India’s trade dependence on China – Triumph of Group-think

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!