China Imports: India should Shun Knee-Jerk Reaction, says SBI Report

SBI Ecowrap moots calibrated steps to reduce import dependence on China

India has to clearly take a calibrated call in reducing its import dependence on China and not through sudden stops, according to State Bank of India’s economic research report ‘Ecowrap’.

This suggestion comes in the backdrop of India banning 59 Chinese mobile applications (apps) in the wake of China ratcheting up tension along the international border with India.

“There is now a huge clamour about banning imports from China, after the border stand-off.

“Ideally, India must go for imposing restrictions on certain products in which it has a Revealed Comparative Advantage over China, and which will provide support to MSMEs (micro, small and medium enterprises),” Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said.

However, demanding to curtail all imports at one go from a country which is so entrenched in our economic system is unreasonable and might disrupt the local supply chain, when looked at either from the producers’ side or consumers’ side, he added.

China’s share in India’s total merchandise imports has steadily climbed from 1.9 per cent in FY1997 to 13.8 per cent in FY2020. Clearly, China has slowly and steadily built a solid base in both high- and low-value imports into India, the report said

At an eight-digit (product/commodity classification for imports and exports) level, a humongous 6,844 products were imported by India from China aggregating to $65.3 billion in FY20.

According to Ecowrap, in principle, China has spread out in all other categories, including low-value manufacturing to high-value capital and electrical goods, which are exported to India.

Low-value imports

In terms of low-value imports, if commodities with an import value of less than $100 million are taken into consideration, but which command more than 90 per cent share in India’s imports, India imports 823 products from China worth $3.9 billion.

The concentration is in organic chemicals, machinery and mechanical appliances and electrical machinery, textiles and textile articles.

There are also imports of articles of iron and steel, tools and products made of other base metals, other miscellaneous manufactured items (toys, furniture,etc.), articles of stone, plaster, cement, asbestos, mica or similar materials; ceramic products, glass and glassware, plastics, rubber and footwear, among others, in the low-value category.

These items are a mix of finished goods and intermediate inputs, and India has a revealed comparative advantage in many of these imports.

Ghosh observed that “If India wants to wean itself off its dependence on China, capabilities have to be developed in these areas, especially chemicals, textiles, and footwear, so that both inputs and final consumer goods in these low-value imports can be manufactured domestically.”

High-value imports

At HS-2 Digit classification level, the high import value categories accounted for 49.7 per cent of the total imports from China in FY20. This share was just 14 per cent in FY97.

Item-wise, primarily these are in the form of telephonic and telegraphic equipment and personal computers, solar cells, parts of electronic integrated circuits and micro-assemblies, lithium-ion and di-ammonium phosphate. There are other goods also under electrical and electronics imports.

“Our dependence on China is huge in these as more than 40 per cent of our imports of these products come from China, and the import value is more than $500 million.

“Drastic reduction in these areas can only be possible if we source from other countries, while building a domestic manufacturing base for these (items),” Ghosh said.

Imports of machinery and electronics from China dwarf the rest of the industries. The report underscored that the time period from FY03 to FY08, saw more than 60 per cent increase every year in these imports, helping China slowly and steadily build a solid base in machinery and electronics imports in India.

Given the productive nature of capital and electronic goods, the decline in these imports has to be gradual as India builds domestic capacity to fulfil the needs of the domestic population, as well as meet export demand, the report suggested.

In the case of goods whose import value was between $100 million and $500 million and where the import dependence was more than 50 per cent, the sectors in which the imports are concentrated are chemicals, especially organic, machinery and mechanical appliances, electrical machinery, base metals, and articles of base metals, textiles and textile articles, miscellaneous manufactured articles, plastics, rubber, motorcycle accessories, footwear, and headgear, among others.

Way forward

The report highlighted that the rank of India and China in two big subtopics ― ease of starting a business and enforcing contracts ― clearly tells us why India is not the world’s manufacturing hub. For India to be a net merchandise exporter, it needs a huge manufacturing base. For that to happen, these two aspects need to be strengthened.

China has been building its export base over the years. China’s merchandise exports stood at $2,499 billion, compared with India’s $324 billion in 2019, as per WTO Data.

The report said despite India doing well in ease of doing business ranking, it has not been able to catch up with China as the latter has built its capabilities over a period of time.

According to Ecowrap, anecdotal evidence from local business players tell that they find it much easier to do business in China.

From the data perspective also, although it is cheaper to export from India and more expensive to import to India, the time taken to meet border and regulatory compliance is higher and is one of the reasons why China is preferred.

“We do have a cost advantage in exports but we need to increase the efficiency to successfully overtake China. This is a sad manifestation of a logistics irony that we have faced over the decades,” Ghosh said.

Services: Best thing

The best thing however, is that data on services and merchandise trade exports show that India can definitely compete with China on the services front.

India exports a far greater amount of telecommunications, computer, and information services than China. However, China is rapidly catching up and India needs to buckle up, cautioned the report

Although the ban on 59 Chinese apps, which are quite popular in India, is based on security concerns, it does provide local tech companies the space to develop apps which can compete with their Chinese counterparts.

In this regard, Ghosh suggested that India, with its huge IT base, can thus, focus more on services, while building capabilities in goods exports will take more time to improve its overall trade balance.