It’s clear that the Narendra Modi government’s move last week restricting the import of laptops and other electronics is aimed at China. It couldn’t be anything but—about 60 per cent of those imports come from that country. Of course, the official messaging is all about national security and creating verified and trusted supply chains for electronics. But ‘national security’ is the mainstay of countries looking to get out of international trade agreements.
With Minister of State for Electronics and IT Rajeev Chandrashekhar using the word “trusted” thrice and “verified” twice in the same sentence while justifying the import restriction, it’s absolutely clear that a message is being sent. The government wants to encourage electronics importers to source their supplies from countries other than China.
It’s strategically important to continue to send China a message. Diplomacy, international relations, and security priorities demand it. However, it is important to remember that, economically, showing China a ‘laal aankh’ (red/angry eye) is pretty much as impactful as such a message has been.
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Who does it really hurt?
Almost every recent attempt India has made to hurt China economically has met with as much success as somebody trying to injure an elephant with a pea shooter. And this will continue unless we line up a ‘Plan B’ before we nix the model we have come to depend on.
Relenting and allowing companies a window until the end of October to secure their laptop supplies, when the import restriction was originally supposed to have been “effective immediately”, is an example of action preceding thought. Another example was when we were forced to undo restrictions on the procurement of solar components from China in May this year.
In several cases where India has taken action against Chinese companies, the damage has been felt more by the Indian economy than the Chinese, forcing us to back-track. This needs to change.
Let’s start with the laptop import restriction decision. The first thing to remember is that it’s not an import ban. Companies looking to import simply need to apply for a licence. In theory, companies can still import from China, if they receive this licence. It’s an illusion of freedom, but it’s still distinct from a ban.
The other thing to understand is that two-thirds of India’s laptops are imported, and most come from China. The one-third that are domestically ‘manufactured’ are in fact simply assembled—most of the parts come from abroad, and largely from one country (guess which).
On the other hand, India makes up less than 3 per cent of China’s laptop exports. Beijing simply does not care what New Delhi does to restrict trade in this space. For one, the more laptops that are assembled domestically, the more dependent India will be on China for parts. Our domestic chip manufacturing capabilities fall laughably short of where they need to be.
Second, our two other biggest sources of laptops from abroad are South Korea and Taiwan, both of which don’t have the manufacturing capacity to keep up with India’s growing demand, in the event that our demand is suddenly shifted to them. Where do you think they will source their supplies from, to keep up?
In all this, it’s likely the Indian consumer that will suffer on account of lower availability and higher prices.
Trying to encourage the domestic industry is undoubtedly important, but this is better done through subsidies and other incentives rather than artificially restricting market competition. In other words, re-think the Production-Linked Incentive (PLI) scheme that has failed in this sector, rather than implementing import barriers.
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A failed method on loop
This decision isn’t the first time India has tried to send China a message.
In 2020, the Modi government rightly amended its foreign direct investment (FDI) policy, saying that companies in countries that share a land border with India could only invest here after securing the government’s approval. This, too, was aimed at China, which was caught trying to take advantage of the Covid-19 distress to take over Indian companies.
While no doubt strategically important for India to do this, its economic impact was negligible. According to the government’s own data, China accounted for a minuscule 0.43 per cent of all FDI that came into India in the April 2000 to December 2021 period.
India also amended its public procurement policy in 2020 to mandate that only licensed companies in these neighbouring countries could bid for government contracts. There was a strategic imperative here, too. But the importance of China as an economic supplier showed itself in the fact that, in May 2023, the government exempted public sector enterprises from this mandate if they were importing solar components.
That is, costs of solar projects in India started rising once Chinese imports were restricted, and so the government had to undo that restriction.
Then, there were the multiple Chinese app bans—including of the hugely successful TikTok—that India implemented. These, too, were an important national security decision, with several countries around the world following suit due to concerns about malware installed in these apps.
However, the vocal pro-government lot on social media was quick to call it a big blow to China and its companies. Not quite.
ByteDance, the owner of TikTok, posted a profit of $25 billion in 2022, an almost 80 per cent jump over the previous year. Yes, the TikTok division itself is still in losses, but, as the Financial Times reported, advertisers are increasing their spending on the platform. Whatever contribution India’s app ban has had to TikTok’s losses, it’s still too small to have even dented the parent company’s profitability.
Another ‘major blow’ to China that was touted on social media was the Enforcement Directorate freezing about Rs 5,551 crore worth of funds of Chinese handset maker Xiaomi in 2022. Here, too, the ED probably had good reason. But compare this action to the Rs 9,075 crore worth of tax evasion by Xiaomi and other Chinese handset makers, of which the government has so far been able to recover just 18 per cent.
On the other hand, China’s relative economic size and influence is such that it has forced India’s long-time ally—Russia—to demand partial oil payments in the yuan, something India couldn’t have been happy about.
Any talk of an emerging BRICS currency that can potentially replace the US dollar is incomplete without also saying that this would, in essence, be a China currency.
India has strategic and security considerations that are paramount. But it would be silly to forget the sheer size difference between China’s economy and India’s, and so to hope for an economic impact of Indian action on China might be somewhat far-fetched, unless a lot more thought goes into it. So far, this deeper strategy has been missing.
Views are personal.
(Edited by Prashant)