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One of the key features of the US-mainland China 'decoupling'
over the coming years will be how it forces other countries to
strategically realign their external relations, sometimes counter
to their narrowly defined economic interests. The resetting of the
relationship between the world's two largest economies is certainly
quickening such a realignment in what will be its third largest by
2050. India's foreign policy has been studiously non-alignment
since independence in 1947. With regard to China, successive Indian
governments settled on an awkward separation of commercial
relations and broader strategic concerns. A stand-off near the
Doklam Plateau tested that separation in mid-2017. The military
incidences in Ladakh along the 'Line of Actual Control' (LAC) this
summer collapsed it. The Indian government is now more openly
working with the US to check Chinese strategic advances than ever
before, with implications for businesses operating in any of these
three countries and beyond.
Not business as usual
Within weeks of the Ladakh confrontation, India announced all
direct and indirect investment from countries that have land
borders with India would require government approval (without
explicitly mentioning China). The state government of Maharashtra
suspended three Chinese automotive projects, citing the violent
standoff in the Himalayas. By late June, India's Ministry of
Information and Technology had banned 59 mostly Chinese mobile
applications on national security and privacy grounds. The process
of course pulled in private businesses that participate in both
markets. Google and Apple were required by to remove the proscribed
apps from their play stores and telecommunication and internet
service providers were instructed to block related internet
protocol (IP) addresses and domain names. On 1 July, the Indian
government announced Chinese companies would be prohibited from
bidding for highway construction contracts, even via joint
ventures, amid calls by major Indian media outlets for consumer-led
boycotts of Chinese goods.
Meanwhile India, Australia, and Japan began negotiating a Supply
Chain Resilience Initiative (SCRI), implicitly but clearly to
reduce their reliance on China. The SCRI will prioritise
healthcare, automotives, aviation parts, communications technology,
electronics, and other high-value intermediate goods. In July, the
Indian government appointed Gourangalal Das, a senior diplomat
close to Prime Minister Narendra Modi, to head India's
representative office in Taiwan. This signaled Taiwan's increasing
importance to India, even if India officially adheres to the 'One
China Policy'. Taiwanese manufacturers, especially in the highly
prized telecoms sectors have already begun to diversify production
from China to India. Apple's Taiwanese supplier, Foxconn, began
assembly of the flagship iPhone 11 in India earlier this year and
promised a further USD1bn of investment. Indian policymakers' minds
will have been concentrated by Ladakh. But also they have likely
been emboldened by recent US engagement with Taiwan, including the
10 August state visit by the US Secretary of Health and Human
Resources - the most senior US official to visit Taiwan since 1979.
(Like India, the US officially accepts the One China Policy.)
Economic impact, direct and indirect
The bilateral economic relationship between Asia's largest and
third largest economies, however, is small. India accounted for
only 2.1% of China's total foreign investment outflows in 2018 and
China accounted for less than 1% of India's inward flows in 2019
(latest data), broadly consistent with annual levels since 2000.
India-China bilateral trade stands at around USD93 billion, with
India running a deficit of about USD57bn.
But India is exposed in some strategically important sectors.
These includes telephones, semiconductors - both of which India
wants to manufacture indigenously and export. Earlier this year,
India announced a 10% duty on the import of smartphones, probably
to deter Chinese phones from flooding domestic markets. Imports
from China contribute heavily as value-added goods in India's
exports more broadly. Research published in October in Mint, a
widely respected Indian business publication, showed China's share
of foreign value-add implied in Indian exports grew from 6% in 2000
to 26% in 2018. Furthermore, Chinese capital often seeds India's
thriving start-up, which India's capital-depleted and heavily
loan-impaired banking sector cannot match. (IHS Markit's Banking
Risk Service currently scores systemic banking risk in India at 50/
'significant risk'.) At least 69 Chinese companies have invested in
more than 100 Indian startups, and more than 60% of all Indian
startups valued at over USD1bn have at least one Chinese investor,
primarily in the e-commerce, retail, logistics and mobile payments
sectors. Data from India's Ministry of Commerce, show Chinese
investment in Indian startups increased to nearly USD4 billion in
2019, double that in 2018.
Limited decoupling
Despite this, Indian regulators - like others in the US, the EU,
UK, Japan, and Australia - will almost certainly intensify scrutiny
of new investment from China. In September Indian officials stated
they had begun even retrospective scrutiny of Chinese investments,
focusing on platforms that collect personal data. A new
parliamentary committee to review the risk to national security
interests is now likely within the coming year. Also, India's
Department of Telecommunications has reportedly made an unofficial
request for public-sector telecom companies to not purchase
equipment from Chinese telecom companies Huawei and ZTE - similar
unofficial lobbying of the private sector is highly likely. India's
respective parliamentary committee held a private meeting in
October to recommend restricting Chinese participation in
forthcoming 5G trials. India will be keen to cooperate instead with
Japan (NTT) and the European Union (Ericsson, Nokia), while
promoting India's Reliance Jio. Importantly, Jio is already a
member of the US-backed Clean Network Initiative.
The India-China decoupling will then be different and similar to
that larger US-China one by which it is compounded. The direct
bilateral relationship is much smaller so there will be a much
smaller impact on the global economy. But similar to the US-China
decoupling, there will be a sharp focus on strategically important
sectors, especially communications technology, and careful scrutiny
- in national security terms - of the data captured by new ventures
and who has access to that data. Longer term, as India's economy
becomes the third largest in the world, and if initiatives with
Taiwan, Japan, and Australia are successful, the economic and
supply chain implications of the deteriorating India-China
relationship are likely to be much more significant.
Posted 23 November 2020 by Deepa Kumar, Deputy Head of Asia-Pacific Country Risk Team – Asia-Pacific Country Risk, IHS Markit