Lately, Chinese Dominance in global markets seems to have no bounds. This has birthed a higher level of aggression and hostility towards the nation in the political atmosphere of the Quadrilateral Security Dialogue, also called as “Quad”. Quad is a multilateral group formed by India, Japan, Australia, and the United States. The four nations, comprising the Quad, resumed deliberations in November 2017 after a decade long hiatus. Now, amid the coronavirus related finagle allegations over the Chinese authorities, the argy-bargy among them have zoomed up in context with china’s dominance in the Indo-Pacific region.
Does it provide an opportunity for India?
Quad holds immense importance when it comes to counterbalancing the growing ascendency of the Chinese republic in the region. This turns out to be a strategic phase for the Indian subcontinent.
So can India substitute China as the global manufacturing house? Well, it is hard to say. Currently, India has a lot of hindrances in its way to exploit its full manufacturing potential.
What is the current global stature of India and China?
China is the paramount global value chain hub as countries like Japan, Australia, and the United States are hugely tied to apron strings to China for manufacturing their export products.
India itself is highly vulnerable to china’s global dominance. Approximately one-fourth of the value of India’s exports is added by China itself; India’s dependence on China has multiplied manifold in the last 20 years.
Despite banning the hugely popular Chinese apps and engaging at the LAC (Line of Actual Control), the Indian subcontinent is still abased on China’s Units for its growth. Ironically, the Indian efforts of self- reliance or “Aatma-nirbhar Bharat” seem to be futile as the share of imports of China in India’s accounts has incessantly aggrandized.
Chinese imports stood at 14% of the total imports crossing India’s borders in the fiscal year ended in March 2020. This year’s wholesome data on the Chinese value-add in Indian imports is not currently available but the so-far the share has incremented to 19%. The rise is mostly due to ever-increasing dependence on China for the supply of pharmaceuticals and safety kits to battle the pandemic. Moreover, not only India but other nations all over the world have become more and more dependent on China for medical supplies to deal with the coronavirus pandemic.
It is near to impossible for the Quad to replace the potent Chinese economy with some other economic alternative as of now. Even when the countries are politically and geographically disturbed with China, they have no option but to balance and maintain their economic ties with it.
However, as the pandemic has disrupted the global supply chains, many of these countries are considering shifting their manufacturing units outside China. But this is not as simple as it looks. Needless to say that the companies shifting outside China would definitely get the benefits of diversification but the other side of the coin is that shifting is neither easy nor cheap. The recession brought in by the novel coronavirus has starved the companies out of cash leaving a lot of them impaired to make new investments. Relocation can be seen, but not at a very large scale and to capitalize and monetize this opportunity India needs to take several reforms in context with land, labor, taxes, and finance.
India would face certain limitations to replace China (or any other large economy per se)in the short run but in the long run, the country has maxim potential and capacity to give China a run for its money.
What is so special about China?
China has a unique selling proposition or USP. It lures investments by producing at economies of scale aka big scale at low costs. And the only country that can compete with China in this proposition is India (as it is still a low-cost production center).
China also has world-class business facilities (physical and social infrastructure). This is a major fallout for the Indian economy in realizing its potential and ambitions of competing with China’s production capacity on a global scale.
According to a World Bank Report in 2017, South Asia can become the next manufacturing powerhouse if it is able to work out its business climate, links domestic firms to global value chains, and improves the capabilities of workers and managers.
What factors affect the global supply chain?
Participation in global supply chains has two aspects:
1. Forward participation– How much value a country contributes to the making of foreign exports
2. Backward participation– How much it depends on foreign input for the production of its domestic exports
In India, the backward participation is comparatively higher due to high import dependence in many industries, its forward linkages are much lower.
The data from UNCTAD-EORA GVC database reveals that India’s participation in global production has declined since 2008. Over that, its gains from integration have also drastically dropped. Currently, the country uses more high-value inputs from abroad to produce its exports and adding less value to the exports of other countries.
What policy measures are needed?
The country needs to take efforts in the following directions-
1. Reduce trade barriers
2. Enhance infrastructure
3. Improve access to finance can aid further integration with value chains
The recent policies focused on improving the ease of business are steps in the right direction but have fallen short in impact. These include- industrial corridors, de-licensing, and the Make in India initiative.
However, other contradictory policies such as Tariff walls prove to be counterproductive as they end up hurting Indian industries by raising input costs.
Another problem is the lack of Indian business firms. Lead firms (typically transnational corporations) help to bring business by creating networks by breaking down the production chain into distinct functions and locating them wherever they can be carried out most effectively and efficiently.
For example, Tata Motors in the automobile sector and Reliance in the petrochemical sector play a crucial role in establishing supply chains, transferring technology, and attracting foreign investment. But India still has very few such leading sectoral firms most probably due to skill shortage, lack of access to finance, and regulatory uncertainties, preventing them from developing and expanding in India.