DPG Policy Brief
The China Factor in India’s Economic Security
Authors Dr. V.S. Seshadri, I.F.S (Retd.)
Date: September 26, 2024
This brief provides a timely assessment of China’s state-induced overcapacities resulting in its dominance over global trade and economy, and strategies being adopted by both developed and developing economies to deal with this challenge. Against this broader context, it then goes on to analyse how India must re-shape its trade and investment ties with China.
The author draws attention to how China’s economic model of low consumption, high savings and industrialisation enables it to create overcapacities and capture export markets, virtually across all domains. The distressed property market in China has only aggravated this trend further. Even the WTO Secretariat has been constrained to underline growing concerns about opaque subsidies and government support-led overcapacity.
With the industrialised economies of the West confronting direct competition with China in a growing range of sectors, coupled with the disruptions of supply chains during the COVID-19 pandemic, de-risking has acquired importance. Industrial policies are now commonplace, and substantial investments have been made for manufacturing EVs, batteries, solar panels, critical minerals and semiconductors in the US and Europe. Furthermore, measures to protect domestic industry from Chinese overcapacities have become a priority for the West. Investment scrutiny, export controls and other regulatory checks have been tightened.
China, meanwhile, is trying to mitigate the impact through retaliatory measures and improved trade and economic ties with South East Asia and other select economies. However, increased investments from China in economies such as those of ASEAN have only scaled up their import dependence on China even further.
The question then arises as to what policy options India must exercise, given the massive and steadily rising imbalance in its trade relations with China? At a juncture when this bilateral trade is asymmetrically skewed and border tensions are undermining normal relations, India’s trade dependence on China has become a vulnerability that must be addressed with some urgency and determination.
The author goes on to outline a four-point framework that has emerged in India’s approach to economic relations with China: keeping out risk-ridden trade, investments and technologies; strengthening indigenous capacity and competitiveness; forging supply chain collaborations with friendly partners; and entering into FTAs with select partners.
He argues that these steps need to be pursued in a missionary mode, particularly as China has never shown any interest in addressing the trade asymmetry. The nature of import dependence on China also needs to be analysed in greater depth, so that adequate policy tools are in place and trade remedies can be made available to protect domestic producers. Careful scrutiny of all Chinese investments must remain in place for the foreseeable future, with guidelines and guard rails put in place to ensure coherence, consistency and speed of decision-making.
The author concludes that the overall objective in managing India-China trade and economic ties in the present difficult environment must be two-fold: the risks of dependence must be reduced, not elevated further; and there must be greater national convergence on pursuing this overall approach across the entire spectrum of government policymakers, implementing officials, economic experts, and business and industry.
To read this Policy Brief Vol. IX, Issue 24, please click “The China Factor in India’s Economic Security”.
The author draws attention to how China’s economic model of low consumption, high savings and industrialisation enables it to create overcapacities and capture export markets, virtually across all domains. The distressed property market in China has only aggravated this trend further. Even the WTO Secretariat has been constrained to underline growing concerns about opaque subsidies and government support-led overcapacity.
With the industrialised economies of the West confronting direct competition with China in a growing range of sectors, coupled with the disruptions of supply chains during the COVID-19 pandemic, de-risking has acquired importance. Industrial policies are now commonplace, and substantial investments have been made for manufacturing EVs, batteries, solar panels, critical minerals and semiconductors in the US and Europe. Furthermore, measures to protect domestic industry from Chinese overcapacities have become a priority for the West. Investment scrutiny, export controls and other regulatory checks have been tightened.
China, meanwhile, is trying to mitigate the impact through retaliatory measures and improved trade and economic ties with South East Asia and other select economies. However, increased investments from China in economies such as those of ASEAN have only scaled up their import dependence on China even further.
The question then arises as to what policy options India must exercise, given the massive and steadily rising imbalance in its trade relations with China? At a juncture when this bilateral trade is asymmetrically skewed and border tensions are undermining normal relations, India’s trade dependence on China has become a vulnerability that must be addressed with some urgency and determination.
The author goes on to outline a four-point framework that has emerged in India’s approach to economic relations with China: keeping out risk-ridden trade, investments and technologies; strengthening indigenous capacity and competitiveness; forging supply chain collaborations with friendly partners; and entering into FTAs with select partners.
He argues that these steps need to be pursued in a missionary mode, particularly as China has never shown any interest in addressing the trade asymmetry. The nature of import dependence on China also needs to be analysed in greater depth, so that adequate policy tools are in place and trade remedies can be made available to protect domestic producers. Careful scrutiny of all Chinese investments must remain in place for the foreseeable future, with guidelines and guard rails put in place to ensure coherence, consistency and speed of decision-making.
The author concludes that the overall objective in managing India-China trade and economic ties in the present difficult environment must be two-fold: the risks of dependence must be reduced, not elevated further; and there must be greater national convergence on pursuing this overall approach across the entire spectrum of government policymakers, implementing officials, economic experts, and business and industry.
To read this Policy Brief Vol. IX, Issue 24, please click “The China Factor in India’s Economic Security”.
