Economic implications of

Updated: May 31 2013, 07:59am hrs
Nabeel A Mancheri

Greater economic engagement has killed a number of Indian industries and has grievously injured telecom equipment manufacturers

The Chinese Premier Li Keqiangs first overseas visit to India came after a two-week standoff between the two countries in the border region of Ladakh. So, naturally, the major headlines on Lis visit revolved around border and water issues. Apart from these issues (China may have had minimum interest to talk on these issues), Li Keqiang was accompanied by a large business group with a predominant economic agenda as the Chinese are currently becoming increasingly concerned about the dwindling of their economy.

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Li was leading a business delegation comprising bankers and executives of large state-owned companies as well as private ones. The Chinese are aware of the huge potential of Indian power and telecom market and wish to supply more equipment to these sectors through various means, including financing the power projects, as evident previously in the Reliance deal. Private sector power companies such as Reliance, Lanco and Adani have relied earlier on cheaper Chinese credit to import Chinese equipment that directly benefits Chinese business interests. National PSUs like Powergrid Corporation, NTPC, BSNL, etc, also depend on Chinese companies for a large number of critical equipment which also have direct links to national security.

According to newspaper reports, this time the immediate beneficiary of Chinese benevolence is Essar Energy and Essar Oil. The company signed an agreement with China Development Bank for one billion dollar as external commercial borrowings (ECBs). In return, PetroChina, a state-owned enterprise, signed a long-term buy back agreement to purchase Essar products linked to the loan amount. This may be the Chinese way of addressing Indias concerns of a one-way trade, consisting of $40 billion deficit. If China is ready to pump a little fraction of its enormous foreign reserves into the Indian market either through FDI or loans, this would clearly benefit in reducing Indias balance of payment deficit and, in the long term, result in an improved terms of trade.

The Chinese are more upbeat than the Indians about the increasing volume of trade, which was close to $70 billion last year, and both sides are targeting a goal of $100 billion by 2015. However, the negative impacts of greater economic engagement have completely killed a number of Indian industries by cheap products emerging from China, while others like furniture, gift items, toy industry as well as higher-end sectors like automobile accessories and parts and technological products like telecom equipment are grievously injured.

One strategic industry that has long struggled in competition with cheap Chinese products is the telecom equipment industry. Indian policy makers have much to learn from China, where the Chinese state supports their strategic industries in various ways regardless of whether it is a state-owned enterprise or a private company.

Top executives from two Chinese telecommunications giants Huawei and ZTE also accompanied Li during his visit to India. Both companies are currently facing serious scrutiny from the western governments and are subject to restrictions while doing business in the US and European markets.

Cheap capital and Chinese state support for these companies are enabling them to dump their products in international markets including India. Huawei and ZTE started their operations in India in 1998-99 by setting up software outsourcing centres. In the initial years, their successes in the Indian telecom sector were limited. Huaweis major breakthrough came in 2005-06 when they used low price tactics and a variety of other methods to win business with ITI, BSNL and MTNL.

Huaweis entry into such important government networks established their credibility and very soon they began to gain entry into the networks of private telecom players. The larger private operators in India, reeling under the impact of hyper competition and low average revenue per unit, were easy baits for Huaweis predatory pricing strategy. Riding on this, Huawei, which had only $170 million in revenues from its India operations in 2005, has grown at a scorching pace.

Currently, both Huawei and ZTE are doing good business in India without much fuss. Huawei employs around 6,000 people out of which 2,500 are working in the R&D sector. The company reported revenue of $1.2 billion in 2011, registering a growth of around 30% compared to the previous year and expects sales revenue of $2.7 billion in 2013. The company targets sales revenue of $10 billion by 2017. ZTE, which has 23 offices throughout India, is one of the leading telecommunications company in India. Starting with a modest investment and overcoming suspicion from different quarters, it has emerged in better shape in recent years in the Indian market with peak revenue of $1.5 billion it generated in 2009.

Chinese companies have realised that, in the long run, innovative R&D companies from India having similar R&D cost advantage like them could become their competitors and challenge their global plans. To nip this problem in the bud, from 2007-08, they started dumping equipment in categories where Indian products existed at artificially low prices, so as to drive the Indian companies out of business.

India should see this sector as a strategic industry and should support and nurture its domestic industrial base. Here is an industry that can generate R2,50,000 crore of annual revenues within a decade as it is estimated that the demand for telecom equipment in India constituted 6.2% (R76,940 crore) of the global demand (R16,38,255 crore) in 2012-13. A failure to initiate domestic manufacturing would force the country to import $150 billion worth of equipment during the next 10 years.

India must focus and build strong capabilities and leverage the available skills to become self-reliant in telecom equipment considering at the very least the security angle. However, to achieve this goal, the government must bring in proactive and favourable policies to nurture and encourage local telecom equipment industry. Specific policies such as giving preferential market access to Indian products, particularly for all government-funded telecom projects, promote R&D and innovation in telecom products, providing incentives such as R&D funds and grants should be considered. The government should formulate a comprehensive policy to promote local industry providing infrastructural assistance and fiscal incentives.

The author is an assistant professor at the National Institute of Advanced Studies, Bangalore