‘Galwan’-ising manufacturing: How India can take on China

R Srinivasan | Updated on July 09, 2020 Published on July 08, 2020

It is possible to take on China. But all stakeholders need to ante up

India’s immediate and most visible response after China’s incursion across the Line of Actual Control in Ladakh’s Galwan Valley has been to ban Chinese apps. This time around, the apps have not just been removed from popular app stores but Internet service providers have been told to block them so they do not run. But is banning Chinese apps — even 59 of them — enough to send a message to China?

If India’s objective was to simply send a message to its expansionist neighbour about its displeasure at the latest developments, perhaps the app ban might work. Particularly since other, and even more lucrative markets (for China) like the US are showing some worrying signs of wanting to follow suit.

But banning apps is not likely to even dent the over $48-billion trade deficit India is currently running with China. The reality is that despite the rhetoric, the average imports from China on a month-on-month basis have doubled since the BJP first came to power in 2014.

Nor will it help reduce India’s critical dependence on China for everything from electronic components and mobile phones to advanced pharmaceutical ingredients, automotive components, power generation equipment and the like.

On the other hand, close to half of India’s exports to China consist of raw material and intermediary goods. In other words, we are in no position yet to tell China to take a walk. But if China tells us to take a walk, we have no option but to walk.

How do we fix this? Rhetoric and chest thumping calls to patriotically boycott Chinese goods will have limited impact, if any. And the other response, urged by the trade lobby, of either outright import bans or stiff import duties (the pro-BJP Confederation of All India Traders has come up with a ready list of 3,000 Chinese products to be boycotted, and several hundred others on which it wants import duties imposed) is almost certainly going to run afoul of WTO regulations.

Rhetoric and shortcuts are simply not going to work. And if we as a nation are to be serious about taking on China in our own home market, then all of us — manufacturers, importers, retailers, consumers and the government — need to commit to this. And more importantly, be prepared for both the consequences and costs of such a move.

Govt initiatives

So far, it has been only the government which has been putting its money where its mouth is. In fact, the recent production-linked incentive scheme for large-scale manufacturing of mobile phones and select electronic components, and a similar scheme for the domestic manufacture of key starting materials, advanced pharmaceutical ingredients and drug intermediaries are possibly the best conceived and clearly articulated schemes to have emerged from the government in recent times.

Under the schemes, the Centre is committing ₹40,000 crore in electronics and ₹10,000 crore in pharma towards direct incentive to be given to manufacturers in India over the next five years, provided certain milestones in terms of investments and sales are achieved.

These schemes address the single biggest stumbling block that previous attempts to wean Indians off their Chinese fix have hit — the overwhelming price difference that Chinese manufacturers are able to come up with. Of course, quality, ability to offer goods at scale and in many areas, even technology, are definitely factors which play a part too. But while Indian manufacturers can, potentially, cope with Chinese competition on quality, technology and eventually, quantity, price has so far proved a bridge too far.

The PLI scheme addresses precisely that problem with a simple solution — make in India and we will compensate your “loss” incurred by not importing from China. And by giving clear milestone targets and an exit window (hopefully, the scheme will not get evergreened on some pretext or the other as has happened in the past), it provides a clear playing field for domestic manufacturers willing to pick up the gauntlet.

Unfortunately, this cannot be a universal solution across all the sectors of manufactured imports. The government simply does not have enough money.

So does that mean that India will be perennially linked to Chinese imports? Not necessarily. The Department for Promotion of Industry and Internal Trade has drawn up a list of over 1,000 low value and low technology items that India need not import from China.

But such a list is pretty much pointless as long as the Indian consumer, aided and abetted by an importer-distributor-retailer network that feeds it, is hooked on to cheap Chinese imports. In 2018-19, for instance, India, despite being one of the world’s largest producers of plastic, imported over ₹19,000 crore worth of plastic goods from China, up to and including cheap tiffin boxes and replicas of Indian gods and goddesses.

Those who have been doing business with China say that while Chinese firms typically use “shock and awe” tactics — offering prices lower by 20-30 per cent to start with — the real difference in costs alone works out, in most cases, to not more than 8 per cent.

This is an easily bridgeable gap. Unfortunately, India Inc has so far (other than making patriotic noises) expected the government to bridge this entire gap. That is neither practical nor feasible. The only way this can work is if everybody chips in with a contribution to the larger cause.

All must chip in

The government can kick things off with a 2 per cent contribution. This can come either directly by way of a tax rebate, or indirectly through a combination of incentives, subsidy and tax rationalisation.

The manufacturing sector will have to cough up too. It must be prepared to take a 2-3 per cent hit on its real margins. This means that it absorbs the higher cost of localisation of its inputs and does not — as it has been wont to so far — pass it on to the end-consumer and then howl about cheaper Chinese imports. This is actually an investment as far as manufacturing is concerned, since this is creating a stable, large and growing market in the long term, and one which is in its own backyard.

Another 1 per cent has to come from the intermediary sector — like logistics — and the retail/distribution sector. One per cent may not sound like much, but when you are competing with a giant like China, the margins are very thin. But one per cent for country is not a big ask.

And finally, the balance of 1-odd per cent will have to be paid by us, the consumers. If you think this is too small an ask, think again — as any online retailer or airline can tell you, a price difference of a few rupees is enough to shift consumer “loyalties”. But yes, we can, and should pay a bit more.

Yes, we can defeat the dragon. But that victory will come at a price. A price all of us will have to pay.

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Published on July 08, 2020
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