Fighting the dragon on the battlefield is easy. But fighting the trade war and winning the Chinese is not easy. As per the trade data ‘India Importing’ billions of dollars worth of goods from China, in reality, it is thousands of privately owned businesses importing from China. They are profit-seeking private businesses.

These business houses will keep importing from China unless import from somewhere else or cheaper substitutes become available in India itself.

We must understand that India has developed a significant level of dependence on imports from China not only in a short period but it took years for China to take over. It took decades for China to capture the Indian markets with its wide range of products.

Before 2003–04, India’s imports from China were less than $3 billion and the trade deficit was less than $1 billion. Over the next five years, India’s imports from China increased to $32.3 billion in 2008–09 and with exports expanding relatively slowly to about $10 billion, the imbalance in India-China trade widened to $23.1 billion that year.

Over the next decade, China’s exports to India more than doubled to reach $76.4 billion in 2017–18. India’s exports to China also grew but neither consistently nor rapidly. They were $13 billion in 2017–18. The trade deficit with China that year was a massive $63 billion, nearly 40% of India’s overall trade deficit in goods.

However, it can be said that the Chinese strategy of following a mass production formula, is to keep profit margins low and cover the gap by the subsequent boost in sales. The huge production in Chinese industry is geared towards supplying larger domestic products and also exporting extensively into global markets

The most probable reasons of Chinese Manufactured Goods being Cheaper

It is ambiguous that the ubiquity of Chinese products is due to the abundance of cheap Chinese labor that brings down the manufacturing costs but there is much more to it than that. In addition to its low labor costs, China has become known as “the world’s factory” because of its strong business ecosystem, lack of regulatory compliance, low taxes and duties, etc.

 Lower Wages

China is home to approximately 1.39 billion people, which makes it the most populous country in the world.1 The law of supply and demand tells us that since the supply of workers is greater than the demand for low-wage workers, wages stay low. Moreover, the majority of Chinese were rural and lower-middle-class or poor until the late 20th century when internal migration turned the country’s rural-urban distribution upside-down. These immigrants to industrial cities are willing to work many shifts for low wages.

As of Jan. 2020, Shanghai’s minimum hourly rate was 22 yuan ($3.16) per hour or 2,480 yuan ($355.70) a month. In Shenzhen, the rate is 2,200 yuan per month ($315.55) and 20.3 yuan ($2.91) per hour based on an exchange rate of 1 yuan = $0.14.

A large number of laborers in China helps the country to produce more in bulk, meet the demand schedule accordingly even if there is an increase in the demand, the productivity i.e. supply can also be increased due to a huge labor pool.

Business Ecosphere

Any industrial production does not take place in segregation, but rather relies on networks of suppliers, component manufacturers, distributors, government agencies, and customers who are all involved in the process of production through competition and cooperation. China has emerged and had worked a lot in building and enhancing the business ecosystem as well as up-grading the skill of its laborer’s in the last 30 years.

If we take into account, Shenzhen, a city bordering Hong Kong in the southeast, has evolved as a hub for the electronics industry. It has adopted such an ecosystem that supports the manufacturing supply and demand including component manufacturers, low-cost workers, a technical workforce, assembly suppliers, and customers.

Lack of Adherence

Manufacturers in the West are expected to comply with certain basic guidelines with regards to child labor, involuntary labor, health and safety norms, wage laws, and protection of the environment.

However, it has also been claimed that the Chinese production houses are not following the rules and guidelines set by the concerned authority.

Earlier, it has been noted that the Chinese factories used to employ children before their official age to be appointed as workers in any sector. Some factories used to follow policies where the workers are paid once a year, it was a strategy by the Chinese employers so that the workers are unable to quit their job before the expiry of their tenure

Due to flooded criticism, the Chinese government has claimed to institute reforms that protect workers’ rights and provide for fairer compensation. However, compliance with the rules in many industries is low and change has been slow. Additionally, environmental protection laws are routinely ignored, enabling Chinese factories to cut down on waste management costs.

According to the World Bank report 2019, 18 of the world’s top 20 most polluted cities are in China.

Taxes and Duties

The export tax rebate policy was initiated in 1985 by China as a way to boost the competitiveness of its exports by abolishing double taxation on exported goods. Exported goods were subject to zero percent value-added tax (VAT), meaning they enjoyed a VAT exemption or rebate policy. Additionally, consumer products from China were exempted from any import taxes. These lower tax rates helped to keep the cost of production low, enabling the country to attract investors and companies looking to produce low-cost goods.

Policy Formulation in India to adopt manufacture friendly economy

However, the policymakers of our country must develop a manufacturing-friendly economy with adequate quality manufacturing infrastructure which would boost the economy in manufacturing various products and make India a manufacturing hub and availability of products at a lesser price. This would further lead to a decrease in imports from China.

In 2017 replying to a question that sought to know the reasons behind the higher prices of domestic products in comparison to the products manufactured in China, the Union Minister for State MSME, Haribhai Parthibhai Chaudhary said in a reply in the Lok Sabha, ” The products manufactured in China are reported of lower price mainly because of their opaque subsidy regime and distorted factor price”.

The minister also added that the survival and growth of micro, small and medium enterprises (MSMEs) depends on several factors like availability of timely credit, up-gradation of technology, infrastructure, access to market, quality of products, etc.

 Trade Barrier

The FY21 Budget announced tariff increases on a range of household products and appliances as part of a trade policy to restrict ‘unnecessary’ imports. Many of these imports are from China, India’s widening trade deficit with which has caused the government concern. The rationale given is to protect local manufacturers and give a boost to Make in India. This comes soon after the cutting of corporate tax rates to make them globally competitive, especially with ASEAN countries like Vietnam, with which India is competing for investments. Despite a range of policy initiatives, the manufacturing share of India’s GDP remains stubbornly ‘stuck’ at around 15%. While India is not alone in imposing higher trade barriers post the 2008 financial crisis, it is one of the most aggressive users of anti-trade notifications. WTO estimates that India’s average MFN tariff is the highest among major economies.

            However, in A study conducted jointly by Assocham and NEC Technologies it has been observed that the Goods and Services Tax (GST ) regime would lower the cost of manufacturing significantly.

   “The local manufacturers will be able to pass on the tax benefit to consumers in the form of price reduction,” said the study “Electricals and Electronics Manufacturing in India”, jointly conducted by Assocham and NEC Technologies.

The study observed that multiple taxes and cascading effects of taxes will be eliminated with the implementation of the GST.

India needs Innovation-led Growth

India is lacking behind the culture of innovation. India to compete in the global markets and become a manufacturing hub India needs to improve the productivity of factor endowments, especially on the large labor force. Improving productivity and competitiveness across the board depends upon the “innovation” where India lags behind China in a very big way.

India aspires to become the next manufacturing hub, but it has to go a long way to take up the pace. In the pharmaceuticals sector, India still enjoys a comparative advantage. India is one of the largest producers of pharmaceuticals, it produces high-quality medicines with lower prices due to competitive advantage and Research and Development (R&D).

However, despite being one of the largest manufacturers of medicines yet its share in the world’s bio-pharmaceuticals is only 3% less than countries like China and South Korea. India keeps the mission to reach a 5% share in the world’s bio-pharma by 2022.

In recent years, China has focused on innovation in the pharma sector by taking appropriate measures on building strong regulatory framework transparency, opening doors to foreign contract manufacturing organizations, etc.

India lacks behind in comprehensive policy-making for innovation not only in pharmaceuticals but other sectors as well. Mostly labors in India are cheap but not skilled enough which remains a drawback for the nation. Therefore, strengthening IPRs and regulatory procedures that would facilitate partnership in research, technology, and innovation is the need of the hour in the Indian economy. Sector-specific skill development programs, capital investing, better infrastructure, and more public-private partnership is necessary for innovation across sectors, including pharma.

India needs to focus on policies to promote innovation that would lead to growth and retain competitiveness in the world market.

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