India’s new economic distancing
‘There is a little bit of China in every Indian’s life’. Indians are beginning to realize China’s presence in their household and the trillion-dollar economy. It’s not just mobile phones, apps, Chinese cuisine, heavy equipment, or fireworks. Cheap Chinese goods have flooded the Indian market. As Indian traders look at maximizing profit, China becomes their savior. Every day a new message about ‘Chinese products’ is posted on WhatsApp and reading it only makes Indians more aware of how Chinese products have entered virtually into every household. The Government of India has not taken any major step to practice economic distancing after the skirmish beside the Galwan river area in Ladakh. The place saw the bloodiest face-off on the Indian eastern border since 1975 and pushed back India-China relations by a few decades, at least. Yes, there have been diplomatic responses from the Indian side.
And, then mainstream media witnessed a broad anti-China campaign that focused on stifling the Chinese by giving an appropriate economic response. Many have since then called Indians to use wallet power and boycott Chinese products. Some baby steps are being taken, for example, contract cancellation with Chinese firms. Chinese imports reportedly are going through additional checks at Indian customs. On June 29, India banned 59 mostly Chinese mobile apps including TikTok. On the ground, there are images of some people breaking Chinese equipment and products that they had already bought.
The jury is out whether the move to economically hurt China by restricting trade, ala America, will work. Some argue even a small dent will make China realize that they should not take the world’s second-most populous country lightly. In this article, we are looking at finding answer to the burning topic: Will India’s economic distancing work against China? We also examine how changes in sectors, if brought on by self-reliant India thrust, may impact stock prices of companies amid this unprecedented China backlash. Keep reading.
Pharma, Auto, Consumer Durables, Telecom Equipment The recent border conflict with China in the Galwan valley of Ladakh is unprecedented and has heightened geopolitical tensions. This has caused a significant backlash in India. Further, the narrative of reducing trade dependence on China is gaining steam. The situation is currently fluid with diplomatic and political emphasis on disengagement and the desired return to normalcy at the earliest. However, these events have caused a significant backlash in India, giving rise to a narrative of reducing dependence on China, both on business and commercial fronts.
Media reports suggest that the Government of India has asked the industry to prepare a list of products imported from China; this would help identify non-essential imports, for which local substitutes could then be made available. Further, business contracts awarded to Chinese firms have been canceled by some state governments (Maharashtra and Haryana).
At a macro trade parameter level, there is great inter-linkage between India and China in different sectors. India depends on China in terms of sales, supply chains as well as investments. China’s influence on India is not a new thing. From barely any deficit in 1999-2000, India has run a trade deficit of $48.6 billion (1.7% of GDP) with China in FY20. India’s imports from China have risen steeply from just 2.6 per cent of total imports in 1999-2000 to an all-time high of 16.4 per cent in FY18 before easing to 14 per cent in FY20, according to MOFSL.
India’s exports to China, as a percent of total exports, have just started picking up pace after touching 3.4 per cent in FY16. In FY20, it stood at $16.6 billion or 5.3 per cent of total exports from India.
Several sectors have material linkages with China. From a sectoral perspective auto, consumer durables, pharmaceuticals, telecom, chemicals, and renewable power sector (solar) seem to be the most dependent in terms of sourcing from China. Also, in many cases, there appears to be a lack of alternative suppliers on the same scale or costs.
While consumer durables segment is dependent on China for components, Pharma is also dependent on API (Active Pharmaceutical Ingredient) sourcing. Telecom is dependent on China from a network standpoint as well as for 4G smartphone handsets as China caters to more than 75 per cent of the Indian handset demand. Various sectors have material inter-linkages with China and form a critical part of the supply chain for many firms in India. Any potential escalation between the two nations could increase operational/supply-chain risks in the current economic backdrop, even as economies look to recover from the pandemic. Overall, it would be difficult and expensive for Indian firms to immediately find alternative suppliers, in MOFSL’s view.
In the short-to-medium term, experts believe the deep inter-linkages of several sectors preclude any meaningful retaliation on the trade front. However, as the world looks to de-risk its supply-chain from China given the backdrop of the Covid-19 pandemic, from a long-term perspective, the need for emphasis on Indian Manufacturing gets reinforced now. Further, the Indian government has also announced several measures to drive self-dependence in various aspects (Atmanirbhar Bharat). For a sustained change, however, there is a need for structural reforms encouraging manufacturing (ease of doing business, ease of compliance burden, etc.) and market reforms (land, labor, and capital) would augur well to augment India’s manufacturing competitiveness.
Specific potential impact
Any major Indian government move with respect to weakening China’s economic influence on the Indian economy will have varied reactions. We do not know what is running in the minds of the Indian government. But sector-specific moves will impact Indian companies.
Automobiles - Tata Motors, Motherson Sumi, and Bharat Forge would be the least impacted due to their diversified nature of business and global operations. The tyre industry has already seen multiple increases in anti-dumping duties, which has benefited tyre companies.
Consumer durables - Havells and Crompton Greaves would be the least impacted due to low exposure to China. Voltas would be the most affected in the case of tariff hikes.
Pharma - Dependency on China is ~60-70 per cent for key starting materials. In case, any tariff or import curbs, Sun Pharma and Cipla would be the least impacted as they are fully integrated and have considerable exposure to the branded business.
Telecom - Vodafone and Bharti Airtel would be the most impacted in the case of tariff or import curbs on telecom network equipment providers. Reliance Jio would be the least impacted as it has no exposure to China in the network equipment space.
Chemicals - A higher impact could be seen in Rallis, Dhanuka, Sumitomo India, Insecticides India. A lower impact expected in PI Industries, UPL, Coromandel (at the company level), Bayer India. Potential beneficiaries could be SRF, Aarti Industries, Atul Ltd, Bharat Rasayan, Excel Industries.
E-commerce - Info Edge would be impacted as its investee companies – Zomato and Policy Bazaar – have exposure to investments from China. Indian tech and E-commerce start-ups like Paytm, Snapdeal, Ola, Swiggy, BigBasket, and Byju have significant investments from Chinese companies.
Utilities - Tata Power has exposure to the execution and commissioning of solar power plant.
Make in India to gain momentum
Hindi-Chini is no longer ‘bhai-bhai’ in the current paradigm. India is attempting to rejuvenate its signature ‘Make in India’ programme (one of our 7 secular themes post-Covid) by fast-tracking several reforms & policies. BoFA Securities believe the recent rise in geopolitical tensions with China will put India’s $51 billion trade deficit (latest estimates) with China in focus and accelerate government’s plans towards import substitution. While any success here would create a positive India story in general over the long term, with potential for a multiplier effect across sectors, Industrials, Pharma, Metals & Logistics sectors as potential near term beneficiaries.
With rising Indo-China tensions recently, media reports suggest the Indian government is mulling action against Chinese companies through a multi-pronged strategy: 1) a combination of tariff and non-tariff measures (like quality standards & checks) against Chinese imports & 2) restricting participation by Chinese firms in govt. contracts and infrastructure projects. Contracts floated by PSUs (Public Sector Undertaking) could also exclude Chinese firms: state telecom companies & Railways have already moved to rescind some contracts awarded to Chinese firms.
With a potential hike in import duties on ~200 products (mostly Chinese), along with raising non-tariff barriers on another 100 products, seemingly the current geopolitical situation is a factor being considered by the government in terms of promoting higher participation by domestic companies, including a push for local manufacturing through the Make in India programme, according to BoFA Securities.
The Prime Minister launched the auction process of 41 coal blocks for commercial mining yesterday. At their peak production capacity, the government expects these blocks to produce 225MT coal p.a. For context, despite having the fourth largest coal reserves in the world, India imports ~249MT coal p.a. ($23 billion in FY20). While experts believe on-ground implementation is key and could take time, many see this as yet another development that will likely boost the government’s import substitution plans. It has already launched incentive schemes/measures in this regard for a host of other sectors including consumer electronics, pharmaceuticals, and defense, which account for a fourth of India's merchandise imports. But these are all plans at the moment. To replace China, India needs to find another China or become China. Put simply, India finds itself in the same position as other countries. India imports a lot of goods from China and exports comparatively little to the Asian giant. Some experts feel that India will only stand to lose if it takes any knee-jerk reaction against this trade imbalance.
Slow, long-term distancing from China
While a one-day big-bang announcement may sound good for headline-mongers, the truth is India needs to have a slow but sure long-term economic distancing plan with respect to China.
To be fair, distancing had started before the face-off itself. Remember how a Chinese institution had increased its stake in HDFC beyond the one per cent mark. In so far as making India gain, the Government is also trying to attract global companies looking to relocate its factories out of China.
Unfortunately, China’s attempts to threaten India could actually be a message it is trying to send America. Many believe India finds itself in the crossfire of these two superpowers - the US and China. America may be a strategic partner of India, but China is a neighbor with which India shares a 3,500 km long unresolved boundary. As the relationship between the US and China has worsened, there is a lot at stake. Donald Trump-led America emerged as the worst-hit country in terms of coronavirus disease deaths. The US has accused China of concealing information, pressuring WHO, and contributing to the spread of the pandemic, which has led to over 5.62 lakh cases in India and nearly 17,000 deaths.
India’s economy, which had shown clear signs of slowing down even before the pandemic struck, is certainly in an unenviable position. The ruling BJP government can’t afford to remain silent for long as people scream ‘revenge’, like they do when skirmishes happen with Pakistan. If the Government indeed takes hard measures, the upcoming economic contraction will still happen no matter what. Actions against China may only worsen the immediate prospects.
Acuité Ratings has conducted an analysis of the current import portfolio from China to understand the scope for import substitution in the near term. In their opinion, there are nearly 40 sub-sectors that have the potential to lower their import dependency on China. The sectors where there is a significant scope of import substitution in the initial phase include chemicals, automotive components, bicycle parts, agro-based items, handicrafts, drug formulations, cosmetics, consumer electronics, and leather-based goods. Collectively, these sectors contribute to $33.6 billion worth of imports. Without any significant additional investments, the domestic manufacturing sector can substitute 25 per cent of the total imports from these specified sectors under consideration in the first phase, thereby enabling India to reduce $8.4 billion worth of trade deficit in a single year.
Clearly, such steps would have a positive cascading effect on the economy as an equivalent quantum of revenues would not only be added to the turnover of domestic enterprises including MSMEs, but is also likely to translate to benefits through forward and backward linkages, better economies of scale along with cost competitiveness and importantly, enhancing the scope of employment generation.
Sankar Chakraborti, Chief Executive Officer, Acuité Ratings & Research says, “we believe that the Indian industry has the wherewithal to successfully safeguard its interests and reduce India’s dependency on China albeit in phases. With a strategic intent and highly calibrated approach from both the government and industry, the Indian economy can see a new narrative that can’t only reduce its trade deficit but also kickstart the long-awaited cycle of fresh private sector investments. Perhaps this can be a meaningful beginning to the implementation of the ‘Atmanirbhar Bharat’ campaign envisaged by the Government of India.”
The writer is a journalist with 14 years of experience