Why India cannot withdraw from China, despite geopolitical tensions

A border clash with China in the Himalayas left 20 Indian soldiers dead and soured public sentiment, and many in India, including some local politicians, called for a boycott of Chinese goods.

It lobbied Prime Minister Narendra Modi’s government to respond even as military commanders on both sides continue to participate in negotiations to ease tensions. India banned dozens of Chinese mobile apps last week, sparking Beijing’s ire.

But experts say it is difficult for New Delhi to withdraw from Beijing and cut ties in the short term due to how intertwined countries have become in recent decades.

The data shows that China’s influence on trade, investment and technology in India has grown substantially over the years.

India has an asymmetric trade relationship with China, its largest trading partner after the United States.

Government data showed that India imported more than $ 65 billion in goods from China between April 2019 and March this year and exported only around $ 16.6 billion in products. That left New Delhi with a trade deficit of more than $ 48 billion with Beijing. Still, trade volume is down from the previous fiscal year ending March 2019, while reports suggest India is planning additional tariffs on certain Chinese imports.

India imports intermediate and finished products from China, including electrical machinery and equipment, consumer electronics, chemicals, pharmaceuticals, and electronic components, among others.

“Reducing dependence on Chinese imports is easier said than done,” Kunal Kundu, an Indian economist at Societe Generale, told CNBC. “It has to be a medium to long-term policy with concomitant policy movements.”

Kundu explained that most of the goods that India imports from China can be manufactured domestically. The government should provide the right kind of policy support for the micro, small and medium-sized companies that make some of those products, including those operating in India’s informal sector, he said.

But that would take time to materialize. The current economic outlook remains bleak as India is recovering from the consequences of a national blockade with the number of coronavirus cases continuing to rise.

India’s inadequate integration with the global supply chain also means companies moving from China are looking for places like Vietnam to set up their factories, according to Kundu.

“While India’s ability to increase its attractiveness as (an) investment destination is more of a medium and long-term perspective, in the short term it would make sense for India to streamline various FTAs,” he said, referring to free trade agreements. from New Delhi. with other Asian countries, the European Union and Latin American nations.

The data showed that Chinese investments in Indian companies have grown steadily in recent years.

Between 2015 and last month, 42 deals worth $ 8.7 billion were announced where the investor was a Chinese company and the target company was in India, according to information provided to CNBC by Mergermarket. Each deal was worth more than $ 5 million, according to Mergermarket.

Chinese investors have invested roughly $ 4 billion in Indian startups, according to a report by foreign policy think tank Gateway House earlier this year. As of March, 18 of India’s 30 unicorns, startups valued at more than $ 1 billion, have received funding from Chinese investors.

Gateway House provided three reasons why Chinese companies dominate India’s nascent tech space. First, there are no major Indian venture investors for local startups, a gap that China took advantage of when Alibaba invested in Paytm in 2015.

“Second, China provides the necessary patient capital to support profitable Indian startups like any other. Compensation for market share pays off. Third, for China, the huge Indian market has sales retail and strategic value, “the report said.

India has already introduced restrictive measures on Chinese foreign direct investment before the border crash last month. China’s investment restrictions could potentially hinder India’s startups in the short term, as they will have to look elsewhere to raise new funds.

India is one of the fastest growing digital consumer markets in the world, with more Indians online every day. That makes the country a very lucrative market for technology companies. Chinese tech companies, including Alibaba, Tencent, and TikTok owner ByteDance, regularly compete with Facebook, Amazon, and Google to reach Indian consumers.

For example, India has one of the world’s largest smartphone markets outside of China. According to Counterpoint Research, four of the top five smartphone brands in the country are Chinese and control approximately 80% of the market, while local brands have only 1% of the market.

“It would be difficult to replace Chinese smartphones as there are very few alternatives in India,” analysts at Counterpoint Research told CNBC, adding that local smartphone makers would have to invest significantly in research and development to make a mark. .

But, India can implement restrictions in areas like the telecoms sector where alternatives are available, analysts said. That means New Delhi could cite security and privacy concerns to prevent people like Huawei and ZTE from participating in the country’s telecom infrastructure. Some reports already suggest that Huawei could potentially be excluded from the launch of 5G in India.

“Such a move from India will be a huge blow as Chinese sellers represent about a quarter of the Indian market,” Counterpoint Research said, explaining that most Indian telecom operators use equipment from Huawei and ZTE.

To be clear, none of the apps that India banned last week were from local companies that were funded by Chinese investors.

Gateway House in its report said that China sees another early opportunity in India, with a potential shift to electric mobility. While India has ambitious goals in the electric vehicle space, China already dominates the market and supply chain, manufacturing key components for the sector.

As such, analysts have said that any accelerated move by New Delhi to reduce India’s exposure to China in the short term can lead to supply disruptions and higher input costs, making it a costly move for the economy.