Over the last few weeks, arguments have been presented against using Chinese products and services in India. Noted personality, Sonam Wangchuk released two videos explaining how and why Indians should stop using Chinese products. Sonam has some reservations against Chinese government, thus he wants people to punish the Chinese government. Moreover, Sonam argues that China uses earning from Indian consumers to fund military expenses and use that to show aggression against India. As expected, Sonam has found a lot of support from followers of Modi government. Government, which is busy creating a narrative around “Atmanirbhar Bharat” has initiated a new policy of using Indian product as a solution to economic slowdown. This blog will try to present arguments on this brewing debate.
Economic trade (comparative-advantage) plays an important role inefficient utilization of resources and fuelling economic growth. Let’s take an example of a doctor D and a farmer F. If D & F do not trade their product and services, then D must grow food for her needs and F must learn about medical science. But if D & F agrees to trade their product and services, D can efficiently treat more patients and use that income to buy food from F and vice-versa. Similarly, at the country level, global trade allows a country to efficiently work on its strength and produce goods and services at a lower cost and export them to rest of the world. The country can use the proceeds from exports to buy products, which are produced more efficiently by other countries.
India-China Trade Background:
China has been able to provide low cost labour and efficient governance thus supporting business environment and has been able to fuel Chinese economy by exporting products to the rest of the world. Trade dynamics between China and India have been very skewed in favour of China. For instance, India has a trade deficit of nearly USD 56.3 Bn with China, which means we imported nearly USD 56.3 Bn worth of products more than we exported to China in 2019. This has not been a new trend; India has been running consistent(Avg- USD 49.5 Bn) trade deficit with China over last 6 years.
So, Is trade deficit bad? Of-course, trade deficit makes a country a net buyer of foreign currency, at the same time it affects domestic industries. Moreover, it also drags the GDP growth of an economy.
(Remember GDP = C+G+I+(X-M)) here X-M = Trade Deficit)
Will rejecting Chinese product improve India’s GDP?
But the real question is – Will boycotting Chinese products improve India’s GDP? To answer this question, we should go back to Pre-1991 Era, in those times, India was struggling with a very low Hindu growth rate, high restrictions on trade and Congress government interfering in almost all business activity. India had followed a policy of import substitution i.e. Indians will not consume imported goods rather Indian companies should produce goods locally. We all know how that policy turned out. In current times, US-China trade conflict also presents key learnings – US President, Trump has been taking multiple steps to narrow down US-China trade deficit, but in the process, overall trade growth has been crashed and the whole world is paying the price. Despite, all the noises and volatility in financial markets, US trade deficit with China remained broadly unchanged at USD 345 Bn in 2019 against USD 347 Bn in 2016. On other hand, US-China overall trade, which had grown by 4% on average, has actually declined in three-year period.
This brings us to next question, who wins from trade conflict? & Why Indian government supporting, though informally, such movement? As we discussed, from the economic standpoint trade war is lose-lose situation, but there is one clear winner – Politicians. In US-China trade conflict nobody gained except for Trump, who consolidated his voters by creating rage against China. In India, Modi government has been trying to deflect the core-issues – slowing economy, failing health infrastructure against Corona Virus. Interestingly, we believe that, China is also trying to deflect global attention from Coronavirus. Hence the fire-works on India-China borders.
There is a huge disparity between India and China on economic and military fronts. For instance, India-China trade accounts for just 2% of total Chinese trade, while it accounts for nearly 9.4% of India’s overall trade. So, any serious conflict might not yield a positive outcome for India. At last, India must try to reduce trade imbalances, but neither by uninstalling Chinese App nor by import substitutions. Rather, it should focus on business bottlenecks and implementing a series of economic, land and labor reforms thus building India into a new economic powerhouse.
Prashant Jain, FRM, is a banking professional with 6+ years of experience in currency markets. He writes about monetary and fiscal developments. He has been associated with teaching for the last 5 years. He has a keen interest in politics and cricket.