How to disengage Indian economy smartly from China

14 Jul 2020

To reach self-sufficiency India needs to reduce Chinese imports. But it must do this in a way that does not violate WTO norms

Opinion: Sanjib Pohit

The India-China relationship is now at a nadir following border clashes in the Ladakh region. The ‘Boycott China’ war cry reverberates across India. Though it emanates mostly from common people or consumers the government has also indicated in one or two cases that Chinese investments are not welcome.

Indian industries on the other hand have provided a measured response saying that disengagement with China is not possible in a short span as the supply chain of production has been geared towards imports of Chinese intermediate goods. The search for alternative suppliers may begin if the government wishes so but it would take some time to reorient production with alternative suppliers.

In hindsight if the Atmanirbhar Bharat initiative is to succeed there is no alternative but to bring down the imports of cheap Chinese products a large part of which result from the Chinese exchange rate policy and the dumping of goods with underwritten government subsidy to their exporters. Furthermore India needs to adopt a balanced approach so that the policy action adheres to the WTO norms and the country does not have a loss of face.

Here are some measures India can consider:

Restrict FDI flows from China: The Department for Promotion of Industry and Internal Trade recently revised its policies on foreign direct investment (FDI) restricting funds coming from five countries that share a border with India.

Since investment is neither covered under the GATT TRIMS or GATS which India has committed to the move is not a violation of any WTO commitment. This is indeed a good tactical move by the government.

Impose uniform rules across private and PSUs: In the aftermath of the attack by China’s People’s Liberation Army the Department of Telecommunications (DoT) has asked Bharat Sanchar Nigam Ltd (BSNL) to rework its tender for the upcoming 4G business by excluding Chinese equipment.

BSNL had shortlisted Chinese suppliers because of the low cost. However when it comes to commerce introducing such a fiat for PSUs and not imposing the same set of rules for private players ( but only imploring them to reduce their dependence on Chinese equipment) does not set a good precedent. This practice will kill PSUs in the telecom sector and in other sectors too if replicated.

Set the right perspective for public procurement: Annually the Central government spends nearly 13 per cent of the GDP to acquire supplies services and capital assets. The large size of procurement outlay empowers the government to leverage the same to implement select national policies.

Government entities can for example require that contractors adopt fair employment practices encourage purchases from MSMEs and promote innovation. Countries across the world do use public procurement as a tool to set their own agenda. This needs to be a decisive tool if Atmanirbhar Bharat is to succeed.

However we need to refine our public procurement system. By and large the government has adopted the two-bid system where vendors are requested to submit both technical and financial bids in sealed envelopes while tendering for any project/service.

First the technical bids of the various vendors are evaluated as per the standard laid out and subsequently the financial bids of the qualified vendors are opened to find the entity with the lowest bid. The contract is given to the lowest bid among the technically qualified vendors.

In this two-bid system the procurement agency has very little role in ensuring quality/standard. Of course one can argue that the technical bid evaluation criteria may be made stringent to ensure quality. However one invariably finds that the selection criteria of a technical bid are more of a checklist than guidelines to identify standard/quality of the bid or to fulfil the desired objective. Adopting L1 may not the way to promote Atmanirbhar Bharat.

Use of anti-dumping duty judiciously: Given that India and China are both members of the WTO and have extended the MFN (most favoured nation) status to each other India is not in a position to impose additional import duty selectively on Chinese imports. However we can impose anti-dumping duties on Chinese goods keeping within the WTO rule-book.

It is a known fact that China follows an aggressive pricing policy to export goods and many a time with tacit financial support from the government. Among WTO member-countries India is an active player in respect of imposition of anti-dumping duty. However most levies are usually negated by the WTO dispute settlement body after examination of evidences submitted by the Indian government. India needs to build its technical capacity in this respect.

A close interaction between government industry bodies and economists are a must for filing evidences to the WTO panel which can rightly put forward India’s stance.

Discourage imports of finished Chinese goods though Nepal: If India becomes vigilant on the imports of Chinese goods one can expects that Chinese consumer goods will be routed through Nepal through the informal channel. These products directly compete with Indian products in the heartland of northern India especially in Tier-II and -III cities. Strong action is required on this front.

Make use of trade facilitation measures: Since the rules of the same are not well laid out in the WTO India has much leverage to use this channel to discourage Chinese imports. For instance imposing a tighter standard may simply discourage Chinese imports.

Frequent scrutiny of Chinese imports for complying with various trading procedures and sending more samples of agricultural product imports to check whether they meet the necessary sanitary and phytosanitary standards would give the message to the traders/industrialist that Chinese imports are not wanted. Once they get the signal they will surely establish alternative supply lines for their required imports.

The writer Sanjib Pohit is Professor NCAER. Views are personal.

Published in: Business Line, July 14, 2020