The Economic Survey 2023-2024 released on Wednesday, July 22, has recommended that India take advantage of the reducing dependence on China for manufacturing and work towards promoting Foreign Direct Investment (FDI) from China.
The survey said as India looked to deepen its involvement in Global Value Chains (GVCs), it could take a leaf out of the successes and strategies of East Asian economies. These economies have typically pursued two main strategies: reducing trade costs and facilitating foreign investment. The FDI was a better choice rather than importing from China, adding some value and re-exporting it, the survey said.
“Choosing FDI as a strategy to benefit from China plus one approach appears more advantageous than relying on trade. 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 (‘China plus one strategy’), 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,” the survey said.
Over the last five years, global companies have slowly moved away from China, which has predominantly been the global manufacturing hub. Countries like Mexico, Thailand, and Vietnam have stepped up their production, suggesting a move away from China. “This shift is primarily due to disruptions caused by COVID-19, growing tensions between the US and China, and rising costs of doing business in China. As a result, several companies have adopted a ‘China plus one strategy’ to reduce their reliance on China for high-tech electronic products and components,” the report said.
The survey quoted a research note by Rhodium Group, which pointed out that China’s dominance over so many product categories created a risk of economic coercion, where the government restrained access to crucial inputs for political leverage. Rhodium’s note also said that Brazil and Turkey had raised barriers to imports of Chinese EVs, but enacted measures to attract Chinese FDI in the sector. European nations, too, have decided to follow a similar approach. Hence, India must find the right balance between importing goods from China and importing capital (FDI) from China, the survey noted.
At present, FDI from China requires the Government of India’s approval. According to Business Today, the Ministry of Commerce and Industry approved just three investment proposals from China or Chinese nationals in 2022–23. The available data showed that a staggering 58 FDI applications from China were rejected by the department between FY21 and FY23.