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Daily Editorials

Delinking India from Chinese manufacturing

1. CONTEXT OF THE NEWS

The border clash at the Line of Actual control (LAC) between Indian and Chinese soldiers leading do the unfortunate death of 20 Indian soldiers has reignited the question on India’s reliance on Chinese manufacturing.

This article aims to answer this ‘Billion Dollar Question’.

2. THE RISING NUMBERS

2.1 Indo-China Trade

  • China is Asia’s largest economy with $13.6 trillion GDP (second highest in the World) while India is No. 3 in Asia at around $2.7 trillion.
  • From supplying industrial components and raw materials to investments in India’s startups and technology firms, China is India’s biggest trading partner after the U.S.
  • bilateral trade between India and China was $81 billionin 2019­ 2020 out of which Indian imports from China accounted for $65 billion.
  • Presently, China is India’s largest trading partner, accounting for 14% of the total imports and 5% of total exports.

2.2 India’s dependence on China

  • Trade deficit for India vis-à-vis China was $57.86 billion in 2018.
  • Reports suggest a $68 billion import from China and $16.32 billion exports to China.
  • Therefore, India’s trade deficit with China, or in other words India's dependence on the Chinese economy can be valued at $52 billion.

2.3 A look at India’s total imports

India’s imports from China reached $70 billion in 2018-19, a 45 times jump from 2000

  • Major imports from China are smartphones, electrical appliances, power plant inputs, fertilisers, auto components, finished steel products.
  • Capital goods like metro rail coaches, power plants, iron and steel products, telecom equipment, pharmaceutical ingredients, chemicals and plastics and engineering goods are also imported.
  • India's pharmaceutical industry is the third largest in the world in by volume and ranks 14 by value.
  • India exported medicines worth over $14 billion to the U.S. in 2018-19 but India imports two-thirds of its active pharmaceutical ingredients, or key ingredients of drugs, from China.

2.3 A look at India’s total Exports

  • Indian exports to China consist mostly of raw materials and industrial inputs.
  • Major items of export are organic chemicals, mineral fuels, cotton, ores, and plastic materialsitems.

3. HOW MUCH IS INDIA DEPENDENT ON CHINA?

3.1 Rise of the dependence

  • China’s economic prowess has seen a sharp upward movement since the 2008 Global Financial Crisis.
  • Decline in money power of the American Dollar due to USA’s engagement in counter-terror-cum-geostrategic wars in the Middle East and AfPak regions have furthered the cause of Chinese economic prowess.

3.2 Size of dependence

  • Invest in India from China come through direct route, routed route and through corporate penetration in technology and infrastructure sectors.
  • FDI from China in India amounts to $2.34 billionas per the official reports.
  • However, some observers and think tanks report it at $6-$8 billion included investment from rerouted routes.
  • China has invested about $5.5 billion in the last five years (2014-2019) in Indian startups.
  • Chinese smartphone manufacturers have captured 75% share of the Indian smartphone market.
  • Chinese money is deep rooted in the Indian economic system.
  • Capital goods required for Indian manufacturing like electrical machinery, semiconductor driven machinery is also imported from China.
  • Some imported items are in the essential category, imports like humidifiers for COVID-19 treatment, medical masks, liquid soaps are also imported largely from China.

3.3 Why is China so important?

  • China is integral to a very large number of global and regional supply chains because it offers the capacity to businesses to develop the supply chains by considerable lengths within itself.
  • This is a combined effect of the geography of China and the wide broad basing that it has developed over different sectors, and by and large in most products.
  • China is final stage assembler and this gives it an upper edge in the global market. China has also become a major consumer for final products.
  • Post COVID-19 situation, businesses want supply chains that are shorter, more resilient, more durable, and located close to the final demand markets. China is a major source of final demand market and hence shifting physically supply chains out of the Chinese geography is going to be difficult because of agglomeration advantages.

4. BRIDGING THE GAP

  • India has been trying to reduce the trade deficit from China, but has been unsuccessful so far.
  • Even today, India is still critically reliant on China for supply of electronics and drug raw materials.
  • Another worrisome factor is that Indian imports are being localized to few limited nations. India is not importing from a wide diversification of countries. For example, critical medical supplies for frontline healthcare workers in the COVID­19 battle are imported mostly from China.
  • Putting China aside, there are only 3 – 4 countries on which Indian dependence is increasing.
  • Imports from China are also very broad bassed. Therefore, it is going to be a difficult choice for India to get out of this dependence.

4.1 Make in India Initiative

  • The initiative launched more than 5 years ago was a good opportunity to scale up Indian manufacturing but India has not been successful in cashing on the opportunity.
  • Make in India strategy talked about FDI in manufacturing, but foreign investors still prefer Services sector, which does not need much investments.
  • This is due to the problem of required skill set in India. Foreigners invest in sectors they are comprehensive about like the IT services.
  • Lack of infrastructure is the second big challenge.
  • The common fallacy that investment will come to India due to low wage rates is not true anymore, as it is productivity-linked wages that matter and productivity in India is very low.

4.2 Are Labour Laws in India really the problem?

  • Lack of Labour Reforms and labour laws are often cited as the biggest hurdle in foreign investments India.
  • COVID-19 experience has shown that there is virtually no labour law in the country. This is evident from the large scale inter-state migration of workers in India.

4.3 Lack of investment in Greenfield Projects

  • Majority of FDI in India in the last few years like Walmart’s acquisition of a large stake in Flipkart, or that of Facebook in Reliance-Jio, has been to acquire assets than to build one.
  • Only Greenfield projects are capable of large-scale job creation.

4.4 Should India take the China way?

  • A big impact of 2008 financial crisis was that today, Global value chains are becoming local. Countries are depending on their own markets than global supply chains.
  • The global market driven industrialisation strategy, an export driven strategy that China has been using since the 1990s is not viable anymore.

4.5 Identifying the problems in India

  • India has not been able to harness the dominant domestic market adequately.
  • India should have gone for a strategy of increasing the manufacturing sector allowing it to absorb labour from other sectors primarily agriculture, easing the burden on agriculture in the country.
  • The next step would be to have a more resilient manufacturing sector, and reducing the dependence on countries like China.
  • In the absence of above strategy, the unemployment rate has actually gone up and the direct result of increase in unemployment rate is shrinking of the domestic market as people do not have huge income at their disposal.

5. THE COVID-19 LESSONS

  • The COVID-19 pandemic has resulted in large restrictions in Inter-State trade and disruption of supply-chain lines. This presented India with both a challenge and an opportunity.
  • India has shown exemplary commitment and resolve to deal with the COVID-19 epidemic with a spirit of self-reliance. This is best evident from the remarkable achievement of ramping up country’s manufacturing capabilities for Personal Protective Equipment (PPEs) from mere 47,000 annually to 2 lakh in a single day.
  • Taking inspiration from the experience of managing the local demand without relying on imports in a major way, Prime Minister Narendra Modi called for a building a self-reliant India.

6. GOING FORWARD

  • Government is already working on restricting low quality Chinese imports by formulating technical regulations for imports.
  • India can also look at non-tariff barriers being imposed by countries like China.
  • India can also look to set up alternate supply chains outside China.
  • In this context the commerce ministry has also identified 12 sectors -food processing, organic farming, iron, aluminium and copper, agro chemicals, electronics, industrial machinery, leather and shoes, auto parts, textiles, and coveralls, masks, sanitisers and ventilators to make India a global supplier and cut import bill. Also reducing dependency on China in the process.
  • To reduce import dependency on China for APIs (Active Pharmaceutical Ingredients) Indian government in March approved a package comprising four schemes with a total outlay of Rs 13,760 crore to boost domestic production of bulk drugs medical devices in the country along with their exports.
  • Severing all ties from China is going to be a herculean task.
  • We need a holistic understand of Chinese exports to India, look at the broader picture and prioritise the areas where we can develop domestic manufacturing rapidly and move back from China in them, and make slow improvements in sectors it will take longer to reduce the Chinese dependency.

Unpacking the Reform

1. CONTEXT OF THE NEWS

Last week the President of India promulgated the following Ordinances to boost up rural India and the farmers engaged in agriculture and allied activities:

  • The Farmers’ Produce Trade and Commerce (Promotion & Facilitation) Ordinance 2020
  • The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020

The ordinance came into effect after the landmark decisions by the Government of India for reforms in the agricultural sectorto raise the income of the farmers as part of the ‘Aatmanirbhar Bharat Abhiyan.

This article presents a critical analysis of the ordinances.

2.  AATMANIRBHAR BHARAT ABHIYAN

  • India has shown exemplary fortitude to contain the menace of COVID-19 situation. That all of this has been done with a spirit of self-reliance only makes this achievement all the more praiseworthy.
  • In these trying times, the Hon'ble PM has given a call to convert the COVID-19 situation into an opportunity for India to become Aatmanirbhar(self-reliant) to enable the resurgence of economy.

2.1 The Five pillars of Aatmanirbhar Bharat focus on:

  1. Economy
  2. Infrastructure
  3. System
  4. Vibrant Demography and
  5. Demand

2.2 The Five phases of Aatmanirbhar Bharat are:

  1. Phase-I: Businesses including MSMEs
  2. Phase-II: Poor, including migrants and farmers
  3. Phase-III: Agriculture
  4. Phase-IV: New Horizons of Growth
  5. Phase-V: Government Reforms and Enablers

3. DETAILS OF THE ORDINANCES 

The ordinances aim to provide additional trading channels for farmers and traders, the scope of which goes beyond the APMC markets, to make the trading of produce more remunerative for the farmers.

3.1 The Farmers’ Produce Trade And Commerce (Promotion & Facilitation) Ordinance 2020”

  • Creation of an ecosystem giving more freedom of choice to farmers and traders with respect to the sale and purchase of agricultural produce by the farmer.
  • The ecosystem will provide better remunerative prices due to competitive alternative trading channels
  • The ordinance aims to provide more efficient, transparent and barrier free inter-State and intra-State trade and commerce of the produce outside the realm of physical markets or deemed markets notified under various State agricultural produce market legislations.
  • The ordinance will also provide a facilitative framework for electronic trading

3.2 “The Farmers (Empowerment and Protection) Agreement On Price Assurance and Farm Services Ordinance 2020”

  • This ordinance will provide for a national framework on farming agreements that protects and empowers farmers to engage with agri- business firms, processors, wholesalers, exporters or large retailers for farm services and sale of future farming produce at a mutually agreed remunerative price framework in a fair and transparent manner.

4.CONCERNS WITH THE ORDINANCES  

  • The writer believes that the bureaucracy and State Governments for a variety of reasons have historically opposed the ordinances introduced.
  • It was because of the multiple failed attempts to raise the incomes of Indian farmers, combined with the urge to deliver reforms instantaneously, that the government has introduces ordinances and not bills.
  • Bills would require an elaborate procedure like
    • placing them in the public domain for comments
    • holding consultations farmers
    • holding discussions and states and getting them inboard as with the introduction of the bill,  the revenue opportunities and powers of the states would be curtailed
  • However, in the haste of instantaneous and overhauling implementation, the ordinances are ill conceived, comments the writer.

4.1 Exposing the farmers to an unregulated market

  • Unionisation of intermediaries and their financial and political influences have deterred state government to amend the exploitative agriculture marketing laws and help farmers realize the true monetary value for their produce.
  • The writer suggests that instead of persuading the states with financial help to regulate these markets the government has created an unregulated market and exposed 15 crore farmers to skulduggery of traders from all over the country.

4.2 Revenue Loss for States

  • The Constitutional validity of the ordinance is already under doubt and beyond that, it also raises questions on the spirit of federal polity in India.
  • With the execution of the ordinance, the states will lose an important source of revenue to even support, upgrade and repair rural infrastructure.

4.3 Apprehensions with the Ordinance

  • The Farmers (Empowerment and Protection) Agreement on Price Assurance and Farm Services Ordinance 2020, aims to assure both, the farmers and the contractor by providing legal support to the agreement.
  • The legal recourse is not a viable option for small and marginal farmers in India given a poor judicial setup in the country and persuasive power and influence of aggregators with deep pockets.
  • The long drawn tedious and high litigation expense will discourage farmers to seek legal recourse or settle for unfavourable terms. 

5.POSITIVE POINTS IN THE ORDINANCES  

  • It will start the formalization of the country’s largest informal sector.
  • New business models and a new class of aggregators will challenge the monopoly of local traders by creating multiple competing channels and trade avenues.
  • As farmers will be able to sell their produce outside the APMC markets, these markets will lose out on the commission on sale of farm produce. This will motivate the APMC markets to raise their standards, provide better infrastructure and opportunities and rationalize the commission charged.
  • The decision to shield the produce derived from contract farming operations from any obstructionist law is a very good and welcome step.
  • This will be very beneficial to the Farmer-producer organisations and encourage new aggregators to step and play in the market. This will directly benefit the small corners of rural India.

6.THE ALTERNATE PATH

  • Instead of overhauling the whole market structure, the writer suggests that the government should have introduced changes in the Essential Commodities Act (ECA), 1955 to bring out the same result in a better-conceived way.
  • This amendment was supposed to allay the genuine fears of traders emitting from the bureaucracy’s draconian powers to arbitrarily evoke stockholding limits etc.
  • The trader’s uncertainty is compounded by the arbitrary import-export policy decisions which dilute the purpose of the amendment itself.

7. GOING FORWARD

  • The ordinances are the first step to realize the Shanta Kumar Committee recommendations to dilute and dismantle FCI, MSP & PDS.
  • Though this is a welcome step but if ill implemented, will force the farmers to bear the brunt.
  • For example, the ordinance may be interpreted to imply that the sugar industry is not anymore required to pay farmers the central government FRP (Fair and Remunerative Price) or the state government SAP (State AdvisedPrice) price for sugarcane.
  • For farmers the bottom line is not as much about “markets” as much as about fair remunerative prices. Prices should not only cover the cost of production but also provide for a dignified living.
  • Both regulated markets like APMCs and unregulated markets like local mandis have failed to provide farmers with remunerative prices.
  • While the ordinance shoots the right bullets to provide new avenues for trade and new competing channels of commerce helping better realization of prices, these avenues need to have some oversight and protective mechanisms for farmers, especially given that the current market is highly unequally playing field skewed in the disadvantage of the farmers.

Additional Information: Shanta Kumar Committee

  • The Government of India (GOI) set up a High Level Committee (HLC) for Restructuring of Food Corporation of India (FCI) in August 2014.
  • The committee consisted of ShantaKumar as the Chairman, six members and a special invitee.

Major recommendations of the committee are:

On procurement-related issues

  • FCI should hand over all procurement operations of wheat, paddy and rice to Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab as they have sufficient experience and reasonable infrastructure for procurement.
  • FCI procurement should focus on eastern belt, where farmers do not get minimum support price.

On stocking and movement-related issues

  • FCI should outsource its stocking operations to various agencies such as Central Warehousing Corporation (CWC), State Warehousing Corporation (SWC), private Sector under Private Entrepreneur Guarantee (PEG) scheme.
  • It should be done on a competitive bidding basis, inviting various stakeholders and creating competition to bring down costs of storage.

On PDS and NFSA related issues

  • Restructuring the National Food Security Act (NFSA) by virtually diluting its scope and coverage from 67 per cent of population to about 40 per cent population.
  • In order to curtail leakages in PDS Government should differ implementation of NFSA in states that have not done end-to-end computerization.

On Buffer Stocking Operations and Liquidation Policy

  • One of the key challenges for FCI has been to carry buffer stocks way in excess of buffer stocking norms.
  • The underlying reasons for this situation are many, starting with export bans to open-ended procurement with distortions (through bonuses and high statutory levies), but the key factor is that there is no pro-active liquidation policy.
  • The current system is extremely ad-hoc, slow and costs the nation heavily. A transparent liquidation policy is the need of the hour, which should automatically kick-in when FCI is faced with surplus stocks than buffer norms.
  • Greater flexibility to FCI with a business orientation to operate in OMSS and export markets is needed.

On Labour Related Issues

  • HLC recommends that the condition of contract labour, which works the hardest and is the largest in number, should be improved by giving them better facilities.

On end to end computerization

  • HCL recommends end-to-end computerization of the entire food management system, starting from procurement from farmers, to stocking, movement and finally distribution through PDS.
  • It will help for real time basis monitoring in order to curb leakages.