Call of Nationalism and Boycott will lead to Disruption in Supply Chain and Higher Inflation

Call of Nationalism and Boycott will lead to Disruption in Supply Chain and Higher Inflation

 ‘Sudden Import Substitution of Chinese Goods and Boycott would have Supply Side Shocks for the Indian Economy.’

 ‘With India under the Unlock phase from Covid-19, wherein most factories have resumed production to some extent, a sudden call of nationalism by boycotting the Chinese goods would lead to a supply side shock and result in higher inflation, as India imports USD 62 billion from China annually.’

 The Indian economy has been struggling with the Covid-19 crisis and for the first time in four decades there could well be a contraction in GDP and the GDP may contract by 5%. With the number of cases on the rise even in the first week of July 2020 when many other nations have reached a point that the Covid-19 curve has been declining and normalcy has been resorted to a large extent, India is also in the phase of Unlocking. In the last few months there has been a supply side as well as demand side shock to the Indian economy. Supply side has been hit as millions of companies have been shut, millions of people have lost their jobs and there has been a mass movement of migrant labourers back to rural India which was the backbone of the workforce in urban centers.

 The demand side has been hit to a very large extent due to the implementation of one of the most severe lockdowns in the world and with no movement of people allowed, consumption in terms of essentials only have only been permitted to a large extent. With the unlock phase in India, supply side constraints have been taken care of to a large extent. Just when things seem to have coming back and a “V” shaped recovery was anticipated in the Indian economy, there has been tension escalation at the LAC with the Chinese troops.

 The Indian economy and especially the production sector have a large dependency upon the Chinese economy and a large part of the total imports for India are from China. Last year imports worth USD 62 billion have been imported from China. The imports consist of end used finished goods as well as intermediate goods used by factories for production.

 The call for nationalism has resulted in large number of Chinese apps been banned in India and also a strong call for banning all Chinese products. The overall association of the Indian economy on China is at 4 levels and China has a significant part of overall world trade. In 2019, share of China in world trade was 13.3%, compared to India’s share of 1.75%. In value terms the Chinese exports are worth of USD 2.5 trillion. In a globalized and highly interconnected world a boycott of a significant export power house like China would have long and grave consequences.

 The Indian economy was liberalized in 1991. India was ahead of China in GDP terms till 1990. India’s per capita GDP in PPP terms was USD 1230 compared to that of China which was USD 1094. India has grown at a good pace since liberalization, however not as fast as China. With a policy to develop world class infrastructure at a massive scale and export lead strategy China grew at double digits in GDP terms for over a decade. By 2018, China’s per capita GDP rose to USD 15,300 compared to India at USD 6700.

 Chinese constitutes 14% of total imports for India, whereas for China, India is only 3% of their total exports and Indian companies only export 5% of the total Indian exports to China. Hence the impact on the Chinese economy with a ban on China products may not be very significant. Even in terms of Gross National Income (GNI) India still comes under the low GNI nations’ category of income between USD 1025-3995 unlike China.

 The trade war with US had a definitive impact on the Chinese economy. In the 1980’s China’s GDP was only 5% of US GDP but now it is almost 60% of US GDP. The trade wars had an impact of almost 1% of GDP for the Chinese economy due to the fact that US is a far larger trading partner with China than India is.

 Keeping this context in mind a sudden boycott of goods would result in many companies sourcing similar components from EU and other nations thereby resulting in higher cost which will be passed on to the Indian consumers, leading to higher inflation which will lead to a setback in recovery of the Indian economy.

 India and China have trade and investment with each other. Some of them can be substituted and some would be very difficult to substitute.

 ·        Chinese companies’ goods that are sold in India which are low cost mass items – Can be boycotted.

 ·        Multinational companies manufacturing in China example – Apple. – If cost advantage, ease of doing business is provided companies would move base to India.

 ·        Chinese imports which are intermediate parts and used in production by Indian companies – Difficult to boycott and would require a long-term planning and approach.

 ·        Chinese Investments in Indian companies – In a globalized world, wherein Chinese investors invested in most unicorns in India and own over 1% stake in leading companies like HDFC Ltd – Very difficult to unwind or boycott.

India's Dependency on China  % Share in India's Imports  1 Pharma API  68% 2 Furniture & Beading  57% 3 Electronics 45% 4 Organic Chemicals 38% 5 Machinery/Capital Goods 32% 6 Automotive Parts  28% 7 Fertilizers 28%

Keeping this large dependency on China especially for intermediate goods in place, the approach to eliminate Chinese imports into India will have to be planned and well calibrated over a period of time and could well take a few years wherein India Inc. becomes self-dependent and look at Indian substitutes.

 Of the total of USD 65 billion trade with China, USD 15-20 billion could be reduced easily and within a very short period of time. However to look at a complete boycott in a globalized and inter-dependent supply chain world, China is a force to reckon with, a total elimination should be ruled out.

 Indian consumers or consumers around the world opt for Chinese goods only because of the low cost, high technology and mass production capacity that they offer. Similarly, companies look at China as a base for manufacturing due to the high ethnology and low cost facilities they offer.

 Way forward for the Indian Government would be to streamline ease of doing business, improve infrastructure by leaps and bounds and provide incentive for foreign companies to set up base in India. FTA’s with EU and other leading nations should be closed at the earliest to take advantage of this anti-China rhetoric that prevails around the world at this movement. If this time slips, other emerging nations like Vietnam, Thailand would take the lion’s share in world trade in years to come.

 Investors should keep a tab on Indian companies that would gain from the ‘Go Local Be Vocal’ theme in India. If companies can scale up in terms of technology and compete in price parity at a global level this could well be the opportunity for many Indian companies to rise to a global scale and peak new highs in term of valuation and stock price even in these turbulent economic times.

 _Farzan Ghadially.