NEW DELHI: By taking military action in 2020, China has clearly indicated that she does not desire a stable, balanced, forward looking relationship with India and that she is willing to use military coercion to resolve her disputes with India. All earlier bilateral agreements aimed at maintaining peace and tranquility in the India-China border areas have been violated by China. China has decided the nature of the future India-China relationship: she appears to desire a conflictual, unbalanced and tense relationship with India.
The military message that India has sent China is that it will not accept this bullying and attempts at coercion, lying down. India has shown the spirit of fighting back. The India-China relationship is predicated on peace on disputed borders. If and only if there is tranquility on the border, the rest of the relationship can potentially move ahead as it has done over the past three decades. Therefore, India will have to reset its China policy. It cannot be business as usual. This is a time for a fundamental rethink of the India-China relationship.
In the short run, the hand of cards which India has been dealt is not favourable. Indian economic and military power cannot be easily changed in the short run. In the short run, containing China will require forming coalitions of like-minded countries, a path that is new for Indian foreign policy. Alongside this, a long-run strategy must simultaneously be put into motion. In many ways, India is better placed to establish a dynamic market economy located in a liberal democracy as compared with Xi Jinping’s China which is characterised by concentration of power in one person and one political party. This gives an opportunity for India to achieve superior GDP growth for 20 years or so, after which Indian foreign policy will hold a better hand of cards.
As a consequence, in the short run, India will fare best through participating in coalitions to balance China. These coalitions would naturally consist of countries with shared values and interests. As an example, once an appropriate deep trade agreement is in place, the natural focus of finance and trade for Sri Lanka or Bangladesh is with India and after that, their interests would lie in supporting a strong and successful India.
Three groups of countries are our natural partners in such coalition building: (a) the major democracies of the world, (b) the countries in the Indian region and (c) countries that share a border with China, including major powers such as Russia, who are our natural partners in this venture. Building such coalitions including the Quad and others is the need of the hour.
The main argument of this document is that India can prevail in this long game by mixing a short-term strategy of sophisticated and nimble foreign policy with a long-term strategy of strategic patience with domestic reform which generates high economic growth.
India has recently launched productivity-linked Initiatives and chosen sectors for deep investments. To succeed in the future, we have done an assessment of global opportunity and relative status of India and China to advocate industry specific strategies in three broad categories of industry sectors:
- CATEGORY 1: Huge asymmetry areas where India must progressively reduce dependence.
- CATEGORY 2: Opportunities to focus on “atmanirbhar” and meet all domestic demand.
- CATEGORY 3: Global Industry building opportunities.
A summary of this is listed here.
CATEGORY 1: Huge asymmetry areas where India must progressively reduce dependence
Rare Earths: Having the largest natural availability of rare earths, China has a dominant position here, controlling 90 per cent of global production. With many clean energy applications and high-tech industry products like electric and hybrid cars dependent on rare earths, the concern of the world at this huge dependence on China is the only factor going against Chinese dominance in future. Australia and the U.S. will chip away at China’s share. India has performed in this industry below potential in spite of significant beach sand mineral deposits.
The future game plan for India has to be to make the mining and production of rare earths more attractive for the private sector and become part of at least some global supply chains in this area.
CATEGORY 2: Opportunities to focus on “Atmanirbhar” with “Atmavishwas” and meet the domestic demand to gain technological leadership
Telecom: The global market in 2019 was US $1.74 trillion and rising spending on wireless communication due to shifts to cloud technologies and mobile devices is changing the complexion of this industry. India’s revenues in this sector stood at US $96 billion while China’s mobile ecosystem added US $750 billion to the country’s economy in 2018.
China’s success in deregulation has led to mega companies like China Mobile, China Tower, China Telecom and China Unicom and more recently, Huawei and ZTE.
India’s opportunities for the future lie in the move from traditional copper-based networks to dense optic fibre cable networks and the entry of major private sector players like Jio with focus on 5G. In 5G, India needs to be committed to blocking the entry of Chinese players for both self-reliance and security reasons. There is an imperative to stem the influx of imports of Optical Preform, Optical Fiber and Optical Fiber Cable products through Safeguard and/ or higher Basic Custom Duty to encourage local capacity development. The Indian government should allocate 1 per cent of annual GDP towards publicly funded fiber infrastructure and reduce dependency on the private sector. Broadband connectivity itself has a correlation with GDP growth, so a sustained, structured program will enable further economic growth across sectors.
It is important to underline recent developments in India in this segment. While the entire start-up investment in India was less than US $15 billion, Reliance Jio’s ability to raise over US $20 billion at an equity valuation of US $58 billion demonstrates the tremendous global tech majors and investors see in the potential of the telecom segment in India.
In the investment announcement made by Google, who came into Jio at the same valuation as fierce tech industry rival Facebook, CEO Sundar Pichai said their excitement stemmed from the potential for millions of users in India to become owners of smartphones. With the advent of 5G and the massive expansion and national push that Jio is expected to make, Google expects that new opportunities will be unlocked, powering the vibrant ecosystem of applications and pushing innovation to drive growth for the Indian economy. It may be worth emphasising that China must be barred from participating in India’s 5G revolution, both from security and self-reliance points of view.
CATEGORY 3: Global Industry building opportunities
Consumer Electronics: The global consumer electronics industry is expected to reach US $838 billion in 2020 with over US $151 billion revenue generated by China. Investments in smart robotics and factory automation, extensive investments in AI and prosperity driving consumer appliances are all pluses for China. India needs to accelerate the roll out of 5G and IoT and leverage initiatives such as Digital India and the Smart Cities Mission to usher in a new era for electronics products.
Tremendous opportunity has been lost in hardware even while the software and business process industries have made great strides. While India has built an outstanding Information & Communications Technology (ICT) industry with dominant market share in IT, Engineering, BPM and Product Engineering services in the world, India has missed the opportunity in core ICT. The core ICT layer includes base stations, routers, blade servers, phones, laptops, etc. that are built using semiconductors like semiconductor chips, hardware processors and other components like optoelectronics and sensors. A big frontier for core ICT systems is Cloud for 5G, which will need a new class of server blades with the capability to support wireless networks with multi-gigabit per second throughputs. Important thrust areas in semiconductors include special purpose engines for deep neural networks capable of handling large modelling applications with large volumes of data and co-packaged optical transmissions with massive processing power bits per second and connectivity from a single chip. Through core ICT, the industry will move from just software to hardware along with embedded software and firmware and this will be the passport for India to be a true participant in the multi-trillion-dollar global core ICT industry.
ICT will be the key enabler of many high growth industries in India including biotech, pharmaceuticals, advanced materials and even energy. India’s best bet to enter the core ICT ecosystem is to grow new companies while expanding the existing industry efforts in this area. India requires entrepreneurial university researchers and engineers from industry within and outside the country. The initial opportunities for India will be in the design layer—systems and semiconductor design where the engineering skill sets are largely available and investments are relatively smaller. However, semiconductor and other component manufacturing are important too and careful planning will be needed to build this sector.
By focusing strongly on all three layers—domain, services and core ICT—and building a new era of patents and inventions, India can truly lead the world in all aspects of ICT. A reasonable 10-year target for India in core ICT can be a 5 per cent share of global revenue, which means a 200 billion dollar plus per annum value addition by 2030. Indian engineers have what it takes; there is now the ability to be part of a China-less supply chain, attract global venture capital and build the 200-million-dollar core ICT capability for the country.
Automobiles: The global markets have been dominated by U.S., European and Japanese manufacturers, though China is counted among the largest markets worldwide. China’s early moves in the autonomous, electric and connected car segment and their dominance in the batteries production for electric cars have led to projections of market leadership by 2040, which India should watch, emulate and challenge.
Indian self-reliant production of cars conforming to all emission standards have to be ramped up and an aggressive push for exports made. All major automakers in Japan, Korea, the U.S. and Europe should be incentivised to use India as the base for massive global production. Special automotive SEZs offering significant tax benefits and excellent infrastructure could be the way forward.
India should leverage its successful IT and auto component sectors to manage the complex systems of vehicle electronics and connected vehicles and use the accelerating investments of global players in Indian manufacturing plants to accelerate in this critical sector.
Initiatives like the Ministry of IT’s STPI Centre of Excellence for Autonomous, Connected, Shared and Electric Vehicles need to be substantially supported through domestic R&D and investments to enable India to take a lead in the next generation of transportation.
Chemicals: The global revenues in this segment had reached US $3.94 trillion in 2019. India’s revenues of US $150 billion places it far behind China, which became the world’s largest producer in 2009 and today enjoys over 40 per cent of global industry revenue. With 676 chemical parks and more than 60 million employed compared to India’s 2 million, China is far ahead in this sector though given the context of oil prices moving to lower levels and Chinese labour costs rising, China’s competitive advantage might be less in future.
India has opportunities to leverage a China Plus One objective of many global consumers to present a real alternative destination by creating special purpose SEZs, positioning the country as a leader in certain value chains and segments and showcasing the use of digital technologies and Industry 4.0 smart production systems as well as low-cost labour to be the destination of choice for the future.
Healthcare and Pharma: While India has done well in the pharma segment, a large percentage of inputs to any drug manufacturing comes from China. China also has one of the fastest growing healthcare markets in the world. Of the total US $8.4 trillion global healthcare market, China’s market size will cross 1.3 trillion in 2020, while India is in the region of US $200 billion. China’s pharma market was valued at over US $140 billion in 2019 while India’s domestic market was just in excess of US $20 billion in 2019 and an estimated export of US $16 billion in FY 20.
With strong focus on healthcare in India and the extensive use of digital technology and services, India has an opportunity to substantially ramp up healthcare revenues and also make big impacts on the global pharmaceutical industry. There is an upside potential if Indian companies become major global producers of COVID vaccines and syringes. Tele-health and wellness tourism are also significant segments to be exploited.
On the pharmaceutical side, the Indian drugs industry is a heavy user of Active Pharma Ingredients (APIs) sourced from China. In an environment where China is seen as a bad actor in the global economy, where Chinese nationalism can harm counterparties abroad, this presents a problem. Solutions have been discussed in detail in this paper, including sourcing diversification, boosting API domestic production with committed offtakes by government players.
Agriculture: While China has the highest agricultural output of any country with sixteen successive bumper food crops and over US $800 billion value added in FY20, India remains somewhat monsoon dependent and has low farm productivity. Agricultural exports from India recorded over US $38 billion in FY19. The opportunity is huge with the global food and agriculture technology and products market size projected to have crossed US $500 billion in 2019 with food and beverage processing equipment having the highest segment share and aquaculture products growing fastest.
India has the potential to double farm income by 2022 and the growing use of genetically modified crops will improve yields. Agri-exports should be a focus area for the country. The adoption of food safety and quality assurance mechanisms such as Total Quality Management (TQM) including ISO 9000, ISO 22000, Hazard Analysis and Critical Control Points (HACCP) and Good Hygienic Practices (GHP) by the food processing industry will offer several benefits which have to be exploited.
India’s quest for success and self-sufficiency in agriculture has resulted in large farm lands being used for wheat and rice production. While this has been a relatively secure segment of GDP growth, there is an opportunity to move towards much higher productivity agriculture including grains, fruits and organic produce which would have higher farm productivity and free up land parcels for industrial and other productive uses.
Finally, it is an encouraging step that the Indian government has committed US $26.6 billion to address the nation’s manufacturing capabilities and enhance exports across 11 sectors through production-linked Incentives. These include mobile handset and components, automobiles and auto components, solar photovoltaic (PV) modules, speciality-steel makers, man-made and technical textiles, food processing, specialised pharmaceutical products, advanced chemistry cell battery, and IT hardware. This scheme relies on identifying National and Global Champions in each sector to manufacture part of their needs and hence make India an integral part of the new supply chain. It is inherently WTPO compliant and serves the need of those who would like to see their global value chains insulated from a possible trade war between India and China.
As India moves to become a US $5 trillion economy, the one area of dominance that India has—the US $190 billion Software, Engineering and Business Process Management industries—could propel the accelerated building of a trillion-dollar Digital India. Investments in the core ICT opportunity could add US $200 billion to a potential US $300 billion that the domain and services led approach can become. And the vast sectors of financial services, agriculture, healthcare and e-commerce enabled through digital platforms could generate half a trillion dollars of value addition through digitally enabled services.
(Excerpts from a paper dated March 2021 by the Pune International Centre on Strategic Patience & Flexible Policies: How India Can Rise To The China Challenge authored by Gautam Bambawale, Vijay Kelkar, Raghunath Mashelkar, Ganesh Natarajan, Ajit Ranade and Ajay Shah.)
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