IMPACT OF INDIA CHINA CONFLICT ON THE ECONOMY

It has been 45 years since we’ve seen significant combat fatalities along the Line of Actual of Control (LAC). The deadly clashes of 16th June 2020, in the Galvan valley, deep within the treacherous mountains of Ladakh, resulted in 20 Indian and an unconfirmed number of Chinese casualties. This was an unprecedented escalation between the two nuclear-armed neighbors, and, in the light of this, it is pertinent to grasp the economic implications of the actions of both the parties involved.

As tensions continue to rise, the appetite of Chinese investors for India’s eCommerce companies may start faltering. Plenty of Indian companies like Ola and Swiggy count Chinese powerhouse companies such as Alibaba, Tencent Holdings Ltd., and funds like Fosun Capital as their vital investors.

Arguably, the most at risk due to the political discord would be the Indian supply chains. The sectors which would bear the most brunt could be Auto, Pharmaceuticals, Telecom, Chemicals, and Renewable Power, as these are heavily dependent on China, in terms of sourcing of materials. It would be difficult and expensive for Indian firms in these sectors to find alternative suppliers immediately, that too at similar scales and costs. With regard to the cheap large-scale supply of any material, China has attained global domination, and replacing them completely would be next to impossible. Even as both economies look to recover from the pandemic, this could create hurdles for companies, who would not only have to look for alternative suppliers, but would also invariably add up to their costs, and that too at a time when the pandemic has severely dented their financial conditions.

Following is a list of each sector’s dependency on China- • Consumer durables is dependent on China for components • Pharma is dependent for API (Active Pharmaceutical Ingredients) sourcing • Telecom is dependent on both, network point of view (4G,5G); as well as for smartphone handsets (catering to more than 75% of Indian handset demand singlehandedly)

There is also increased vigilance at trade ports, in view of the border tensions. This is leading to delays in clearance of shipment customs, which could affect the Make-in-India initiative, general economic growth, and job creation.

Calls for boycott of “anything Chinese” have also grown louder amongst the masses. Amid growing tensions, the Indian Railways scrapped several project contracts awarded to multiple Chinese companies. In a bid to appease public sentiment, we saw the government ban 59 Chinese apps, including TikTok, WeChat, and Helo.

Nevertheless, the situation isn’t bleak for all sectors. Some are actually benefiting from the present conditions and will continue to do so, at least until the conflict is resolved. Companies producing defense-related products would emerge as the winners. Shares of China’s Beijing Emerging Eastern Aviation Equipment Co. and Anhui Great Wall Military Industry Co. have soared by at least 10%. In India, Zen Technologies Ltd., a designer of military simulators, has reported a steady streak of gains ever since the Galvan valley clashes.

However, India must also be careful about how far it pushes. The government had already amended the regulations to allow the exports of hydroxychloroquine (essential in drug testing for COVID 19) to the US, at President Donald Trump’s request. Two-thirds of India’s bulk of drug and drug intermediates come from China. From this, it is obvious that India’s trade imbalance with China, in addition to significant Chinese FDI, will prevent any significant economic decoupling from taking place in the foreseeable future. For the moment, it doesn’t appear that a reciprocal de-escalation will take place anytime soon between the two superpowers.