Developmental Approach to take on China

ECONOMY /GOVERNANCE 

Topic: General Studies 3:

• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Developmental Approach to take on China

Context: There is need to get industrial policy right, so as to take on China in Post-COVID world 

India’s developmental approach post 1991 

• Development has been service sector-led and has undermined manufacturing 
• At the same time, China has made rapid strides in manufacturing that has resulted in an uneven balance between the two 

Consequences 

• The share of manufacturing in GDP and employment has stagnated since economic reforms began in 1991 and manufacturing employment actually fell after 2014. 
• China has developed capacities across a wide spectrum in applied engineering and chemical processes and has attempted to capture global markets. 
• India on the other hand is stuck with various low-end services, the scope for which is rapidly declining. 
• The annual trade-deficit between the two countries, of over $50 billion 

Why the present India-China trade balance is unsustainable? 

• Most Indian exports are raw materials or in that genre (low-tech and low employment, like ores, rare earths, chemicals), while the imports are in manufacturing (high-tech) 
• Such a trade pattern inevitably results in unequal terms of trade in time  
• Even in areas where India has some competence, critical inputs are imported from China. For instance 

• Pharmaceuticals (68% dependence on China, for active ingredients)  

• Auto-industry (15-20% dependence on China for electricals, electronics and fuel injection) 

• A sustained current account deficit has led India to multilaterals for loans even for undertaking earthworks, and then use the foreign exchange to balance the current account.  
• High imports from China also leads exporting meaningful jobs to China. 

What should India do to rectify the trade balance with China? 

• India’s approach to development has to change in favour of manufacturing if a total surrender is to be forestalled. 
• Also, there has to be a near ban on imports of low-end products and consumer goods from China. Up to 3,000 imported (Chinese) items (toys, watches, plastic products) could be substituted by local supplies. 
• There would be short-term financial losses to consumers, traders and domestic manufacturers for up to 2-3 years by not being able to import inexpensive goods from China, but this will gradually reduce 
• Lower imports from China would also imply better overall terms of trade and therefore, stabilisation of the rupee, resulting in lower rupee value of petroleum products 

Isn’t the above approach equivalent to import-substitution model of yesteryears? 

• There is a clear difference between strengthening local companies to become globally competitive (proposed) and companies producing under license for captive markets (earlier) 
• Earlier, local industries could not grow in size due to controls, now they can 
• Earlier, they were psychologically not prepared to face international markets, now they are. 

• Also, the approach proposed here is not to fully substitute imports but to reduce unnecessary imports for saving foreign exchange and jobs, along with weaving the Indian industry into the international division of labour. 

Way Ahead 

• Government and industry need to work closely and create mutual trust for promoting industries through tariffs, subsidies, land and labour law easing, infrastructure, etc.  
• Approaches to gain economies of scale need to be put in place to overcome India’s shortcoming of having 66 million MSMEs. A “one-state/district-one product approach” can bring together SMEs to form a single giant unit. 

• Need to invest heavily in targeted R&D, for which private-public sector partnership is essential. Expenditure on R&D should rise 3-4 times from 0.7% of GDP at present. 
• Investment in education, training, and human capital formation should rise from the current 3% to 6% of GDP, with greater industry-based training, focus on quality, and emphasis on STEM. 
• Contain brain-drain out of India (from top engineering and medical colleges) to foreign shores. Partnerships with the best universities in the West is one approach to provide quality education here. 

Connecting the dots 

• Atmanirbhar Bharat Abhiyan 
• Make in India – Critical Analysis