The Story Of India’s Economic Pushback Against China

by Tushar Gupta - Jul 14, 2022 01:17 PM +05:30 IST
The Story Of India’s Economic Pushback Against China Chinese President Xi Jinping and PM Narendra Modi
Snapshot
  • Even before the Galwan clash, the Indian government had been upping the ante against Beijing.

    The pushback is only getting stronger against China, be it company practices, Huawei, data security, import dependence of critical materials, or supply-chain diversification.

Without much ado, one reform and one policy at a time, the Government of India under Prime Minister Narendra Modi has begun a pushback against the Chinese's supremacy in manufacturing and production.

The pushback, however, is not constrained merely to moving parts of critical supply chain infrastructure to India but also restricting the free passage many Chinese companies have enjoyed for the last few years, especially those engaged in the sale of products for mass consumption.

After Xiaomi, Oppo And OnePlus, Vivo Under Government Scanner

Earlier this month, anti-money-laundering agencies in India launched a crackdown against Vivo, accusing it of channeling around $7.9 billion or Rs 624-odd billion outside India, mainly to China, to escape the tax liabilities.

To put things in perspective, the amount laundered was almost half of the company’s total sales revenue in India, around Rs 1.25 trillion, since 2014. By channeling the funds outside India, Vivo was able to cite losses and thus, could avoid paying taxes for the companies incorporated in India.

The agencies raided properties of Vivo in India across 48 locations. Assets that included 119 bank accounts with a total balance of Rs 4.65 billion and gold bars worth two kilograms were seized. There was also the question of forged identification and addresses while incorporating companies in India.

Agencies, during their investigation, found a unit in Shimla with three Chinese directors that had the address of a government building. The directors used several companies with little history to channel funds to Vivo India.

However, this is not the first case of tax evasion that the agencies in India are investigating. Xiaomi, Oppo, and OnePlus have been on the government’s radar for similar practices since last year. The raids were underway in December 2021, with offices of contract manufacturers for Xiaomi in India coming under scrutiny.

Eventually, Xiaomi was ordered to cough up the $88 million it owed in import taxes between 2017 and 2020. In April, assets worth $730 million were seized, given the company, like Vivo, had channeled funds outside India.

Turning On The Heat Against China's Predatory Investments

Even before the Galwan clash in June 2020, the Indian government had been upping the ante against Beijing. It began with making government approvals mandatory for foreign direct investments from countries sharing a land border with India in April 2020.

The policy targeted the Chinese, who had been accused of making predatory investments in several startups. For almost a year, until mid-2021, almost all the FDI proposals were put on hold. Until March 2022, of the 347 proposals received worth over Rs 75,000 crore, 66 had been approved, and 193 had been rejected.

The Indian government’s apprehensions were not without reason. Alarm bells rang through the corridors of power in April 2020 when media reports surfaced about the People’s Bank of China (PBoC) raising its stake in one of the largest private banks in India, HDFC, from 0.8 per cent to more than 1 per cent.

The investment was a secondary market transaction, and there was no role of the HDFC in the whole process. Given that the PBoC stake exceeded the 1 per cent threshold, HDFC was required to disclose PBoC’s name to comply with the regulations.

As per the exchange rate back then, PBoC’s stake amounted to a little over $380 million, but in the larger scheme of things, it was a drop in the ocean, given they had over $5.2 trillion in several holdings across the globe.

However, the HDFC news woke many from their slumber, acquainting them with the threat of predatory Chinese investments in several private companies. In 2020, Chinese firms had significant stakes in Zomato, Swiggy, One97-the parent company of Paytm, BigBasket, Snapdeal, Paytm Mall and Ola.

The clout of Chinese investments then extended to many other startups and unicorns in India. These include Byju’s, Dream 11, Hike Messenger, Oyo, CarDekho, Policy Bazaar, Quikr, Rivigo, Rapido, MX Player, Practo, and many more across different sectors.

China’s love for Indian startups could be gauged by the increased investments, which rose from a mere $459 million in 2016 to around $3.9 billion in 2019.

In 2018, China’s investment had been a little over $2 billion, thus making the government approval on FDIs, especially from China, important, especially given how Beijing had employed the same monetary methods to capture strategic infrastructure in Europe.

After the global recession, China invested more than $318 billion across Europe. The United Kingdom saw more than 220 deals of around $70 billion, and Italy and Germany had deals worth $31 billion and $20 billion, respectively, across sectors ranging from technology to airlines.

In what can be termed one of the biggest deals in Europe, China National Chemical Corp announced the takeover of pesticide manufacturer Syngenta AG, based in Switzerland, for $46.3 billion in 2016.

As per the data compiled by Bloomberg, across Europe, close to 360 companies were taken over, and partial or complete ownership was extended to four airports, six seaports, and 13 professional soccer teams. Investments by state-owned enterprises in China alone constitute more than $165 billion.

Across the world, between 2007 and 2017, China has made deals worth $155 billion in energy, $102 billion in finance, $75 billion in mining, close to $50 billion in internet/software and utilities each, and close to $60 billion in chemicals, around $45 billion in logistics, and worth of $5 billion deals in aviation alone.

These investments do not factor in the deal routed through third-party investment funds or countries.

The Indian Government Shows Huawei The Door

The pushback was visible on the 5G front as well. In May 2021, the government gave the go-ahead for 5G trials around the peak of the deadly Delta wave. However, Huawei was not allowed as one of the telecom service providers' equipment and technology partners that included Airtel, Reliance, Vodafone Idea and MTNL.

In magnitude, the move was more significant than banning all the Chinese mobile apps, including TikTok. Keeping Huawei out of India’s telecom sector was as huge as India’s pharmacy banning China for the imports of active pharmaceutical ingredients (APIs) or perhaps, looking elsewhere for cheap androids and not China.

More than a political problem, the issue was rising costs for the TSPs, given their reliance on Huawei for 3G and 4G networks. The government, yet, chose to bite the bullet, indirectly acknowledging the concerns around national security.

China: Not The Only Factory Of The World Anymore

The Galwan clash was the tipping point for India when it came to the pursuit of Atmanirbharta. Beyond Androids and 5G, it was now about upping India's production and manufacturing capacity and ensuring self-reliance in critical industries. For the rest of the world, the need to diversify supply chains stemmed from the lessons learned during the pandemic, especially in the last few months when China introduced Covid-zero lockdowns even when the world was returning to normalcy.

Post-Ukraine crisis, the question of Taiwan is also weighing on the minds of the corporations, especially concerning semiconductors. In the last week of February 2021, President Joe Biden signed an executive order directing the administration to address the worrying shortfall in semiconductor production that impacted operations at some auto plants resulting in losses worth billions of dollars.

The mere possibility of China doing a Russia against Taiwan has many policy heads worried across the globe, given where it could leave the TSMC, given it holds over 50 per cent of the global market share.

This was merely one of the many motivations for the Indian government to introduce the Production Linked Incentive (PLI) scheme. In December 2021, the government introduced a $10 billion PLI scheme for the semiconductor industry. By April 2022, the central government's flagship PLI scheme had attracted investment commitments of Rs 2.34 lakh crore across 14 different sectors.

The PLI schemes for the automobile and auto components, advanced chemistry cell batteries, speciality steel and high-efficiency solar panels garnered the maximum interest from potential investors.

For the world as well, diversifying away from China makes sense, not only to hedge against the semiconductor vulnerability due to Taiwan but also due to the increased dependence on the dragon for the most basic raw materials.

Making A Case For Production Linked Incentive Schemes

In the early days of the pandemic, as the national lockdown was announced, the Indian pharma lobby was worried, given their dependence on China for over 70 per cent of the Active Pharmaceutical Ingredients (APIs). In 1991, the API import from China was less than 1 per cent, but given the lower cost of production, the dependence increased manifold in three decades.

APIs are made of two components. One, the KSM or the ‘Key Starting Materials’ and two, the intermediate chemical components, and China is dominating both the spheres, thus giving them the dominance in APIs.

As late as 2017, China was producing 40 per cent of the APIs required globally as per some estimates. The main advantage was that it was low-cost. The total cost of producing APIs in China was 80 per cent of the total cost incurred in India with huge margins in fuel, power, logistics, and mainly, raw materials.

For instance, India imports close to 99 per cent of the APIs for paracetamol, a routine tablet for fever, 90 per cent for metformin, a critical tablet for type-2 diabetes, and 90 per cent for other antibiotics. Thus, in case of a short conflict, the Chinese could easily weaponise these supplies. In the larger sum game, the dependency remains a hindrance to India’s goals of becoming a global powerhouse of pharmaceutical production.

In March 2022, less than two years after the Galwan clash, manufacturing of 35 critical APIs was underway in India. Earlier, import dependence on China for these APIs exceeded 90 per cent.

In April, Apple began producing iPhone 13 in India. Similar to pharma, the Indian government has initiated PLIs in other sectors which include electronics, auto components, batteries, solar modules, to name a few. Given the size of investments committed, more brands and corporations are expected to come and ‘build in India, for India, and for the world’.

Moving On From China To India

Barring the intellectual property thefts, there is also the problem of corruption for many countries engaging with China, quite like what has been witnessed with Vivo and Xiaomi in India.

For instance, in Africa, 60-70 per cent companies admitted paying a bribe to dodge the system and obtain licenses for trade in Africa. In the last few months, the unpredictable lockdown policy has rattled many corporations.

In a survey of 140-odd Japanese corporations, over 55 per cent of them admitted to the rise of business risks in China. An overwhelming majority of the responders agreed on China’s Covid-zero policy being the reason behind supply chain issues.

China is still the world’s factory, but the faultlines are widening and for everyone to witness. The unquestioned lockdowns, the rising land and labour costs, the looming Taiwan factor, and the lack of transparency is ushering a slow exodus from China.

The pushback is only getting stronger against China with India leading the way, be it company practices, Huawei, data-security, import dependence of critical materials, or supply-chain diversification.

The days of the Chinese getting a free pass in India are long gone.

Also Read: How China Conquered Hollywood

Tushar is a senior-sub-editor at Swarajya. He tweets at @Tushar15_
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