After the liberalisation of the Indian economy in 1991, it was said by many that the 21st century would be India’s century. In 2015, India was the fastest growing economy in the world, but soon things went off the rails. During the first decade of the 21st century, Chinese products in the Indian market had become rampant.
Strategically, China supported its core industry at a time when India opened up its economy allowing private players the freedom to either import or locally procure goods. Between 2001 and 2016, India’s imports from China jumped 33 times, from $1.83 billion to $60.48 billion. In the last few decades, the growth of China as a global trading giant has created buzz around the world because of its intensity and impact.
China has focused on reaping the benefits of globalization and reforming the international economic order, but without a revolutionary stance. Every year China spends more than $200 billion on research (second only to the United States), turns out close to 30,000 P.hDs in science and engineering, and leads the world in patent applications (PCT applications originating from China were 58,990 which represents 11 per cent growth from the previous year and 2400 per cent increase from 2005).
Chinese companies have understood requirements of rapidly urbanizing countries and amplified new products and services quickly to meet them. According to a recent report by the McKinsey Global Institute, China supplies the critical components in 70 to 85 per cent of the world’s solar panels, 75 to 90 per cent of high-speed rail systems, 60 to 80 per cent of agricultural machinery, and 40 to 50 per cent of cargo ships.
China is a key producer of the primary chemicals that are required for making medicines and is home to a vast supply of well-educated but low paid scientists. The USA remains a global leader in the discovery of drugs, but much of the manufacturing has moved offshore. According to Yanzhong Huang, a senior fellow for global health at the Council on Foreign Relations, Chinese pharmaceutical companies have supplied more than 90 per cent of U.S. antibiotics, vitamin C, ibuprofen and hydrocortisone, as well as 70 per cent of acetaminophen and 40 to 45 percent of heparin in recent years.
Recently White House Trade Advisor Peter Navarro said that “China has managed to dominate all aspects of the supply chain using the same unfair trade practices that it has used to dominate other sectors — cheap sweatshop labour, lax environmental regulations and massive government subsidies.” China is India’s second largest trading partner.
Exports from India include organic chemicals, cotton, ores, plastic items, salts and so on, while the imports range from critical raw materials, rare earth materials, electrical machinery, nuclear machinery, optical and medical instruments, vehicles and accessories of iron and steel. The assessment of India’s dependence on China can’t be comprehensively articulated but a combination of myopic policies, burdensome regulations, costly capital, absence of adequate manufacturing facilities, deficit in skills, issues in governance and complexities in labour law are some of the distressing issues.
Chinese imports have put a spanner in the wheel of India’s economic progress and the industrial sector. Unscrupulous practices including inflow of under-invoiced Chinese goods brought in through mis-declaration and outright smuggling over the years have led to massive inflow of cheap imports which have made manufacturing uncompetitive. Made-in- China has engulfed Make in India.
The change in orientation from manufacturing to trading and high dependence on inputs from China, the ease in connectivity and networking of both formal and informal means and presence of Indian brokers in China have subverted Make in India with non-essential imports. Chinese investment in India is already visible, as strategic equity and debt, in large, medium and start-up sectors. India opted to stay out of the Belt and Road Initiative, but tech-led new economy businesses and e-commerce have large investments from Chinese funds.
Presently, the world is fighting against Covid-19 which originated in China. It has created ripples across businesses in India and abroad by causing disruption in supplies of raw material and capital goods. Consequently, the pharma industry is largely dependent on Chinese imports to make medicines and the chemical industry (worth $163 billion) covering more than 80,000 commercial products is under constraint causing huge collateral damage to local drug makers. According to the information presented in Indian Parliament, India imports almost 70 per cent of its bulk drugs and intermediates from China.
Out of the total $3.56 billion imports of such products in 2018-19, China’s share was $2.4 billion. So, the pertinent question which can be asked during this prevailing scenario is whether this pandemic will give us any lessons or when this grim situation is over things will be dealt with in the same way? During the Covid-19 pandemic, countries like US, Japan, Spain, Portugal and India etc. are realising their huge dependence on China for getting basic things like masks, testing kits, medicines, PPE kits, medical equipment etc.
To deal with such pandemics and supply chain disruptions in future, the US government is in the process of drafting an executive order that would close loopholes allowing the government to purchase pharmaceuticals, face masks, ventilators and other medical products from foreign countries. The US government is pushing for streamlining the regulatory approvals for US-made products and more detailed labelling of the origin of products made offshore.
The government has funded research into new types of manufacturing systems that are smaller- scale and more flexible than operations run in China. Moreover, a new bill has been introduced that would require drug makers to report the source of active ingredients in their pharmaceuticals to F.D.A. Similarly, Japanese Prime Minister Shinzo Abe has recently earmarked around 240 billion yen to support domestic companies in decoupling their supply chains from China, especially those in high value-added manufacturing.
Countries like Spain, Portugal, and France are also considering some strong steps to tackle such dependence. But it is pertinent to ask which countries are enlightened enough to take the place of China? The critical gaps in the Indian manufacturing ecosystem make it hard for India to take advantage of the disruption in global trade. Diversion from the source to procure is mired with problem of lockdowns of other countries, restrictions, trade preferences, constraints in capacity, high logistics cost and non-tariff barriers.
The Department for Promotion of Industry and Internal Trade (DPIIT) released a press note dated April 17 by which it has informed that the government has revised the Consolidated FDI Policy, 2017 which seeks to curb “opportunistic takeovers or acquisitions of Indian companies due to the Covid-19 pandemic”. There are 17 sectors including defence, telecom and pharmaceuticals that need government approval if any company from abroad wants to invest beyond a certain percentage.
The revised rule has now brought companies from China under the government route filter which makes it “difficult” for companies from countries sharing land border with India, including China, to “invest” in the country. However, a spokesperson of the Chinese Embassy in India, Counsellor Ji Rong, in a statement raised objections on the change in FDI Policy and asked the government to re-consider it.
This decision will likely impact the foreign investments in India, particularly from China which has invested around $2.34 billion in India between April 2000 and December 2019. Prime Minister Narendra Modi recently suggested that “India, with the right blend of the physical and the virtual can emerge as the global nerve centre of complex modern multinational supply chains in the post Covid- 19 world. Let us rise to that occasion and seize this opportunity.”
The coronavirus outbreak has made it clear that we must combat with supply chain vulnerabilities and dependence on China in critical sectors of our economy. So, the need of the hour is not to get trapped in problems but to act effectively by removing hurdles and giving support to local companies through low-cost power, subsidies, faster approvals and liberal regulatory and environmental regulations.
The government should not only help the local manufactures to take India towards self-reliance but also provide an atmosphere to foreign investors where they can come and invest in India without any fear.
(The writers are lawyers at the Supreme Court of India and Allahabad High Court)