As the world battles the wrath and economic standstill that has emanated from the COVID-19 pandemic, geopolitical tensions have soared in East Asia along the non-delineated borders of India and China. The altercations that ensued between the two nations, along the historically peaceful region of the Galwan River Valley, peaked in mid-June when China attempted to unilaterally change the status quo by violating the sovereignty of the Line of Actual Control (LAC). While the LAC, unlike the Line of Control (LoC) between India and Pakistan, remains non-demarcated and hasn’t been internationally agreed upon, it has ironically sustained relative peace. However, the 2020 skirmishes resulted in 20 casualties on the Indian side while China is said to have lost an unconfirmed number, despite the clash being restrained with no use of bullets.
China has been globally targeted for its neocolonialist approach over the past decade, be it through cheque-book diplomacy as in the case of Sri Lanka, or through blatant expansionist policies, as in the current scenario. When India refused to participate in the first Belt and Road Initiative summit in May 2017, it practically refused to fall for the former approach and became a hindrance to China’s grand geopolitical strategy, resulting in the orchestrated Doklam standoff that followed a month later, in June 2017.
This bears weak resemblance to the current scenario, wherein the export consignment of faulty medical equipment by nationalised Chinese pharmaceutical companies and the possibility of COVID-19 being an engineered bioweapon has turned global sentiments against the Chinese economy in general. As a consequence, global investment portfolio rebalancing is expected. Additionally, many major MNCs realised that they had put too many eggs in one basket, and are looking to move their production units to South Asia, where India stands waiting in anticipation with lucrative policies. This speculation has prevailed since the US-China trade war began but has been concretised over the past quarter, leading many to believe that this was as much of motivation behind the violation of the de-facto border as the local territorial integrity. While peace is the prioritised goal, the primary objective for India remains to restore the status quo ante, leading to prolonged conflict. Since both nuclear powers ascribe to the ‘no first use’ policy, the dispute has permeated into the economic foreground leading to calls for a strategic boycott.
The discord comes at an opportune time for China, as India closes to the peak of COVID-19 and faces a fragile and vulnerable state of affairs. The financial markets have rallied temporarily, and have, since February, gone through the Denial-FOMO (fear of missing out) cycle identified by Robert Shiller in the American markets, which can be loosely extrapolated to fit the Indian scenario. Once again, the stock market appears to be considerably decoupled from the state of the economy which is said to be headed towards depression. In such a situation, the escalation of bilateral tensions with a nation that accounts for over 16% of total imports and 9% of total exports of India is seemingly not a viable course of action. Although, as proclaimed by many, the boycott, if successful, will not be entirely harmless, and ironically, this is the best time to put it to action.
India majorly imports organic chemicals and electrical machinery from China to be used as raw materials in the Indian industries. Both can be procured from separate sources, at slightly higher prices, which might interfere with pharmaceutical price control regulations in case of organic chemicals. But hiking import duties on non-essentials is definitely a doable move at this juncture when the fall in imports is much larger than the fall in exports due to slowdown in industrial activity.
However, as the nation proceeds to unlock and the economic cycle initiates, it is unlikely that businesses will be able to afford the switch and diversify their supply chains. Ideally, the graph of the India-China trade balance mapped as a function of the timeline since the initiation of a (successful) boycott should take a familiar tilted J-shape, with the curve beginning in the negative-Y (deficit for India) threshold. The initial crater of the J-curve is owed to the inelasticity of demand, and the deficits might worsen when the economy reopens and imports rise from their current low levels. Eventually, as the demand revives, and (if and only if) the businesses remain encouraged to diversify their supply chains, the boycott may be considered successful.
However, the argument remains that this will be more of a diplomatic win rather than an economic one. In order to play this strategically and move towards what Indian Prime Minister Narendra Modi calls an ‘Atma Nirbhar’ (self-dependent) India, free of import dependence, one must play for the long haul. China became the world’s factory because of its extremely cheap wages, but it managed to remain so despite the 8,500% wage increase since the past 30 years, solely due to its simplified policy framework. Chapter - 6, Volume - 1 of the Indian Economic Survey 2020, elaborates poignantly how China fairs better than India in virtually all the parameters of the Ease of Doing Business Index by the World Bank. The complications involved in acquiring construction permits, licenses, and the magnitude of applicable rules and statutory laws for manufacturing are quite overwhelming for any business to venture into India. Although there have been underrated reforms like the Insolvency and Bankruptcy Code of 2016 that have been revolutionary in disciplining the attitude of businesses towards their sources of finance, we still need a major revamping of the legal system of the nation in order to strengthen contract enforcement.
Another pertinent question that we need to ask ourselves is that even if the global economy permits, are we ready to become net exporters even in the long run? India’s growth story has always been driven by local consumption power, which is also skewed towards import-intensive goods. That leaves little room for domestic savings, leaving us prying for FDI, and that demand is honoured since India is a favourable destination during prosperous periods owing to the lucrative emerging market grade returns. A country can have either a net current account surplus or a capital account surplus, we face the latter case. China faces the former, by its choice. It even resorted to the old currency devaluation tactic back in 2019, when the trade war with the US began to frustrate the officials with threats of taking away the current account surplus. This surplus is precious to China due to the grand strategy of foreign capital investment it has undertaken under its neocolonialist approach. But India cannot steal both the FDI and the exports of China, that would go against macroeconomic fundamentals. This is practically why many have opposed the idea of a boycott and called for more government focus on rearing natural competition while reaping the advantages of smooth FDI. It is eventually up to the government to prioritise and strike an ideal balance between diplomatic and economic victories, which may not go hand in hand in the short run.
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