China-India: Economic & Political Relations Behind Two Asian Powerhouses
This article was originally published in Italian in Panorama on 19th Oct 2022.
Please note that this is a courtesy translation of the Italian language article originally published in the Panorama Magazine Issue at: https://www.panorama.it/news/dal-mondo/cina-india-relazioni-economiche
India, the seventh-largest country in the world by area and the second-most populous country (1.3 billion) has been steadily showing steady growth in recent years, with GDP growth of 18.96% last year, as well as 4.1% in Q1 and 13.5% in Q2 of this year, surpassing the UK to become the fifth largest economy in the world.
Within this context, China has recently become India’s largest trade partner, overtaking the United States (US) with USD 11.49 Billion worth of goods traded in July of this year. In total, the bilateral trade volume between China and India stood at USD 125.66 billion last year, an increase of 43.32% YOY. Suffice to say, the two countries are heavily dependent on each other, not only in matters of trade, but technology and investment. However, since 2020, economic and political relations between the two countries have gone through a significant sea change.
Now, are China & India attempting to reduce their respective dependence on each other and what may be the potential implications for European companies investing in Asia?
Mounting Economic Friction
On 13th April 2020, the People’s Bank of China raised its stake in India’s leading commercial bank Housing Development Finance Corporation (HDFC) from 0.8 per cent to 1.01 per cent through open market purchases, which created a storm amongst Indian regulators. As Indian stock markets plunged steeply on account of COVID-19, the regulators feared that China’s state-controlled firms could acquire assets of Indian companies at low prices. Therefore, to curb “opportunistic takeovers/acquisitions of Indian companies” under these circumstances, the central government amended the Foreign Direct Investment (FDI) Policy by introducing restrictions on all direct and indirect foreign investments from seven countries sharing land borders with India – China, Pakistan, Bangladesh, Myanmar, Bhutan, Afghanistan and Nepal.
Under the revised regulations, such investments would mandatorily require government approval. While India labelled this as a step to better monitor and protect Indian companies going through a tough financial phase, the Chinese Government claimed it was discriminatory in nature and against the free trade policy of the World Trade Organization (WTO).
Boycott & Tariffs
Since 2020, many Indian politicians have pushed the government to boycott Chinese products. By September of the same year, the Indian Government had banned 118 Chinese apps, including very popular ones such as WeChat, TikTok and Alipay – India is TikTok’s biggest overseas market with over 200 million users. The government justified this action on grounds of national security and data privacy, claiming it was necessary to prevent the Chinese Government from having access to the personal information of Indian citizens.
The Chinese multinational technology company Huawei has been playing a very important role in the Indian telecoms sector for almost two decades now. In December 2019, India permitted Huawei to participate in 5G trials. However, after the border standoff, sentiments changed. According to several newspaper reports, the Indian Government issued unofficial orders to local telecoms companies precluding them from entering into ventures with Chinese service providers, including Huawei.
Within the smartphone market in India, the world’s second largest, Chinese manufacturers have already played a large role, with Xiaomi occupying a 30 per cent share, followed by other Chinese brands such as Vivo, Realme and Oppo. However with recent policy changes, such as the government requesting Chinese smartphone companies to increase their exports from India to prop up domestic players, a ban on companies such as Huawei from setting up 5G networks in the country has been estimated to have increased the costs of the switch to 5G by as much as 35 per cent.
As China is India’s biggest source of imports, covering a wide range of products such as electronics, chemicals, pharma, fertilisers, automobile parts, furniture, paper, heavy machinery and plastic toys. In order to make India self-reliant and curb imports of non-essential commodities from China, the Indian Government has imposed higher tariffs and other measures such as higher compliance standards for 300 products.
By way of example, The Indian government has tightened the regulations around pharmaceutical imports from China through stricter scrutiny of active pharmaceutical ingredients, of which it has been reliant on China for approximately 70% of such materials.
Clashes Over Disputed Border
Bilateral relations plunged to an all-time low two years ago after China amassed tens of thousands of troops in the Ladakh sector of the Line of Actual Control (a 4,057-km long border which separates Indian and Chinese controlled territory and traverses three areas of northern Indian states.)
The two nations had been competing to build infrastructure along the border. India's construction of a new road to a high-altitude air base is seen as one of the main triggers to one brutal clash in Galwan Valley in June 2022, which killed 20 Indian soldiers and at least four Chinese troops. India and China have withdrawn frontline troops from the two banks of Pangong Lake, Gogra and Hot Springs after more than two dozen rounds of diplomatic and military talks since the standoff began. However, there has been no forward movement on other friction points such as Demchok and Depsang.
Potential for Reconciliation
From the abovementioned issues alone, it is clear to surmise that China-India relations are in a state of limbo. Recently, President Xi, on his first trip abroad since the pandemic began, at a two-day summit of the Shanghai Co-operation Organization in Uzbekistan last month, had a full schedule of meetings with national leaders, yet there was one notable omission: India’s prime minister, Narendra Modi. Not only did the two not meet, but they did also not appear to exchange greetings when they stood next to each other at a group photo.
India has since sought to enhance ties with America and its allies, especially Japan and Australia, most evident via the Quadrilateral Security Dialogue (QUAD) mechanism. Managing relations with India has become one of President Xi’s biggest diplomatic challenges. Attempting to assert territorial claims, while risking access to the vast and fast-growing Indian market for Chinese companies that are struggling to grow at home and in the West.
India/China & RCEP
On November 4th, 2019, Prime Minister Narendra Modi chose to opt out of the Regional Comprehensive Economic Partnership (RCEP) and a year later, 15 Asia-Pacific nations, including China, signed the world's biggest trade agreement, the Regional Comprehensive Economic Partnership (RCEP).
China was touted as the single most important factor for India’s reluctance to join the RCEP (Regional Comprehensive Economic Partnership), with India's trade deficit with China a massive $55-60 billion. India has claimed that China holds an advantageous position in the deal and would leave India in an unfair position amid the ballooning trade deficit.
India might lose investments while its consumers may end up paying more than they should, especially when global trade, investment and supply chains. For the RCEP member states, they would lose out on an opportunity to access India's large consumer market that is notoriously hard to get into, especially during the current global economic situation.
However, the Modi government has rolled out a number of incentives-based schemes for multinational companies to establish in India.
China Plus India?
Beijing's hardline approach to eradicating the pandemic has led to industrial lockouts and large-scale supply chain disruptions. As a result, global firms are increasingly adopting a China plus one business strategy (avoiding investing in China alone in order to re-orient their supply chains.)
With the European Chamber of Commerce in China publication, Decoupling: Severed ties and Patchwork Globalisation, European Companies were as early as the start of 2021 recognizing the need for establishing one supply chain and R&D system to exclusively serve China and one to provide for the rest of the world. The costs for companies however, are estimated to be considerable, in consideration that each step taken down the path of decoupling inflicts further damage on innovation, efficiency, cost-saving and economies of scale. Some companies, especially those for whom China represents a small share of global sales, admitted that, if left unchecked, decoupling could so imperil their economies of scale that they would be forced out of China altogether. Others, especially those with a higher proportion of global sales in China, would have to reorganise their company structures. In either case, this translates into lost investment.
Last week Apple announced plans to make its latest phone model, iPhone 14, in India, a significant milestone in the company's strategy to diversify manufacturing outside of China. Five percent of iPhone 14 production is expected to shift to the country this year, much sooner than analysts had anticipated.
By 2025, a quarter of all iPhones the company makes could be produced in India, say analysts at investment bank JP Morgan. Despite Apple already manufacturing iPhones in the southern Indian state of Tamil Nadu since 2017, the decision to make their flagship model in India is a noteworthy step as trade tensions show no signs of letting up. The move also assumes significance in the backdrop of the global supply chain de-coupling due to China's "zero-Covid" policy.
Conclusions
India, Asia's third largest economy, has positioning itself as an attractive manufacturing and exports hub for multinationals, with a large domestic market and plentiful low-cost talent.
India has signed close to 13 Free Trade Agreements with various countries while also in the advance negotiation stage of a Free Trade Agreement with the European Union (EU) after a long gap of 8 years, which will invariably help discover the significant untapped potential for boosting economic ties between the two regions.
A shift in global strategy by multinational companies due to economic uncertainty, COVID-19-related factory closures, and a worsening political relationship between the US and China has left them seeking supply chain alternatives. Apple may be the biggest company shifting production away from China, but it’s not alone as Amazon is now making its Fire TV devices in Chennai, India.
India now has the biggest potential to scale its production facilities to match up with China at a strategically advantageous time for the country, as investors large and small all stand up to take notice. While the manufacturing push has already resulted in leading companies increase their India manufacturing base the government’s push for aggressive transformation of the logistics infrastructure, the National Logistics Policy, is the latest move to turn India into a global factory, which has been a major contrast between the Chinese and Indian business marketplaces, with higher logistics costs resulting in a competitiveness gap of EURO 185 billion for India. The Navi Mumbai International Airport Limited, an international airport to be operational by the end of 2024, with a planned throughput of 60 million passengers and 1.5 million tonnes of cargo per annum a major indicator of the country’s progress and intent.
