The Indian Government’s pre-budget Economic Survey, released on Monday, argues for attracting foreign direct investment (FDI), from Beijing in order to boost local manufacturing and access the export market.
The country has changed its hostile stance toward China after the clashes in 2020 Galwan, where the Chinese army killed 20 Indian soldiers. This led to the banning of more than 200 Chinese apps, such as TikTok, among others.
It is suggested that it would be better for Chinese firms to invest in India, export their products there and not import from China.
India and the ‘China Plus One Strategy’
The survey, when discussing the “China Plus One” strategy that companies have adopted in the past few years in order to decrease their dependency on China for inputs struck a pragmatic tone, highlighting examples such as Mexico, Vietnam, and China. It said these countries were the direct beneficiaries of US trade divert from China, but they also showed a growth in Chinese FDI.
The report stated that the world could not ignore China even if it was pursuing China plus one.
According to the survey, India can benefit from “China plus One” by either integrating with China’s supply chains or by promoting Chinese foreign direct investments (FDI).
Focusing on FDIs from China, as East Asian economies have done in the past, seems to be the best choice for boosting India’s exports to US. Moreover, focusing on FDI to take advantage of the China Plus One approach seems more beneficial than relying solely on trade.
Addendum:
The trade deficit between India and China is growing. It is better for Chinese firms to invest in India, then export their products into the US or Europe, as they are moving away from China.
The report also included a note of research from the Rhodium Group, which stated that “China’s dominant position in so many product categories poses a first-class risk of economic coercion whereby the government restricts the access to vital inputs as a political tool.”
V Anantha Nageswaran, Chief Economic Adviser of India, stressed the importance of reexamining India’s policy on FDI. He advocated for a balanced approach between importing both goods and capital.
He cited examples of countries such as Brazil and Turkey that have attracted successful foreign investment by creating an environment favorable for investors.
The trade deficit with China is growing
Economic Survey also takes into account India’s growing trade deficit with China, despite the strained relationship between both countries. Imports from China outpace exports in India.
India exported $16.6 billion to China in fiscal 2023-24. Imports were $101.7 billion. This resulted in an $85 billion trade deficit, an increase from $83 in FY23.
According to the Economic Survey, increased FDI by China would help India achieve greater participation in global supply chain and reduce this imbalance.
China’s FDI is minimal
Currently China is ranked 22nd when it comes to FDI equity into India. It contributed only 0.37 per cent ($2.5 billion), from April 2000 until March 2024.
The majority of FDI into India falls under automatic approval, however, investments made by countries that share land borders with India (including China) require government approval.
The suggestion has divided analysts
Rumki Majumdar, an economist from Deloitte India, noted that China’s investment relationships could be used to help India meet its investment and import needs. This is especially important as India strives for energy independence and wants to reduce dependence on fossil-fuels.
Ajay Shrivastava of Global Trade Research Initiative said that this strategy is not the most appropriate for India, given the changing geopolitical landscape.
Although Chinese firms investing in India, and exporting goods to the west might appear beneficial on a short-term basis, they risk undermining India’s economic and strategic independence in the long term. India’s dependence on Chinese companies for its key manufacturing capabilities may expose it to geopolitical and supply chain risks.
This article India Economic Survey: Seeking FDI in China to boost manufacturing and exports first appeared on The ICD
