have been common. This has, more recently, translated into very specic policy action, with occasional imposition of antidumping duties and of nontariff barriers in the form of quality control orders or other regulations. In April, for example, foreign direct investments (FDI) originating in neighbouring countries were taken off the automatic approval list, even where permitted. The release from the Department of Promotion of Industry and Internal Trade (DPIIT) announced: “An entity of a country, which shares land border with India or where the benecial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the government route.” Specic government permission, and therefore monitoring, was made mandatory. Given the relative importance of investment inows from India’s neighbours, it was clear that this was directed at Chinese investors, private and official, who were seen as picking up equity in
Indian companies at discounted prices as growth slowed and the Covid19induced economic crisis struck.
ECONOMIC OFFENSIVE
But now comes evidence that such defensive economic action will be widened to include offensive measures. Besides banning popular Chinese apps that have overwhelmed India’s digital space, despite India’s claim of being a software power, reports have it that the government is planning to dissuade private telecom operators and the stateowned telecommunication companies MTNL and BSNL from purchasing hardware from Chinese rms (especially Huawei and ZTE) to upgrade their networks. Chinese players are also to be kept out of Indian highway projects, including participation through the joint venture route.
While these and similar measures are being discussed in the corridors of government, “Track 2” efforts seem under way outside government, with a campaign for boycott of Chinese goods and for policies that impose restrictions on imports from China. As of now, the emphasis is on appealing to popular patriotism, with the government facilitating a boycott by requiring ecommerce rms to publish the country of origin on all the goods sold through their web marketplace.
These economic responses in the face of growing diplomatic and military tensions between the two countries have raised a number of questions. One is whether these moves are merely symbolic or would actually hurt China enough to encourage it to hold back, engage in negotiations on border issues and arrive at a settlement acceptable to India. Another is whether India, too, would lose as a result of these measures, and whether the cost of deploying such instruments would hurt an economy that has clearly lost momentum. The answers to these questions would determine whether, together with the announcement of the Atmanirbhar (selfreliant) Bharat drive, these responses targeted at China would put India on a trajectory that reverses the trade liberalisation and open economy agenda adopted by successive governments since 1991. That trajectory
would possibly be supported by sections of business that are looking for protected spaces in the domestic market. Though the ban on apps will not immediately signicantly hurt the prots of Chinese rms, it will check their advance to dominance in the Indian market that is being seen by all as being the next frontier digital market (after China), given the size and demographic prole of its population, and the low levels to which data costs have been pushed by cutthroat competition. The result has been proliferation of ownership of smartphones, increase in Internet use and the growing popularity of ecommerce. According to ByteDance, the company that owns TikTok, that app was being used by at least 120 million Indians every month. While those numbers were yet to translate into revenues and prots, the potential is immense, especially given the collateral advantage that these socalled “tech rms” have in collecting and collating data.
Moreover, Chinese giants such as Alibaba and Tencent have been investing heavily in Indian startups, betting on their success and the returns from appreciation of equity values that was expected to bring. So, if kept out of India’s digital market, Chinese rms are likely to be signicant losers.
That said, the loss of an Indian presence would not be the end of the world for all Chinese rms, which have grown to global scales based on business at home, have strong control over the large home market, and have other jurisdictions to diversify into. It affects more the likes of Huawei, which was banking on becoming the world leader in 5G technology, and which is being kept out on security grounds from many developed country markets. The absence of Chinese rms in India’s Internet space would also not hurt China’s economy much, though its mercantilist ambition, already being thwarted in the United States and elsewhere, would suffer a minor dent. Even if the fortunes of tech rms are seen as inuencing China’s strategic stance, it is unlikely that loss of the Indian market would force the Chinese government to bend on what it declares to be issues of national sovereignty and integrity.
For India, extending its economic response to the military standoff to include trade in goods is the challenge. There is a reason for the government choosing the Internet arena to launch its China offensive. Given the structure of merchandise trade between India and China, it is far more difficult for India to counter China there. The sharp spike in Indiachina trade over the last decade or so has seen India’s imports from China rising much faster than its exports to that country. The net result is that in 201920, when slowing growth brought down imports from China, India ran a decit of $48.7 billion in its trade with China, which, adding exports and imports, totaled $81.9 billion. When growth in India was better and trade buoyant, its China trade decit stood at $63 billion in 201718 and $53.6 billion in 201819.
This decit, it could be argued, strengthens the case for trade sanctions against China, as that would bring down imports and reduce the shortfall relative to exports. But India’s imports reect not just China’s competitiveness in the Indian market visavis domestic and third country suppliers. It is also indicative of India’s dependence on China, not just for cheap nal products but crucial and reasonably priced intermediates and capital goods. China accounts for close to 15 per cent of India’s exports, and is an important supplier in areas such as mobile phones, telecom, power, and pharmaceutical intermediates. Two categories of imports, “Nuclear Reactors, Boilers, Machinery & Mechanical Appliances” and “Electrical Machinery, Telecom Equipment, Audio & Video Recorders, account for 50 per cent of imports from China, and “Organic Chemicals” for another 12 per cent. Close to 50 per cent of India’s electronics imports originate in China, with that dependence rising to around 66 per cent in the case of pharmaceutical ingredients. India’s dependence on Chinese supplies is not just large but also heavily concentrated.
SOARING DRUG PRICES
These imports are not all easily substituted from other sources. The consequences of such dependence were experienced recently. Thus, when the COVID19 pandemic shut down production facilities in China, drug prices rose in India and producers expressed concerns about shortages of crucial intermediates. Together with delays in customs clearance of imports from China in recent times, critical drugs, such as the blood thinner Heparin, are in short supply and have turned more expensive, so much so that the National Pharmaceutical Pricing Authority (NPPA) has allowed a onetime price increase of 50 per cent in the ceiling price of Heparin injection used in treatment of those infected with COVID19.
All this suggests that a sudden reduction in imports from China can be disruptive, and is likely to inuence government thinking, leaving aside the possibility that China would appeal against what it considers discriminatory protection against its goods at the WTO. So while the military and diplomatic standoff would be difficult to resolve, using economic weapons to temper China’s stand would not be easy either. The presence of Chinese rms in a relatively inconsequential area such as mobile apps was, for the India government, an easy and convenient lever to use. Finding more such levers could prove difficult. m
According to Bytedance, the Tiktok app was used by at least 120 million Indians every month.