India’s Dangerous Economic Dependence On China, And What The Former Can Do About It

Yes it has happened. The constant stories that you have been reading about ‘China rising’ over the past 15 years have come true. China has risen. On a purchasing power parity (PPP) basis, China’s gross domestic product (GDP) has already surpassed that of the United States, and is more than five times India’s GDP. China has lately continued to maintain its status as the world’s largest exporter and manufacturer. It is only a matter of time when its military spending starts matching the military budget of the US.

But China shall be unlike any superpower we have seen.

President Xi Jinping, while further cementing his control over the Chinese Communist Party during its National Congress in Beijing last month, made patently clear what close China-watchers have known for years. The Communist Party of China has absolutely no intention of letting China reach the ‘end of history’ – that is becoming a free-trade loving democracy like the United States. Power is to be monopolised by the Communist Party of China and “erroneous viewpoints”, as Xi Jinping put it in his stultifying three and a half hour speech, are to be strictly monitored. With the evidence of a four-decade-long run of uninterrupted and drastic improvement in living standards behind him, Xi also positioned the Chinese ‘model’ as an alternative to the Western ‘model’ for other countries to follow on their path to modernisation.

In the wake of the rising authoritarian and mercantilist superpower, India finds itself at an uncertain point. Its defiance against unwarranted Chinese incursion into its allies’ territory – as evident in Doklam recently – is matched only by its economic dependence on China. It is time we question whether the highly asymmetrical Indo-Chinese economic relationship is in India’s interest.

Trade Asymmetry

India’s trade with China mirrors a colonial-metropole trade relationship that would delight a Marxist professor. The colony exports raw materials, while importing finished goods from the metropole. In the process, the colony usually runs a persistent trade deficit with the metropole and is prone to the dangerous fluctuations of the international raw material prices.

To China, we export iron ores, granite, aluminium, refined copper, raw cotton amongst other commodities – totalling to about $10 billion. And yet, we import roughly six times the amount. This includes virtually all manners of phones and electronics, solar panels, specialised steel amongst other manufactured goods – a lot of these goods manufactured using our raw materials exported to China. Out of the total trade of approximately $70 billion, India runs a deficit of $50 billion dollars. India’s smartphone, renewable energy and construction growth story is paying the Chinese working class for its success.

In recent history, the only other time the subcontinent has had such a blatantly unequal trade arrangement was with Britain during the Raj. In return for Indian cotton and ore, England exported to India textiles, machinery and steel. Historians unanimously agree that such distortion in trade fundamentally stunted the Indian industrial base while helping Britain industrialise. First industrial offshoots took root in India only during the First World War- imposed protectionism. This unequal economic relationship was and has been one of the most formidable arguments against colonialism of the Raj, voiced by anti-colonialists across the spectrum, from the Indian National Congress before Independence to the RSS in the 21st century. Why should the Indo-Chinese trade relationship not be subjected to the same critique?

The Capital Influx

In addition to this spectacularly unbalanced Indo-Chinese trade, India’s start-ups to an uncomfortable degree are being funded by Chinese funds and tech behemoths. The leading doyens of the Indian tech sector – Paytm, Flipkart, Snapdeal, Ola, MakemyTrip and Hike – in their search for cash for battling Silicon Valley giants in their home turfs, are now increasingly looking up to the Chinese investment class. Alibaba is the majority shareholder in PayTM. Snapdeal and Flipkart, since 2016 and 2017 have increasingly been bankrolled by Alibaba-related funds and the Chinese internet giant, Tencent.

In fact, the reflating of the Indian tech-bubble in 2017 – with more than $9 billion of funding this year compared to 2016’s $4.6 billion – seems to driven on the back of Chinese investors. It has led to China becoming the premium route for new Indian start-ups looking for funding.

Without a doubt, the Chinese tech industry’s experience of catering to a billion low-income consumers and its relevance for the Indian context is a major reason as to why a lot of Indian start ups look up to Chinese funds, tech giants and investors. Moreover, the Chinese giants seem to be as dominant on their home turf as the Silicon Valley giants are in the US – giving them ample money and cushion to invest overseas.

However, to any shrewd observer of Chinese politics – this increasing infusion of Chinese capital in India’s tech sector has to be a cause for concern.

The Party’s Decoys

The key reason is the fundamental incompatibility between the Chinese and the Indian systems of governance. In the case of the Chinese, the investment class not only has a clear nationality and loyalty but is directly answerable to an organ that recognises no law above its writ – the Chinese Communist Party (CCP).

An important method of CCP’s totalitarian control over Chinese politics has been to obsessively prevent the rise of an alternative power centre. This not only extends to the prevention of the rise of other independent political parties – Chinese constitution guarantees monopoly of political power to the CCP – but also to civil society actors at large. The CCP, in other words, simply can’t accept a major organisation – any major organisation – outside its control.

This, for instance, explains the Chinese state’s ruthless persecution of the Falun Gong sect, a spiritual organisation entailing millions of devotees whose meditation practices are inspired from Buddhism and Taoism, and the routine crackdowns the Chinese state regularly launches on Islam and Christianity within its borders. Most importantly, however, this control vastly expands to China’s own capitalist class.

In order to reconcile political totalitarianism with state-managed economic freedom, the Chinese state has effectively mandated the plantation of party cells in most large corporations of China – public and private. In effect, most sizeable corporations have a cell – in the form of a department or a committee – that generally functions as a branch of the CCP. This effectively serves as a planted decoy to be switched on in the event the corporation flouts boundaries set by the party or when the party needs a favour. In addition to such institutional control, the CCP will also not tolerate any open deviation from the party line by any of China’s increasingly numerous billionaires.

Therefore, in the event a high executive, a billionaire or his corporation, who may be selling to India or investing in it, does not tow the national party line, the CCP inevitably triggers one of its control mechanisms. This could range from activating its party cells within the firm to smothering finance to the corporation through the mostly state-owned financial system to, in the most extreme cases, basically absorbing the billionaires and the other key decision makers into the extra-legal system and subverting them through torture and imprisonment.

It is virtually unheard of in China, for a CEO or a billionaire to do what Tim Cook, Sundar Pichai and George Soros do regularly in the United States today – openly flout the existing government policy. Nor do these corporations or billionaires have a final court of appeal – there exists no independent judiciary in China.

Fighting Back

In sum, India’s economic relationship with China is characterised with an extremely high reliance on Chinese imports and capital from a Chinese industrial and investor class that can never say no their political overlords when asked for a favour.

What must India do? Learn from what the Chinese do and not what they say. When Xi Jinping gushed about free trade at Davos in January of 2017 he was simply continuing the game his predecessors had been playing for long – sing the song of free trade and open markets in public and do quite the opposite in reality.

China’s economic strength has been a product of sophisticated industrial policies where the government has deliberately sought to restrict imports, diverted the financial system (which is mostly owned by the state) towards exports and manufacturing and powered all of this through a decades-long state-driven drive to artificially increase savings and thus, investment. In other words, the Chinese state, has lock, stock and barrel supported its industry at every stage – often to the short-term detriment of the Chinese consumer.

On home turf, it is a known fact that the Chinese state has been fervently biased towards its home grown internet giants. Alibaba, Tencent and Didi never had to deal with the cut-throat competition that Flipkart or Ola Cabs have had to in India.

China’s industrial strength, whether in steel or solar panels, too has the visible hand of the state behind them. China’s shameless and relentless subsidising of domestic steel industry – which now threatens to destroy Britain’s dwindling industrial base – has made China produce more steel than the rest of the world combined. Similarly, China’s sudden increase in production of solar panels – which has now stunted India’s and the United States’ fast growing solar panel industry is a clear product of China Five Year Plans, whereby the solar industry was an industry outlined for subsidies and tax credits. Such strategies of state support through subsidies, forced mergers, protectionism and cheap finance extend to most major industrial sectors in China.

Close China-watchers have known these tactics for long. Why such stories don’t make it to the front pages of Indian newspapers at a time when we run alarming trade deficits with China remains to be known.

In order to stave off the Chinese challenge, India needs to urgently pick a few leaves off China’s playbook and fashion its own approach towards development, which ought to be wholly pro-industry. This means industrial policies, subsidies and if needed trade tariffs.

India may choose to actively cushion domestic internet champions, as Flipkart’s promoters have repeatedly suggested, to limit their over-reliance on foreign funds. India should also be ready to step up state support to help its fledgling sectors like solar panel, electronics and capital machinery industries – key areas where current capacity is inadequate to support the domestic market and thus is consequently reliant on China.

No doubt, there will be criticism from India’s financial newspapers that such measures may ‘erode competitiveness’ and ‘raise prices’ for consumers. And there may be some truth in it in the short-term – prices for consumers are likely to rise in the event of any crackdown on imports. But, as the Chinese example shows, it is practically impossible to build a viable industrial base without state support.

However, most importantly, India in its attempt to conform to a rules-based international economic order, must clearly recognise that China has never played by any of these rules. This means that any interventionist or protectionist strategy is fair game when battling Chinese economic encroachment upon Indian sovereignty.

China is the greatest geopolitical and strategic threat that India is to face in the 21st century. It is surprising that China’s enormous leverage over us – borne of its economic heft and political authoritarianism – is not a national security concern for the Indian establishment. The repeated border disputes between India and China could one day escalate as they have once in the past.

And when that happens, do we really think that the Chinese Communist Party would refrain from utilising its enormous influence over the Indian economy to harm India?