India is using the economy as a weapon against China, but how far can it go?

Delhi/Kolkata: If you think India and China having a stand-off at the borders is the only issue that they are dealing with or have to sort out in order to have  good relations in the future, think again. For the record, the stand pertaining to the borders of these two countries can be described as the world’s longest standing territorial dispute. India is using the economy as a tool to contain China, but how far can it go, is the question we are trying to find an answer to.

On July 5, the de-escalation process by Indian and Chinese troops was initiated at the Galwan valley. However, in terms of trade, it will take time for things to move at normal pace between the two Asian giants.

Economists who are watching India and China’s move keenly believe that India may not take any further action like it did by banning 59 Chinese Apps that were operational in India. They added that India might not revoke its decision to ban these apps but will keep a close watch on China’s move as far as trading activities are concerned.

Recently some highly placed sources within the Indian government revealed that the Government of India has been reviewing around 50 investment proposals of Chinese investors. There is also the issue of the Chinese network instrument maker Huawei which is interested in participating in the 5G trials in India.

This implies that India has adopted the wait and watch policy and is giving a message that they can take further stern actions besides banning the apps. Trying to understand what the wait and watch policy means we talked to Sanjaya Baru– Media Advisor to Manmohan Singh, the former PM of India and Policy Analyst – Jean Dreze, who is also an economist and has worked with Nobel Laureate Amartya Sen and Prasenjit Bose—one of India’s young economists.

Silly act of banning or boycotting

Jean Dreze, who is inarguably one of the most well known economists and activists in India, stated that India should not try to ban or boycott Chinese products as it is not in the country’s interest. Dreze, who has co-authored a book with Nobel Laureate Amartya Sen, reasoned that India’s economy is already in a bad shape because of the Coronavirus pandemic and earlier policy decisions taken by the government, so any further action related to the economy will hurt India more. “Economic boycott of China is a silly reaction that will hurt India more than China. And it does nothing to resolve the border issue.”

He even warned, “If China boycotts India in retaliation then the impact will be worse. The leaders of both countries can easily resolve this crisis, if they wish to, through talks.”

When asked about what economic measures that the GoI can take now? The noted economist added “I have no idea of the government’s thinking on these issues. I suspect that it (the decision to boycott or ban) is more influenced by domestic corporate lobbies than by the country’s real interests.”

Lack of trust between India and China

However, policy analyst and former Media Advisor to former Prime Minister of India Manmohan Singh, Sanjaya Baru maintained that things are not that easy for China.

He mentioned that India’s import from China is worth $ 70 billion, and amounts to about 17 percent of the country’s total import. However, India exports only 3 percent.

“Whatever measures have been taken by the government with respect to the digital economy, they will continue with it. It is not going to reverse it immediately. If China’s behaviour improves, then only decisions such as revoking the ban on 59 Chinese Apps are likely to take place,” the former advisor to the PM and policy analyst told eNewsroom over the phone from New Delhi.

Baru mentioned that there is a lack of trust between India and China.

“We have a larger problem with China, which is a trade deficit of $ 50 billion. It has been India’s complaint to China for 10 years now. But China is yet to pay heed to it. We will continue demanding for better access to the Chinese market for fruits, agriculture and pharmaceuticals. So India will watch whether China improves (decreases trade deficit) or not. I do not expect any immediate change in our policy,” said Baru.

The policy analyst also pointed out an important issue, “One major decision which we have to take is about Huawei’s interest in being part of India’s 5G trials.  The government will not take immediate decisions. We have to wait and watch how China responds.”

India’s foreign and strategic policy cannot be solved with economic measures

In contrast to the claims of Sanjaya Baru, former Media Advisor to Manmohan Singh, economist and social activist Prasenjit Bose strongly asserted that economic measures will have no impact on China. The young economist explained in detail and claimed that it is a border dispute, and India should have to settle it with China politically and strategically, not by resorting to economic measures.

“Boycott of Chinese goods in India will not have much impact since China has a much bigger economy. Indian imports from China accounted for only around 3% of Chinese exports in 2019, whereas it was over 14% of India’s total imports. Thus China is not too dependent on India as an export market, whereas for Indian imports it is the other way round”, said economist Prasenjit Bose. He added that as per official estimates China had cumulative FDI of over 5 billion dollars in India till September 2019, while Indian companies had invested less than 1 billion dollars in China till then. Much of Chinese FDI in India is also routed through third countries like Hong Kong and Singapore, which does not get reflected in official FDI data. India stands to lose more if the economic relationship deteriorates between India and China.

He further explained, “India’s capacity to dent the Chinese economy is very limited. Economic boycott would rather make China feel more confident that India cannot fight back militarily. Reportedly, Chinese troops had entered 18 kilometres into India’s territory. After negotiations they seem to have moved back 2 kilometres. Therefore they still retain 16 kilometres. The solutions to such territorial incursions by China does not lie in economic boycotts.”

“Why are we dependent on Chinese items? It’s because we cannot manufacture those goods domestically at competitive prices. There are millions of smartphone users in India, why can’t we manufacture smartphones? Why does the BSNL or Reliance Jio have to import Chinese equipment? If we want to become self-reliant, just sloganeering on ‘Make in India’ won’t help. We need large public investments in manufacturing, research and development (R&D). This is where we lag behind”, the economist reasoned.

Commenting on India’s foreign policy Bose said, “Problem also lies in the foreign policy of our country. Why is it that none of India’s South Asian neighbours stand by India even when Chinese troops made incursions into Indian territory? And from whom does India seek help? From the US, Australia, Japan and Europe. Are these our South Asian neighbours? We have a longstanding dispute with Pakistan. But what about Nepal, Bhutan, Bangladesh, Sri Lanka and Myanmar? If they are our friends, why are they silent? In fact, Nepal has openly sided with China. The erroneous foreign policy of India has isolated us in South Asia, while China has increased its influence in our neighbourhood, which is perceptible now. The Modi government’s policies such as the abrogation of Article 370, NRC, CAA etc. have all contributed to India’s isolation in South Asia. Ladakh was converted into an Union Territory overnight and Amit Shah made aggressive statements about PoK and Aksai Chin in Parliament. All that was useless sabre-rattling,” he pointed out.

Bose maintained, “Reversing India’s isolation in South Asia is the key. India has to settle its boundary dispute with China. If it is not settled, Chinese incursions will occur every year and one day they may reach Leh. Economic boycott measures will have no impact on all this. It is a territorial dispute and India needs to find a strategic and political solution for it.”

The economist added, “India will be taken seriously only when our foreign policy is truly independent. If we are to line up behind Donald Trump, who is being opposed all over the world, what message are we sending?”