RAJIV GANDHI NATIONAL UNIVERSITY OF LAW

A PROJECT ON

“INDIAN MARKET IN RELATION TO INDO-CHINA STRESS:

ANALYZING THE IMPACTS”

IN THE COMPLETE FULFILLMENT FOR THE REQUIREMENT OF THE PROJECT ON

THE SUBJECT OF SOCIOLOGY OF B.A.LL.B.(HONS.), 5th SEMESTER.

SUBMITTED TO: SUBMITTED BY:

Dr. JASLEEN KEWLANI ANJALI SHEKHAWAT

ASST. PROF. OF LAW ROLL NO. 18197

GROUP NO. 14

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 TABLE OF CONTENTS

List of Abbreviations……………………………………………………………………………

Abstract……….............................................................................................................................

Research Method………………………………………………………………………………...

Research Questions……………………………………………………………………………...

INTRODUCTION ……………………………………................................................................

INDO-CHINA TRADE RELATIONS…………………………................................................

Background………………………………………………....................................................................

Current Scenario and Recent Clashes............................................................................................

Effect on Economy...........................................................................................................................

EFFECT ON MSMEs…................................................................................................................

EFFECT ON MARGINALISED SECTOR................................................................................

CONCLUSION………………………………………………………............................................

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List of Abbreviations;

MSMEs: Micro, Small and Medium Enterprises

Indo-China Relations: The relationship between the two countries, i.e., India and China.

Global-Market: The aggregate of all national markets, seen as linked through mutual economic
and trade relations.

Asian economies: Indicating all the countries in the Asian continent.

Marginalized Sector: People who are vulnerable and needy have lesser opportunities and
sources of earnings.

Abstract:

The ongoing tension between two major Asian economies, India and China, might lead to a
profound change in the global economy, as well as affect both economies. India has been a
significant importer of Chinese products, and it majorly involves the MSME sector (the second
largest employer of the Indian population after agriculture). Chinese products are cheap and
affordable, which is favored in the Global market as well as India. The sudden movements
towards reducing Chinese effects and increasing Indian production will affect the economy of
India. Many of the/ MSMEs buy products at a cheap rate in China and sell it in India at a higher
rate, which in turn leads a reasonable profit to them. The study will discuss the impacts of
worsening Indo-China relations on the MSMEs in India.

RESEARCH METHODS:

The study will employ doctrinal research methods and carry out secondary research. The study
will analyze available data and analyses through which it will attempt to address the research
problem.

RESEARCH QUESTIONS:

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 1. How does the increasing tension in Indo-China relations affect the MSME sector of
India?
2. What are the sociological implications on marginalized communities?

INTRODUCTION:

There are always two sides to everything, and the same applies to the discussed scenario. The
reduction in imports from China will give a boost to the Indian economy, which will, in turn,
stood to lead to the enhancement of the MSME sector and people involved in it. This will also
lead to a massive loss for people who are already engaged in trade relations with Chinese
companies as their bought products might not get sold, and majorly the Indian products are much
expensive than Chinese products, which will decrease their profit margins. Initially, there would
be a lot of adjustment problems and economic setbacks. Still, suppose there would be enough
government support and buyer's favorability towards Indian products. In that case, this could
lead to a massive opportunity for the Indian economy to develop and build a remarkable place in
the global market. The imports cannot be shut down totally, and also the government could only
encourage people towards favoring Indian products. Up till now, there only has been individual
instances of protest and speeches in this regard. There are not many developments. Even if the
MSMEs, through public awareness, support, and government policies, become self-sufficient and
produce needed products in India itself. This would not change the fact that China's work is too
cheap and affordable. Indian MSMEs are not equipped and qualified enough to compete with
Chinese products in the global markets for many coming years. The MSME sector would rely on
government support for the initial set up and adjustments. The most important thing is to use it as
a popularizing movement for Indian products to develop the Indian economy and strengthen it in
the world market.

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 INDO-CHINA TRADE RELATIONS:

Background:

India and China are the two most populous countries in the world, thus account for the most no.
Of consumers around the globe. The exchange of products to satisfy the consumers occurs from
both countries to each other. The trade relations between India and China were established long
ago. For many decades India and China are continuing a tremendous amount of considerable
export and import from each other. The Indo-China relations can be traced back to the 1950s
when India severed ties with Taiwan and recognized the Republic of China. There was a boost
given to the trade between two countries after the meetings between heads of both countries on
various occasions, such as the Wuhan Summit in 2018. India, like any other country, prefers
cheap Chinese materials over expensive things. China has a very well-established image in the
global market for its cheap and affordable items, starting as small as toys for kids, earphones to
essential services such as mobile phones and electronics. Our country is one of the biggest
importers of Chinese products. India’s purchases from China of everything from electronics to
key drug ingredients to industrial machinery was just shy of $70 billion in 2019 1. Despite all
these political and economic exchanges, the relations between the countries are always skeptical
as India continues to pose a potential competition to China to become a robust economy in Asia.
Especially since the USA has become India’s biggest trading partner leaving behind China and
the US government’s strategic plans to disempower China in the global market. The relations
between India and China have seen up and downs. Currently, they are in a situation of ongoing
border clashes, and India has resorted to economic strategies to defeat China.

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Current Scenario and recent clashes:

The United States of America was already preferring the Indian market over China since 2018.
Now that the outbreak of the world pandemic that has affected our lives so severely and
disturbed our daily lives has occurred in Wuhan city of China. The claims have been made that
this virus was intentionally made in a lab to become a world power and destroy the others,
especially the USA. The global pandemic outbreak has rendered people all over the world
hateful and unacceptable of China and Chinese people. Amidst all this, India and China are
facing warlike situations at borders, and blaming is being done by both the countries of initiating
the military clashes on the Ladakh border. India's external affairs ministry accused China of
breaking an agreement struck to respect the Line of Actual Control (LAC) in the Galwan Valley
in June 2020. BBC diplomatic correspondent James Robbins says violence between two armies
high up in the Himalayas is severe, and pressure will grow on the two nuclear powers not to
allow a slide into full-scale conflict2. These clashes on the border have the Indian government to
take stringent efforts to reduce imports from China and severe trade relations with the country
and intense trade relations with the state. As our country is one of the biggest importers of
Chinese products, this attempt has made with an outlook that this will affect china profoundly,
but this would have larger effects on our country since our reliability on Chinese products is way
more than any other. Not only is there a physical exchange, but many Indians are also using
digitalized apps of China. As a result of the border tensions. India is considering a range of
economic measures aimed at China. The Indian government, on June 29, banned 59 apps of
China, including the Tik-Tok and Shein, both of which are majorly used. Along with this, Union
Minister for Road Transport and Highways Nitin Gadkari announced on July 1 that Chinese
companies would not be allowed to take part in road projects. On September 2nd, the Indian
government banned 118 apps, including PUB-G, and this step was taken to avoid Chinese

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products, earn thereby motivating the Indian economy to self-suffice itself. Many speeches have
been made, and motivational dialogues have been given to Indians by their PM itself, asking to
favor Indian products and increasing production and making it self-reliable. This ongoing tension
between the two economies is going to make a significant impact on our economy.

Effect on Economy:

The ban on the apps and boycott of China’s products would impact the Indian economy as many
industries are dependent upon China for raw material, especially the electronics industry. A
sudden and complete ban would only lead to increment in unemployment, void to replace
products, inflation, etc. This step is more likely to affect India than China at first. The statistics
are such that Chinese exports to India is valued at $77 billion and imports from India at $ 19
billion. Chinese imports account for 15% of India’s imports. The deficit amounts to more than
$50 billion for India, and that clearly shows the utilization of Chinese products by Indian people.
Xi’an Aircraft Industrial Corp., for instance, is a crucial supplier of components to Boeing,
whose 737 Max and 747 aircraft are part of Indian airlines’ fleets3. “At least 70% of India’s drug
intermediary needs are fulfilled by China,” Sudarshan Jain, president of the Indian
Pharmaceutical Alliance4. India’s booming smartphone sector also heavily depends on cheap
Chinese phones made by Oppo, Xiaomi, and others in addition to raw materials required for
electronic products to manufacture. The Indian car manufacturing sector is also highly dependent
on China. The industries are concerned for the non-availability of the intermediate goods,
essential for production. To establish new industries to replace products on a vast scale amid
increasing pandemic outbreak in the country is only a utopian imaginable scenario that cannot be
possible practically. Making India a self-reliant and self-sufficient economy is not trouble-free.
Industries would have to adjust to Indian products, which would also prove to be more expensive
than the cheap goods from china. The already bought products would be challenging to sell, and
the businesses might face losses. Not only the exports from China, but Chinese money has also
penetrated India's technology sector, with companies like Alibaba and Tencent strategically

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pumping in billions of dollars into Indian startups such as Zomato, Paytm, Big Basket, and Ola.
This has led to Chinese giants profoundly embedding themselves in India’s socio-economic and
technology ecosystem. “There have been more than 90 Chinese investments in Indian startups,
most of them made over the last five years. Eighteen out of 30 Indian unicorns have a Chinese
investor,” says Amit Bhandari, an analyst at Gateway house5. Overall, the whole bilateral trade
between China and India touched US$89.6 billion in 2017–18, with the trade deficit widening to
US$62.9 billion in China's favor. In 2017, the volume of bilateral trade between India & China
stood at US$84.5 billion 6. The Indian government can make efforts to phase out gradually and
help out the small-scale productions of India by giving subsidies, loans, etc. Government policies
should be made to carry out plans for the economy, and a way must be found to replace products
from china.

EFFECT ON MSMEs:

MSMEs are defined under the Micro, Small and Medium Enterprises Development Act, 2006
based on investment in plant and machinery for enterprises engaged in manufacturing or
production of goods, and investment in equipment for enterprises providing services. MSMEs
involve micro, small scale, and medium enterprises, which generally include the manufacturing
and producing sectors. Microbusiness is classified as having investment up to 1 crore, small
industries up to 10 crores, and medium business up to 50 crores. India’s MSMEs sector is the
second largest employer of the people after agriculture. People involved and working in the
industry belongs to majorly to the poor and dependent communities. The share of MSMEs in
India’s total export has been more than 40% in the past three years. From 43% in 2012-13, it
grew to 44.7% in 2014-15. MSMEs contribute nearly half of India’s exports. The Indo-China
deteriorating trade relations will affect this sector because of varied reasons:

 Less capital investment:

The raw materials needed for production and manufacturing in industries, mostly electronics,
grew imported from China, and they are available at a cheap rate. Even with less capital,
enterprises could afford it in large numbers. If the products are banned, and taxes are increased,
the companies would face huge losses. The Indian market will take time to replace such raw

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materials, and at the start, it would not be affordable for the small-scale industries. This will
increase the problem of the Indian economy.

 Profit scale:

The profit scale would also decrease as the cheap products would be replaced with expensive
products. Industries won’t be able to earn the profit margin like before. The most important
example of this is ready-made clothing industries in Delhi, which imports d from China at a too
cheap rate and earns a large profit from it. A lot of people are dependent on such markets.

 Black marketing and smuggling:

In the scenario of less availability and increase in prices might lead to plans of black marketing
and smuggling of products from China to India in the greed of profit. This would only increase
the threat to the Indian economy and security as well.

 Employment:

China is not only exporting to India; it is also investing in many Indian companies and sectors.
As a result, people get employment and maintain their livelihood. If such investment is stopped
and inflation increases, then people will lose jobs, and a tremendous unemployment rate will be
faced by India for which it is not even slightly ready. According to a report of Economic Times,
India will be one of the countries with enormous debts in 2021; in such scenarios, completely
cutting off the economy from China and sudden self-reliance on the economy would not be
possible.

 Raw materials:

Car manufacturing and mobile manufacturing industries are the ones importing parts from China
needed to finish the product. The most fundamental products are imported from China, and as

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long as it is not replaced, the manufacturing will come to a halt. Indian economy will move far
away from becoming independent and will lead to a vast depression.

 Competition in the global market:

If the MSMEs, through public awareness, support, and government policies, become self-
sufficient and produce needed products in India itself. This would not change the fact that
China's work is too cheap and affordable. Indian MSMEs are not equipped and qualified enough
to compete with Chinese products in the global markets for many coming years. The critical
point to note is that people will not prefer Indian goods if they are not affordable like foreign
goods, so there would be a need for the push to the production and to curb the situation of
inflation. For example, the clothes available on Shein (China) are much cheaper and stylish than
clothes available on Souled Store or Myntra (India). The mobile phones of China are affordable,
with splendid features in comparison to any other country.

 Lack of infrastructure:

India lacks many technologies and types of machinery needed to fill the void that would be
created by the lack of Chinese products. India either needs to shift to other countries for fulfilling
its need, types of machinery, or the government needs a large amount of investment for the
Indian economy to start its initialization into becoming independent.

MSMEs need a push from the government to sustain its production. Indian MSMEs can be
successful mainly in the area of food products and animal products, as these are the areas of
maximum exports. These industries can boost with providing loans, approval, and oval and
subsidies. These products might even establish themselves quickly an establish themselves
quickly and deeply in the global market. The SME founder and President ChandrakantSalukhe
"In case we import various products from other countries instead of China, the rate would go up
in the range of 25-40%. If we decided to import the same products from South Korea, Japan, or
other countries, we would end up paying more. Moreover, we will have to find new suppliers

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and negotiate with them, which will take time”7. Trade experts also endorse the view saying the
best way to respond will be to make the economy stronger and go for long-haul measures.

EFFECTS ON MARGINALISED SECTOR:

A large part of the Indian population is highly dependent on the MSME sector for employment
as it is the second-largest employer after agriculture. The people usually reliant on this sector for
work are those who don’t earn much and are dependent on their daily/monthly wages for basic
needs. Any drastic economic change which takes place in the country would directly affect the
marginalized people, who usually don’t have access to enough opportunities and resources to
sustain their lives. In the current situation of the Covid-19 outbreak, lockdowns have been
imposed, and thus, many industries have shut down; people have been forced to move back to
their villages to sustain themselves from agriculture. The Indian economy has faced a huge blow,
and reverse migration has been seen in the country. These circumstances have rendered many
people jobless and with no means to sustain their livelihood.

Along with this, if the government imposes bans and stops Chinese imports, it would lead to a
decrease in availability and turn, increase inflation with a reduction in employment. This will just
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worsen the circumstances and increase poverty. If the production is not cheap, then the price
would not be affordable either, and this would lead to inflation, which would directly affect the
ability of the poor to afford and access such consumer goods. In India, the labor people generally
belong to Bihar, Up, or West Bengal. In Bihar, recently, floods have been reported, and people
are losing their households and livelihood. Amidst the pandemic, accessing health care is
becoming difficult. And above all this, if more burden is put on our economy, it will be suffered
by the poor people. Unless the government comes with an adequate replacement and sound
policies to carry out and initialization of setting up new industries, this step will destroy our
economy. Rather than making a blow to China, India will have to face the backfire and
consequences if the government doesn’t make policies within time and assist people in adjusting
to the situation.

A sudden and complete ban, boycott, or increase in import duty is not feasible or possible for
our markets to control and might result in unfavorable conditions. Our merchandise can only
gradually phase out the goods of China and eventually replace it with Indian goods. Industries
need enough time to adjust to the new scenarios in the economy and increase their production
thereby. The critical point to note is that people will not prefer Indian goods if they are not
affordable like foreign goods, so there would be a need for the push to the production and to curb
the situation of inflation. For example, the clothes available on Shein (China) are much cheaper
and stylish than clothes available on Souled Store or Myntra (India). The mobile phones of China
are affordable, with splendid features in comparison to any other country. The input cost will go
up substantially if import from China stops as importing the same raw materials from South
Korea, Japan, and Europe is far costlier. Firms importing chemicals, dyes, electronic items, and

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pharma raw inputs will be the worst hit from any such measures that target China. Inflation will
become an unavoidable situation in Indian markets. Nearly 70% of the Active Pharmaceutical
Ingredientsare imported from China8. If these imports are stopped, the cost of the medicine will
go up. This will eventually hit the lower section of society. Similarly, other items are imported
from China, and an increase in their cost will have a ripple effect - the burden will eventually be
on end-users. SME Chamber of India Founder and President ChandrakantSalunkhe echoes the
view saying the country has first to empower local manufacturers, which are currently facing
myriad problems due to coronavirus9. Any supply disruption at this juncture would impact local
manufacturers to meet export demand. The government must provide loans and subsidies to help
set-up new industries gradually to replace the need for Chinese products in our production.

FINDINGS:
The government needs to give a direct push to MSMEs to ramp up the export of consumer goods
to reap the benefits of its comparative advantage over products made in China in the post-
pandemic world. India can look in the range of incremental exports growing by $20 billion (in
the least favorable outcome) to a significant $193 billion jump in the five-year horizon, only if it
builds its capabilities and captures share from China, according to SBI's Ecowrap report 10.
Although the revealed comparative advantage for India is lower than China as far as capital
goods exports are concerned, India can still capitalize on this opportunity to push its capital
goods exports. "However, the bigger opportunity right now is in the consumer goods sector, in

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which India has an RCA greater than China," said the report 11. The most significant
concentration of consumer goods in Micro, Small and Medium enterprise sector, exported from
India is in the textile and clothing sector (17.30 percent), food products (12.30 percent), and crop
and animal production (10.0 percent)12. We may have a comparative advantage in textiles and
animal goods, in food products, but we are far away from being competitive in the world market.
The government must give a direct push to this sector so that MSME firms involved in food
products manufacturing get benefitted. Former All India Manufacturers Organization National
President K.E. Raghunathan also advises against ad-hoc measures of raising import duty and
suggests the government form committees to draw five-year plans for gradual substitution of
imports. "Today, 35% of our MSMEs are going to wind up. First, nurture the local industry to
survive. Once they stay, promote them to healthiness. After that, the focus should be on revival
and then to prosperity and eventually wealth creation. That should be the steps 13". The positive
side is that this is a remarkable opportunity for India to increase the promote production and
demand for its products in the market. People are also favoring Indian goods over others in the
name of nationalization, and thus, such small industries can boost to satisfy such demands. The
realization of the need for India to become self-sufficient came during the pandemic, as
importing goods from other countries has been difficult. If in the future, such a need arises, India
must be capable of relying entirely on its economy for the fulfillment of the requirements of its
citizens. India has the advantage of being a populous country and thus providing cheap labor and
a large number of consumers of goods. The profit margin of MSMEs can increase if the raw
materials are readily available in the domestic market. Although the current situation of COVID
has a dampened Indian economy with an adequate push and assistance from the government,
India will soon be established enough to compete among world economies.

CONCLUSION:

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This issue is an indispensable upcoming discourse in the Indian economy. There would be both
negative and positive impacts. MSMEs at present are not equipped to handle competition in the
global market and develop the economy on their own. The government, on its part, has been
imposing anti-dumping duties permitted under the World Trade Organization (WTO) for
restricting imports when such imports have been established as unfairly affecting the market for
goods and services produced by Indian industries. Concerning taking any strict action, India
seems to be bound by the WTO framework. While India has initiated specific measures such as
mandating BIS certification for certain products & prohibiting the import of mobiles without an
IMEI number, imposing a ban on apps and stringent import duties, a lot more needs to be done if
this threat has to be countered. There has to be a greater focus on export-oriented sectors.
Curbing Imports and Banning is not the solution to improve the economy of India; increasing
exports and developing the production sector would prove to be the game-changer for India.
Indian government should take steps to assist MSMEs and motivate people to prefer Indian
goods over others. The improvement would be gradual only, and it would take time, but with the
availability of human resources like India, India can establish a sparkling name in the world
market.

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