Trading With The Enemy: It’s Complicated
Quite a few Indian politicians short on knowledge on economics have the habit of shooting their mouth on major trade and economic issues without realising the harm all this might do to the country. Many worthies doing it to get attention of the masses given to supra nationalism is understandable. But why should Arvind Kejriwal, who graduated in mechanical engineering from IIT (Kharagpur), known for its liberal academic environment and was a member of Indian Revenue Service before launching Aam Aadmi Party in 2012, be in that kind of bandwagon! Kejriwal, who cannot plead ignorance of economic affairs after running Delhi as chief minister since February 2015 in a recent uncharacteristic jingoistic outburst said: “Why don’t we stop our trade with China? All things that we import from China can be manufactured here in India. Halting the trade will be a lesson for China and also generate employment in India.”
At his implicit encouragement, AAP’s trade outfit held a protest rally in New Delhi’s Connaught place urging traders to unite in a “boycott of Chinese goods.” Many politicians from other parties too have joined Kejriwal in initiating strong trade action against China.
The spark for all such angry but uninformed reactions came following defence minister Rajnath Singh informing Parliament of Indian Army successfully pushing back Chinese soldiers found transgressing into Tawang sector of Arunachal Pradesh. What the people giving a shrill call for trade suspension with China are likely unaware that India and China have carried on with unsettled borders since our Independence and their liberation.
Solution to knotty border issues, according to former Indian national security adviser Shivshankar Menon, calls for prolonged “hard negotiations.” In the meantime, the two countries remain engaged in reinforcing road and related infrastructure at disputed border points along with high levels of military deployment. The protestors should be told that unless the two major powers of Asia have consciously decided to pursue bilateral relations with particular focus on trade independent of intermittent skirmishes happening at some border points, China could not have become India’s second largest trading partner in 2021-22 from a low of 12th in 2000-01.
There were, however, years in the past decade when China replaced the US to take the top slot in India’s export-import trade. The US and China have been alternating their positions as the two largest trading partners of India, with one constant. While India continues to record a significantly large trade surplus with the US, amounting to $32.85 billion during 2021-22, its trade deficit with the neighbour in the north ballooned from $44.02 billion in 2020-01 to $73.31 billion in 2021-22.
Incidentally, China alone had a share of over one-third of India’s total trade deficit of $191 billion in 2021-22. As expected, China origin import juggernaut is continuing through the current 2022-23 financial year. Commerce ministry data says during April-October 2022-23, India’s trade deficit vis a vis China leaped year on year 39 per cent to $51 billion from $37 billion. Apart from what keeps on happening at the border from time to time, should this rising trade deficit be any reason for politicians worth their salt to give a call for trade extinguishment. The answer will be a resounding no.
For appreciation, one has to consider the items that India principally imports from China to sustain and promote this country’s manufacturing of finished products. For example, if for some reasons there are dislocations in supply of active pharmaceutical ingredients from China for any length of time, production of medicines here will be upset causing serious health problems. Then how will India pursue the cherished goal of a digitally empowered society where growing numbers of people will be using computers and mobile phones for accessing information and conducting all financial transactions unless there are easy imports of electronic components and computer hardware and peripherals from China. Government officials and also industry in general will heave a sigh of relief if the agitation against imports from China does not spread and it actually ends in a whimper.
Commerce ministry data shows that India’s principal imports from China are electronic items, telecom instruments, chemicals and capital goods and their combined imports jumped to $31.008 billion during January-November 2021 from$19.720 billion in the same 11 months of the previous year. Aghast at some Indian politicians’ poor understanding of cruciality of trade between the two large Asian neighbours, Arvind Panagariya, a former vice chairman of government think tank Niti Aayog and now professor of economics at Columbia University told PTI the other day the reason India buys so heavily from China is because for many of this country’s imports, China remains the cheapest supplier. At the same time, Panagariya says: “It also happens that for goods India wants to export, China does not offer New Delhi the best price. So, we sell them to other trade partners such as the US. The fact that this results in a trade deficit with China and trade surplus with the US should be no reason for worry,”
Shocked by the boycott call given in some quarters, the noted economist who left the Niti Aayog job not in happy circumstances, wants the unversed in realities of economics to remember that a $3 trillion economy will better avoid an economic war with a $17 trillion economy in order not to suffer considerable economic damages. In his words: “Now there are some who want trade sanctions on China to ‘punish’ it for its transgressions on the border… if we try to punish China, it will not sit back, as amply illustrated by its response to sanctions by even the mighty United States.”
Only the naive will disagree with Panagariya proposition that in the event of India engaging with China in a highly uneven trade war in response to occasional border engagements “will mean sacrificing a considerable part of our potential growth… purely on economic grounds.” For example, the pharmaceutical industry, the whole range of electronics goods manufacturers and industries dependent on supplies of critical raw materials and intermediate products from China will be paying dearly in case supplies from China get choked. In any case, instead of being concerned with trade deficit with one country, our focus at all times should be on external imbalance reflected on current account deficit showing our external liabilities.
Indian metal makers, particularly aluminium and steel, are buying heavy machineries such as smelters, alumina refineries, coke oven batteries and blast furnaces from China mainly at the expense of traditional establishments in European Union. “We are buying such high-tech expensive equipment from China not for any love for that country but for attractive prices on offer. Chinese equipment in employment here in aluminium and steel plants will match the best available elsewhere on all parameters such as end product quality, energy efficiency and post-installation services. In the process of emerging as the owner of the world’s largest steel and aluminium capacity, Beijing has ensured simultaneous development of machine building capacity matching the best available elsewhere,” says Bharat Aluminium CEO and director Abhijit Pati.
As more and more Indian metal groups, including the government owned ones are buying machines from China, European machine makers have started bringing down their prices globally. India, which has ambitious steel and aluminium growth targets, is a beneficiary of price competition between machinery manufacturers in China and the EU.
Many of our saffronite politicians have only scorn for Indian economists based abroad, irrespective of their achievements. Fortunately, that does not stop them from watching developments in the country of their origin and making some sane suggestions from time to time. Such economists include Amartya Sen, Kaushik Basu, Panagariya, Raghuram Rajan, Pranab Bardhan and Maitreesh Ghatak. Isn’t the Panagariya prescription that instead of threatening a trade war with China, India should focus on signing free trade agreements (FTAs) with developed countries to get easy and duty-free access to its goods and services in their markets? Take the India-Australia Economic Cooperation and Trade Agreement (ECTA) that came into effect a few days ago. As a result, 96 per cent of Indian goods exports will enter Australia duty-free and over the next three years, this will rise to 100 per cent. India in turn will get cheaper raw materials from resource-rich Australia as these get duty exemptions. Indian minister of commerce and industry Piyus Goyal says ECTA activation should raise India-Australia bilateral trade to about $50 billion in five years from $31 billion now and also in the process create about 1 million new jobs here. We have it from Goyal that India will sign at least two FTAs with developed countries this year. Sabre-rattling does not help. The way forward is to negotiate hard and with confidence FTAs.
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