Even as relations with China remain tense, the pre-budget Economic Survey tabled by the Indian government on Monday argued for seeking foreign direct investments (FDI) from Beijing to enhance local manufacturing and tap into the export market.
This marked a departure from the country’s hostile stance towards China post the 2020 Galwan clashes wherein the Chinese military killed 20 Indian soldiers, leading to the ban of over 200 Chinese mobile apps like TikTok and others, and tightening of FDI rules aimed to discourage China.
The recommendation in the survey comes as the US and Europe shift their sourcing away from China, suggesting it may be more effective to have Chinese companies invest in India and export products to these markets rather than importing from China.
‘China Plus One’ Strategy and India’s choice
Discussing the ‘China Plus One’ strategy adopted by companies in recent years to reduce dependency on the country for inputs, the survey struck a pragmatic note highlighting the examples of Mexico, Vietnam and China, which it said were direct beneficiaries of the US’s trade diversion from China but also displayed a rise in Chinese FDI.
“Therefore, the world cannot completely look past China, even as it pursues China plus one,” it said.
The survey said that India has two options to benefit from the “China plus one” strategy: integrating into China’s supply chain or promoting foreign direct investment (FDI) from China.
Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past. Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade.
It added:
This is because China is India’s top import partner, and the trade deficit with China has been growing. As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.
It also added a research note from the Rhodium group saying, “China’s dominance over so many product categories creates, first and foremost, a risk of economic coercion, where the government restrains access to crucial inputs for political leverage.”
Chief Economic Adviser V Anantha Nageswaran emphasized the need to re-examine India’s policy regarding FDI from China, advocating for a balance between importing goods and importing capital (FDI).
He highlighted examples from countries like Brazil and Turkey, which have successfully attracted foreign investments by creating a favorable environment for investors.
Trade deficit with China continues to grow
The Economic Survey suggestions also draws from India’s widening trade deficit with China despite strained relations with imports from China far outpacing exports to the country.
In the fiscal year 2023-24, India’s exports to China amounted to $16.6 billion, while imports totalled $101.7 billion, resulting in a trade deficit of $85 billion, up from $83 billion in FY23.
The Economic Survey suggested that increased FDI from China could help mitigate this imbalance and enhance India’s participation in global supply chains.
Minimal FDI inflows from China
Currently, China ranks 22nd in terms of FDI equity inflow into India, contributing only 0.37 percent ($2.5 billion) from April 2000 to March 2024.
Most FDI in India is under the automatic approval route, but investments from countries sharing land borders with India, including China, require mandatory government approval.
Analysts divided over the suggestion
Economist Rumki Majumdar from Deloitte India noted that investment relations with China could help India balance its import and investment needs, particularly as India seeks energy self-sufficiency and reduces dependence on fossil fuels.
Ajay Srivastava, Founder, Global Trade Research Initiative, however, said this will not be the best strategy for India considering the evolving geopolitical situation.
While Chinese companies investing in India and exporting to western markets might seem beneficial in the short term, it risks undermining India’s long-term economic security and strategic autonomy. Dependence on Chinese firms for key manufacturing capabilities could expose India to supply chain vulnerabilities and geopolitical risks.
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