This was published in the Times of India on 12th Aug 2021
The concept of Group Think was first introduced by the psychologist Irving Janis in 1971. He described it as a situation where “individuals tend to refrain from expressing doubts and judgments or disagreeing with the consensus”. While Group Think is widely prevalent in several social contexts, its presence in higher policy-making and inferences can have outsized impact. Perhaps the most well-known example of Groupthink in recorded history is the Bay of Pigs invasion. A CIA operation to overthrow the new revolutionary government of Fidel Castro in Cuba, it failed spectacularly – and became the showpiece evidence of how groups of smart people rush to consensus without fully analyzing the data.
India’s trade dependence on China falls in the same category
– the overwhelming consensus in the commentariat is that there is a structural
and large import-dependence, one that China can use as a geopolitical weapon in
times of sharp political contestations. Headline numbers are trotted out in
support – how imports from China have kept going up despite Government of
India’s (GOI) Atmanirbhar campaign and backlash against Chinese goods
post-Galwan. There is also a suggestion that China has been able to weaponize
its trade surplus with India, using the surplus for enhanced military
expenditure while making India “dependent” on Chinese imports for day to day
economic life. Most of the hypotheses are in the realm of myths rather than
facts.
Myth # 1 – India
imports too much from China
China is the largest trading nation in the world – its trade
volumes with all countries are very high. It is a function of both China’s size
as an economy (at $14 trillion, the second largest in the world) as well as its
manufacturing prowess. For India, China accounts for 15-16% of aggregate
imports (20-21% of non-oil imports). This number is actually lower than many
major economies in the world, and most major economies in Asia. US, Australia
and Japan – fellow members of the Quad, have more than 20% of their imports
originating from China.
India’s import concentration with China, while it went up
sharply from 10% in 2010 to 16% in 2017, has stabilized at the latter levels
now. For some of the more critical, truly strategic import categories, the
trend has either reversed or there is energetic efforts underway to reduce
dependencies.
Myth #2 – India is
dependent on China for imports, creating strategic leverage
This is perhaps the most important hypothesis, meriting
closest scrutiny. The largest components of Chinese imports are Heavy
electricals and machinery, Power equipment and Organic chemicals. A few trends
are quite clear from the chart below.
Source: Ministry of Commerce
In absolute terms, the largest category – Electrical and
Electronics goods – are on their way down in absolute terms. The Production
Linked Incentive (PLI) programmes rolled out over the last couple of years initially
focused largely on this segment, and as capacities under the programme come on
stream, the impact is likely to be felt even more. Above all, most of these
areas are not “monopoly chokeholds”, ie, there are alternative sources of
supply including domestic, albeit at higher prices.
The same holds true for the second largest category of imports
– Power Equipment. Very similar to Electricals and Electronics, this is an area
where China has built a price advantage over global (and Indian) suppliers over
the years, and the current dominance is a function of that relative price
advantage. A mix of tariff walls, PLI incentives and the US-sponsored global
movement of supply chain diversification (popularly termed as China + 1 in
trade circles) are creating insurance against China-enforced supply
disruptions. Significantly again, China does not have a supply monopoly
choke-hold here either – ergo, sourcing from elsewhere is a function of price
rather than availability in many cases.
It is the third category – Organic Chemicals – where things
are trickier. It includes Active Pharmaceutical Ingredients (API), the
essential intermediate input for a vast majority of pharmaceuticals. China is a
dominant global manufacturer of API, and this could represent a significant
tricky dependence. Till about a decade back, India was self-sufficient in APIs,
before much cheaper Chinese capacities drive most pharma companies towards
imports. Good news is that there are no great technology hurdles in the
segment, merely one of cost and capacity. Already, several Indian companies are
investing heavily in the area. Over the next few years, the dependence on China
will likely come down.
It is actually in a smaller (by absolute $ value) category,
Rare Earth metals, that there are critical strategic issues. China is the
source of a range of rare earth metals that are used in critical electronics,
telecommunication and other hi-tech equipment. It isn’t an India-specific
problem, the world is grappling with the same. The Chinese dominance in the
area was sparked off by gradual US withdrawal from mining/processing of rare
earth oxides and simultaeneous large investments by China. Already, a
US-sponsored globally coordinated effort under President Biden’s
diversification of supply chain initiative is underway. But this is likely to
take time and careful handling by India.
Myth 3 – India’s
strategic nirvana would be to cut down on consumer goods production
There is a general (most economist wisdom driven) hypothesis
that too much of India’s China imports are to fuel elite consumer goods (like
cars and mobile phones). India needs to wean off an economic model that fuels
production of such import-intensive consumer goods. This is equivalent of
cutting one’s nose to spite one’s face. Industries like automobiles, consumer
electronics and mobile phones are not only clusters of large-scale
manufacturing employment, they also provide enormous network benefits by
spawning entire eco-systems of finance, supply-chain and other related
services. They also engender manufacturing exports – small cars, eg, is a rare manufacturing
export success story from India. India’s strategic vulnerabilities will rise
(and not go lower) in case critical manufacturing bases are hollowed out in an
attempt to curb imports. Imports from anywhere, China or otherwise, are not
“bad”, and exports of anything is not tautologically “good”. Both are economic
transactions with outcomes – the focus has to be on outcomes rather than
inputs.
The China import issue, to a large extent, is a bogey.
India’s vulnerabilities, as seen above, are far less than is popularly
believed. India’s also part of the recent global instincts towards
de-globalisation, which is actually nothing too different from redundancies in
supply chains (which in turn is elementary risk management strategy, forgotten
for too long). Our responses, therefore, need to be deliberate rather than
paranoid, focused on key areas (like APIs and Rare Earth metals) rather than
looking to up-end all benefits from liberalized trade that have accrued to
India since the 1991 reforms. In a nutshell, Groupthink pitfalls need to be
zealously avoided!
