Events & Issues

New Delhi, 3 October 2011

Manufacturing Sector

STAVE OFF CHINESE DRAGON

By Dr PK Vasudeva

(Adviser, Inst of Dev Studies)

China is systematically killing the Indian manufacturing sector with a view to capturing more than half its market. This grave concern came to light recently following the media’s access to a secret document of the National Security Council (NSC). It had shocking facts on the 'silent' takeover of the Indian manufacturing sector by the Chinese.

Apprehension was apparent over the impact of the Chinese on the domestic industry, at a high-level meet of the Council, headed by National Security Adviser Shiv Shankar Menon and attended by officials from the Microsoft Certified Information Technology Professional (MCITP) certification, Department of Telecommunication (DoT) and Department of Agriculture an old China hand. The latter had projected that by 2014-15 over 75 per cent of India’s manufacturing will depend on imports from China! Currently, only 26 per cent of India’s manufacturing GDP is dependent on Chinese goods. 

Indeed, the Chinese noose aro­und the Indian economy is tightening. In four years it will get worse, views the NSC. Therefore, the security establishment is worried as it looks for ways and means to stave off the dragon.

Indian’s manufacturing GDP is $304 billion, and it is a measure of the pervasive Chinese linkage that $79 billion of this is linked to imports of all kinds, including raw materials, and that China. Industry output constitutes 16 per cent of India’s GDP of $1.9 trillion. The NSC projects that Chinese companies’ share in Indian manufacturing GDP will rise to $321.75 billion, i.e. 75 per cent of the total industry output which itself will touch $429 billion by 2014-15. By then India’s GDP is expected to top $2.68 trillion. Also, by then, China’s trade surplus with India will cross $60 billion from the present $20 billion.

The NSC assesses that Chinese linkages are not just limited to sectors such as telecom where they have already captured 62 per cent of imports. Of the 5,200-odd items that both countries traded, India is seen to have an edge only in 833 items. In all other items, the surplus was in favour of China. Beijing has also made inroads into chemicals, metals, electronics, information technology and ordinary consumables — from toothpaste and toys to white and brown goods. Then there is infrastructure where Chinese firms are implementing large-costs projects.

The omnipresence of China in India’s economy and its burgeoning trade surplus with us has led to the national security establishment waving the red flag. It is engaged in a discussion with various ministries to put together a blueprint for stopping Beijing’s steady inroad in trade, manufacturing and services alike. The last round was held on August 6, 2011.

Given the situation, Deputy National Security Adviser Latha Reddy and Commerce Secretary Rahul Khullar are heading an initiative to prepare an action plan, both long and short term, to loosen the grip of China on the Indian economy. Over the past six months they have held several rounds of talks with officials of the ministries of industry, external affairs, telecom, information technology, pharmaceuticals, power and agriculture. 

In addition, the NSC has done an analysis in conjunction with the economic ministries. This study attributes 26 to 40 per cent of the Chinese cost advantage to Government subsidies, tax preference (export support), currency manipulation, piracy, counterfeiting, lax health and safety regulations, environment regulations, foreign direct investment and cheap labour.

To illustrate the impact, the NSC has cited an example of compact fluorescent lamps (CFL). Besides, the fact that the market is awash with finished China-made CFL, the entire phosphorous required for by the Indian CFL industry is more or less imported from China. And, with China raising phosphorous prices at will, the Government’s programme to encourage the use of CFL to cut energy consumption has been hampered.

Similar is the case with the steel value chain where China enjoys a 26 per cent cost advantage in raw steel and iron ore, resulting in finished steel that is 40 per cent cheaper. The few areas where India has an advantage include pharmaceuticals, petroleum products, processed gems and jewellery, automobiles, fruit and vegetables and services such as healthcare and education.

However, a threat is being felt in information technology and electronics as well. The Chinese electronics industry has grown 10 per cent annually to contribute 30 per cent of that country’s total export revenues since 2003. The stimulus given by Beijing to this sector has stymied Indian efforts to promote indigenous electronics and hardware. Designs, products and hardware from China have cornered a third of the world trade in these items, whereas India’s share in global production of these is just 1.31 per cent. In 10 years, the worldwide annual demand for electronics is expected to cross $1,200 billion.

According to the Government, complacency, withdrawal of tax concessions for electronics and software in India has propelled the spread of substandard products from China, even as these pose safety and health hazards. This apart the Council has analysed that: “Too much dependence on China poses security concerns with regard to embedded/rogue software, attack on network, leakage of information and data and remote access.” The military imbalance between India and the Sino-Pak axis is widening and moving in favour of the latter.   

In pharmaceuticals too, India is dependent on China for several drugs, formulations and intermediates, especially those that use the fermentation process. “The Indian fermentation industry could not sustain cheap imports from China. It is estimated that Indian pharmaceutical industry is losing business worth Rs 2,500 crore to cheap imports from China,” a joint analysis of the Council and the Commerce Ministry has noted.

China swamping Indian manufacture will be dangerous if the Indian markets are open to them without safeguards. New Delhi should therefore ask for certain conditions and bilateral agreements to be signed between the two countries that should include protection to the Small and Medium Enterprises (SMEs). 

Note should also be made of the seminars organised by the CII, FICCI and PDH Chamber of Commerce and Industry on Micro-Small-Medium Industries. These simply enhance the upper limit for giving loans at low interest rate to these industries. However, these are mostly father-and-son industries and half of their running expenses are in black, out of which they have to take care of the ‘inspector raj’ which continues to be existent. Today, they employ 80 per cent of labour in the unorganized sector, which unfortunately is under the weather and are apparently switching to importing cheap Chinese products, stamping these as their own brand and selling them.   

As against this, in Italy 80 per cent of the industries are SMEs and all are privately owned and well-managed. India may like to emulate the Italian model to stop Chinese encroachment on its manufacturing. This can be followed if India curbs bribery and corruption from this sector, as the two trends are the most common economic crimes that India's manufacturing sector faces, states the PwC Global Economic Crime Survey. Can we pay heed and stop the dragon from encompassing our industries? ---INFA

(Copyright, India News and Feature Alliance)