It is easy to whip up anti-Chinese emotions

Context: Placing tariffs on imports and whipping up sentiment against Chinese goods is easy. Reworking policy to make manufacturing more competitive will be hard. This geopolitical crisis is an opportunity to do that.

Comparing India and China on the scale of trade: 

• India imports about 3% of GDP and exports by about 0.9 % of GDP to China.
• India exports chemicals, fuels, cotton and other low value-added material
• China exports about 0.6% of GDP and imports 0.2% of its GDP from India.
• China exports smartphones, electrical appliances, renewable equipment and other capital goods, fertilizers, auto-components, steel products, and other high-value goods.

More burden over India: India’s dependence (due to a larger share of GDP involved) and lack of structural mechanisms places India at a disadvantage if the trade assumes a dip.

• Costly substitute: India would have to pay more to substitute China’s imports and find new export markets.
• No realistic alternative sources available: when it comes to pharma, renewables and certain electronic components; the alternatives if available, are costly.
• China’s large investment footprint: in the form of FDI into India ($4-5 billion in 2019-20) increases dependency.
• Hard-headed sub-optimal policy: in the form of tariff hikes in turn will force consumers to pay more and won’t incentivize Indian entrepreneurs to cut costs.
• Absence of supporting infrastructure: reliable power supply, decent roads, good telecom networks.
• Inefficient administration and manufacturing:
• Indian manufacturing fails to challenge of value-proposition of Chinese manufacturing.
• Labor laws make hiring and firing difficult.
• Red tape, the involvement of multiple agencies, complex tax codes and tedious legal systems makes hurt the ease of doing business.
• Excessive government borrowing leading to crowding out of the private sector.

Conclusion: Political will is required to execute focused policy reforms. Until this is done, both investors and consumers will suffer as this process takes hold.