How India became dangerously addicted to Chinese imports
Take a walk into an Indian toy shop and as well as picking up a new favourite plaything for a child, you might just get an insight into how the nation is battling for a better economic relationship with its all-powerful neighbour China.
Six years ago, in an attempt to push local manufacturing and keep substandard toys out of its market, India raised tariffs on imported toys from 20% to 60% and eventually to 70%.
Retailers were up in arms and said that domestic firms could never match the foreign-made stuff. But the combination of higher customs duties and quality control standards worked.
Indian imports of toys fell by a third from nearly $300m (£227m) in 2020 to $100m this year, while exports rose from around $129m to $200m in the same period. Moreover, the country was able to drastically reduce its dependence on China, which held a 70% share of the local toy market.
On the other hand, lack of access to the Chinese market remains a major challenge for Indian companies.
"Indian products face a variety of tariff and non-tariff hurdles in China that make it difficult to scale exports," says Li.
"If normalisation [of ties] continues without a serious push for reciprocal market access, India risks a situation where the political relationship improves but the economic dependency stays the same."
The long term solution to both reducing avoidable imports and improving exports performance will be to strengthen manufacturing, says Srivastava.
But that requires sector-specific industrial policy and stronger fundamentals – affordable power and credit, efficient logistics and stable regulations – areas where India still falls short.
India has also recently softened foreign direct investment rules, which could open the door to Chinese companies wanting to expand Indian investments. But these too will need careful vetting, he adds.
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