Beyond Boycotts: Rethinking India’s Economic Relationship with China

Over the past few months, there have been numerous calls for boycotting Chinese goods and rethinking India’s economic relationship with China. Events over the past week have led to an intensification of these calls.

This is reflective of growing public anger in India, which is understandable. An early outcome of this anger has been the reported decision by the Dedicated Freight Corridor Corporation of India to terminate at Rs. 471 crore contract with Beijing National Railway Research and Design Institute of Signal and Communication Group Co Ltd.

The angry boycott calls and the decision on the rail contract one hopes will give Chinese companies in India and the political leadership in Beijing food for thought. Beijing’s myopic approach to New Delhi over the past few years has systematically alienated the current and perhaps even next generation of Indians. This is a strategic failing of Chinese foreign policy under Xi Jinping.

But from an Indian perspective, the question is whether an angry boycott or economic decoupling with China serves India’s strategic objectives. What is the cost of the message that we are trying to deliver? Does it lead us on the path of greater prosperity, thereby bolstering our economic power? Will it alter behaviour at the boundary? Does an economic break-up expand our leverage or reduce levers that we can use during future crises?

The current situation does provide an opportunity for the Indian government to have a deeper discussion about the economic relationship with China. For long this conversation has been captured by the narrative of the trade imbalance, which is important but limiting.

Instead, our economic relationship with China should be located within the context of our broader strategic goal, i.e., transforming the lives of hundreds of millions of Indians and generating wealth, prosperity, and consequent power. To that end, it is clear that we need to engage China, which is the world’s second-largest economy in nominal GDP terms. However, we need to rethink the terms of that engagement from the following perspectives.

First, India’s future growth requires a focus on boosting consumption, and this requires people to have access to cheap yet quality consumer goods. It’s preferable, of course, if these are manufactured in India. Doing this will require domestic policy changes. But such an approach will help drive investment, create jobs and boost consumption. Whether this capital comes from Chinese investors or others is immaterial. We have needed this earlier and now more so with the pandemic’s impact on our economy.

Second, at the same time, we need to think of sectors and domains where these investments can create national security vulnerabilities, and how do we tackle these. For instance, investment which leads to a seat on companies’ boards or confers decision-making authority to Chinese players must be carefully scrutinised and perhaps disallowed. Or sectors like telecom, where core network presence can clearly create vulnerabilities, for which technological solutions are likely to be inadequate, should be non-starters. This, however, might not be the case with regard to say investment in dumb infrastructure, real estate, or automobiles. Balancing these risks while not undercutting opportunities requires a rethink of the institutional architecture, norms and processes for investment screening. There are a number of evolving models around the world, such as CFIUS in the US or the 2019 EU Foreign Investment Screening Regulation, that we can draw upon. Moreover, there is a case to be made for identifying strategic domains and making a political choice of incentivising economic ties with trusted international partners in these.

Third, amid the pandemic, one of the key learnings for states and enterprises has been an appreciation of the risk of over-dependence on any one market or country for supplies. This has been felt particularly acutely in a world where increasingly economic interdependence has been weaponized by states to serve political and strategic objectives. Take the case of the Indian pharmaceutical sector’s dependence on Chinese APIs. Amid the pandemic, this has proven to be a matter of strategic concern, although to be fair, we have not witnessed supplies being hindered owing to political issues. Looking ahead, one can see a similar challenge developing in the new energy vehicle sector, given Chinese dominance over materials. It is, therefore, important for businesses and policymakers to begin thinking about diversification and resilience of supply chains, along with domestic capacity development. This is a strategic imperative. Translating this objective into policy will require the government to work with businesses.

Finally, and perhaps most importantly, while we rethink our external economic engagement, particularly with China, from a position of strength, it is important to look inward. From basic factor market reforms of land and labour to areas like data protection and ownership, liberalisation of the education sector, and boosting R&D expenditure, we need strong policy frameworks that incentivise businesses while protecting the rights of individuals. These are the structural shackles that limit Indian competitiveness.