India should give a big push to its Act East policy to combat China

It is an irony that India is facing problems with its trade with China. China was the biggest trading partner of India consecutively for four years till 2018-19.

Trade relations turned sour with the unprecedented outbreak of COVID-19. It rattled China’s significance as a dependable supply chain. Further, the repeated face-off on the border and intensifying security concerns escalated trade tension with China. Trust deficit grew between the two countries. Eventually, trade deficit plunged and narrowed by almost half in the first four months of 2020-21.

India has been facing a wide trade deficit with China. Notwithstanding that, India opened the door for cheap imports from China, without indulging in any trade dispute on the line of US trade practices. Concern heightened when it was realized that trade sovereignty was at stake due to over-dependence on China. The development of electronic and pharmaceutical industries, pinning over-dependence on China, sparked concern for their survival. This led the policy makers vowing for an alternative to China as a new strategy for trade and investment in Asia, as a part of Act East Policy. India refused to join RCEP, which embraces Asian tigers.

Widening trade deficit with China imparted a major impact on balance of payment. The fallacy of wide trade deficit lies with India importing substantially from China, than it exports to China. The major factor attributing to this was large imports of electronic and telecommunication equipment and parts. About 30 percent of total import from China was accounted by electronic and telecommunication equipment and parts. Incidentally, China was largest supplier of these items. About 39 percent of India’s total imports of electronic and telecommunication equipment and parts are from China. Eventually, this triggered overdependence on China. To decimate the overdependence, India launched a policy for Atmanirbhar initiative under the umbrella of Make in India and set a motion for decoupling from China

China is also a major supplier of bulk drugs and active pharmaceutical ingredients (API). About 80 percent of the imports of bulk drugs and API are from China. Even though India’s dependence on China for API is substantial, it could make little impact on trade deficit. The import of API in total imports from China was only 2 percent in 2019-20.

This means that the overdependence on China is mainly attributed to large imports of electronic and telecommunication equipments. The bane of large scale imports of electronic and telecommunication items remained unnoticed till domestic industries made rapid growth using them as inputs such as mobile manufacturing industries and digital development. It rang the bell of concern when supply chain from China was disrupted by COVID-19, causing a large scale shut down of industries in the country. Added to this, the repeated tiffs on the border enlarged the security concern for doing business with China.

India’s decoupling from China led to a number of harsh steps to undermine the trade and investment relations with China, despite the fact that Chinese investment set the turf for mobile phone manufacturing in the country. It restricted Chinese FDI approval through government route from automatic route. It blocked 59 Chinese Apps, imposed stricter regulations for government procurement and restricted import of colour TVs.

India refused to join RCEP, which include ASEAN -10 + 6 (China, India, Japan, Australia, New Zealand and S. Korea). It alleged that several major issues, which it proposed, were not addressed due to pressure from China. The aim was to undermine China’s easy accessibility to Indian market through ASEAN. Incidentally, China has FTA with ASEAN, which acted as a proxy to China for entering India market. Had India joined RCEP, it could have led to further easy access for Chinese goods in the Indian market.

China used BRI (Belt and Road Initiative) to rein the trade power by reconnecting ASEAN and boost the trade links through infrastructure development. “BRI is the most viable platform for advancing China’s neighbourhood diplomacy”, according to Dr Jonathan Stromseth of Brooking Institute.

With India abstaining from RCEP, followed by Japan, RCEP lost its aura. It is unlikely that RCEP will cling the final deal by November 2020. This opens up an opportunity for India to engage for new economic partnership with Asian emerging nations. For an alternative to China, ASEAN emerging nations can be a better bet. India has FTA with ASEAN. The major trading partners in ASEAN are Singapore, Malaysia, Vietnam, Indonesia and Thailand.

Vietnam and Singapore can be major contenders for an alternative to China. Ever since the US-China trade war intensified, many importers in America, EU and Japan were contemplating for an alternative supply chain. According to US Census Bureau, imports from Vietnam into USA jumped by 33 percent in the first of 2019. Low labour cost is one of the main attractions for shifting investment in Vietnam. It is almost 50 percent lower than China. Vietnam’s biggest specializations are in production of electronics, textiles and furniture. Eventually, both Vietnam and Singapore are the major suppliers of electrical machinery, including electronics and telecommunication equipments.

Political relations between India and Vietnam perked up when Indian Prime Minister Narendra Modi visited Vietnam in September 2016 – the first visit of Indian Prime Minister in 15 years, and a back-to-back visit by newly-elected Vietnamese President Tran Dai Quang.

Singapore is the biggest foreign investor in India since 2018-19, outnumbering Mauritius. Singapore plays a key role in India’s Look East policy and is the key driver for ASEAN FTA in services. Singapore is the major off-shore financial hub for many Indian companies due to the presence of large Indian Diaspora. Over 6000 Indian companies are registered in Singapore.

In summing up, tying a strong knot with Asian tigers can be a better bet to challenge Chinese hegemony, as a new dimension of Act East policy.