By Karan Kashyap
Since clashes with China in Galwan, India has been gradually implementing a series of policy initiatives for over a month to hurt Chinese economic interests and curb its influence in the country; even though these steps have been in line with its Atmanirbhar Bharat initiative, which aims at promoting domestic industries, self-reliance and import substitution of products that can be manufactured locally within the country; they are also creating a myriad of problems for companies operating in this biggest nation in South Asia.
India has banned 59 apps with Chinese links, such TikTok, Helo WeChat, Share IT, UC browser and shopping app Club factory, citing the privacy and security threats posed by these apps to the country’s “sovereignty and security” from China. Along with a strong initiative to discourage Chinese purchases by tightening imports through both tariffs and non-tariff barriers as well as ensuring time consuming manual checks and scrutiny of consignments from China.
The DPIIT (Department for Promotion of Industry and Internal Trade) has asked industry and trade associations to prepare a detailed list of Chinese products that can be substituted with local products, while mandating e-commerce companies to display the country of origin on new products listed by sellers on their sites by August 1 .
While the ban on Chinese apps has been easy to implement owing to the convenience to choose the uninstall option on phones, it has lead to a sudden short-lived spurt in downloads of products from domestic startups such as Share Chat, Roposo and Chingari. To comply with DPIIT’s mandate, e-commerce market places Myntra, Flipkart, Snapdeal have asked for a period of up to four months, as they struggle to provide a non-biased neutral treatment for all the products that they sell on their platforms.
Starting July 21, Amazon India has decided to bite the bullet and make country of origin tags mandatory for its sellers, many of whom are artisans, nascent brands, small manufacturers and even startups, and the platform has also warned them that they could face suspensions or other actions if they fail to comply.
Indian unicorns Paytm, Ola, Zomato, and MakeMyTrip have also not been spared, with Indian consumers venting negative comments, uninstalling these apps and even providing the lowest possible ratings for them on the Google Play Store. Though these companies had been founded by Indian entrepreneurs, they have been at the receiving end of negativity because they have received significant funding capital from China’s internet companies: Tencent, Alibaba and Ctrip.
As a result, prominent risk capital investors have asked their portfolios to diversify their cap tables. Investors from China are on the cap tables of 18 of 30 startup unicorns from India, and it is becoming a moral hazard for a company to accept any capital from China in the current Covid-19 environment, when banks have hugenon – performing assets and there is a scarcity of capital to lend to businesses.
The problem is getting further compounded in the electronics market, where Indian consumers are finding it difficult to differentiate between “Made in India” and Chinese produced smart phones. As more than 70% of the components used in assembling these products are imported from China, manufacturers have been resorting to assemblage of mobile phones, which are at times tagged as “Made in India,” in comparison to the more capital intensive move of setting up the entire component value chain within the country.
Post opening of Covid-19 lockdown in India, the existing electronics manufacturing facilities are still suffering from impacts of non-availability of migrant labor, closure of plants due to corona virus infections and the inability to scale up production due to distancing norms within existing factories. Hence, companies have to depend on increasing the number of import units of durable consumer goods such as dishwashers to fulfill pent up demand from last few months.
In the smart phone market, with a heavy import duty of 22%, the prices of handset have risen, it is becoming difficult for local handset makers Lava, Micromax and Karbonn to make a dent in a marketplace, where the share of these local brands stood at 1% in the first quarter of 2020; and consumers continue to pick up Chinese-made products that offer more value for money in terms of specs, especially when there’s a squeeze on discretionary spending.
Due to the manual checking of their Chinese imports, some electronic companies are fearing the destruction of stranded components such as displays, which need to be packaged under certain temperature conditions with special care. Because of delays in getting clearance for these imports, phone manufacturers are seeing their production hindered, plants closed and shortages of new smart phones and stocks for vital components, which has been adversely impacting sales in June and July.
As these anti-Chinese economic policies have proved more detrimental by not addressing the central problems that include a lack of technology, production capabilities and capital to manufacture electronic components, which are vital to becoming self-reliant in making the finished products. For a long-lasting change towards self reliance and reducing its dependence on China, the Indian government must provide constructive impetus to manufacture high value electronic imports.
It must address the high cost of manufacturing by providing cheaper sources of capital, accompanied by improvements in port infrastructure and logistics. Returning to the regulatory trade barriers or consumer boycotts that are rudimentary tools of import substitution policy, which was discontinued after 1991, would simply recreate many of the same problems that had earlier beset Indian industries.