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August 26, 2020

Asia

INDIA/CHINA: Modi meets military threat with economic retaliation

BY Aditi Phadnis

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( 4 mins)

With little sign that the border tension between India and China is anywhere close to resolution, New Delhi has embarked on an aggressive domestic political exercise to wean Indians off their dependence on Chinese goods, even at the risk of political costs.

Since hostilities broke out between India and China in Galwan Valley in May, New Delhi has been working on policies to scrutinize and stymie the influx of Chinese goods into the country. In his customary national address on 15 August, India’s Independence Day, Prime Minister Narendra Modi asked Indians to be vigilant about the dangers of expansionism and terrorism from the neighborhood, a barely veiled reference to China and Pakistan. The Directorate General of Foreign Trade (DGFT) announced restrictions on the import of televisions late in July to encourage local manufacturing. In financial year 2019-20, of a total value of USD 781mn in TV imports into India, USD 300mn came from China and USD 400mn from Vietnam.

Last week Modi met representatives of the Indian toy industry and urged them to expand the domestic toy and digital gaming industry, currently dominated by China. A law passed in July restricts Chinese companies like Huawei and ZTE from participating in 5G spectrum auctions; though in the current economic climate, there is a question mark over the auction itself. India is also considering measures to prevent trade partners, mainly in Southeast Asia, from re-routing Chinese goods to India with little added value. This move will mainly target the import of electronic components for laptops and mobile phones, furniture, leather goods, toys, etc. Car manufacturers who use intermediate goods imported from China have already warned that the cost of cars made in India could go up as a result.

The government believes that even if prices go up, these moves will have political traction. From burning Chinese products to a minister calling for a boycott of restaurants selling Chinese food to burning posters of President Xi Jinping, there is extensive hostility towards China after the border clashes. A survey by a local TV network on perceptions of China in India reported that 90% of those surveyed agreed with a ban on China-made products in the country: 92% of them were between the ages of 18 and 24.

Even so, a decision to stop the flow of Chinese made goods and substitute them with Indian-manufactured products is risky for Modi. For instance, India has ambitious plans for its solar-power generation industry, with a target of 100GW of solar capacity by 2022. But only 37GW had been installed by March 2020 and analysts are doubtful that the 2022 target will be met. India has been imposing anti-dumping measures to protect local solar manufacturers from cheap Chinese imports. It is now doubling down on these with a new round of custom duties on cells and modules imported from China and Malaysia, where some Chinese companies have set up shop to avoid trade barriers. The plan is to impose up to 25% duty tax on solar modules and a 15% tariff on cells during the first year, increasing to 40% and 30% respectively in the second year. Even with the current safeguard tariffs in place, 85% of all solar modules and cells are imported from China. With local manufacturers still to gear up to the hardware challenge, ministers have also cautioned that India will miss its solar power generation target. But Modi seems to be ready to take that risk.

Other moves to curb Chinese influence are in the offing. India and Japan have advanced a summit-level bilateral meeting from October to September. Modi is expected to tell Prime Minister Shinzo Abe to persuade Japanese car manufacturers in India to source intermediate goods from any country other than China. In the face of such a determined drive to edge the Chinese out of India, retaliation is inevitable. What is not clear is whether it will be military or economic.

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