India fails to take full advantage of China+ strategy by maintaining barriers
By Subrata Majumder
Going by the statements of India’s External Affairs Minister, S Jaishankar, the Narendra Modi Government is going hot with China on diplomacy. But at the same time, Finance Minister Nirmala Sitharaman is soft on the issue of allowing Chinese investments in India. The economic survey of 2023-24 presented before this year’s budget underlines the need for Chinese investment.
There are several reasons behind this new look towards Chinese investment as an economic partner. FDI flow in India is at a plateau despite the fact that it has the highest growth in global GDP. FDI in India dropped consecutively for 2 years. In 2022-23. It fell by 22 percent and dropped further by 3 percent in 2023-24.
India made sparkling growth in the electronic and automobile sectors. But, the growth relied more on imports. China has been the biggest supplier of components and parts for the development of these industries. In other words, if China falters in supplying critical components, these industries are unlikely to spur growth.
Why has India lost the FDI potential, despite the fastest growth in GDP ? Among the several reasons, the noteworthy one was India’s lacklustre approach to China+1 strategy. India failed to reap the benefits of China+1 strategy, due to its discriminatory policy towards China. China+1 became the pivot for a new global FDI landscape after COVID 19 .
China+1 strategy instilled inspiration to foreign investors in China to shift to ASEAN. Eventually, during 2021-2023, FDI in ASEAN increased by over 8 percent’. The trigger in investment was driven by huge USA and China investment. Bulk of the USA investment was shifted from China to ASEAN. USA investment increased by a whopping 109 percent during the period, followed by China. Singapore was the key player to allure USA investment from China. USA investment in Singapore boomed by over 60 percent during 2020-2023. This demonstrates a major shift of USA investment from China to ASEAN.
In contrast, USA investment in India slipped from a high end in 2021-22. It slipped from US $ 10 billion in 2021-22 to US $ 4 billion in 2023-24, a marked fall in US investment in India. Many suspected USA’s downturn in investment was India’s failure to reap benefits from China+1 strategy.
Why has China+1 strategy emerged as a game changer in the global FDI landscape and India failed to catch up with the global trend?
The USA and western assemblers vowed to shift to India from China. USA investment in India made an uninterrupted growth during 4 years ending 2022. But the US investment plunged thereafter. Reason, much of the US investment, which represented shifting from China under China+1, shifted to ASEAN rather than to India.
The main factor discouraging US investors to shift from China to India was their failure to encourage the Chinese supply chain manufacturers to shift factories to India due to discrimination policy. This is despite the fact that USA and western assemblers viewed India a better destination for manufacture of the supply chain than China. Even though India is lagging behind China in critical components manufacture, they preferred India for long term benefits.
Manufacturing in India, which plummeted during the COVID period, made a significant growth post COVID. It surged to 9.9 percent growth in 2023-24, against a fall by 2.3 percent in the preceding year.
This gave a point of inspiration for a second thought to policy makers to the Make in India programme and shifted focus on supply chain manufacturing. The aim was to be embedded in the stream of global supply chain manufacturing.
The Production Linked Incentive (PLI) scheme was overhauled and expanded, embracing a large number of industries with more doses of incentives. The expanded PLI worked well. Eventually, manufacturing boomed.
This caught the Chinese attention for a new partnership with India for supply chain development in the country. Global Times – the noted Chinese media- raised high hopes for partnership with Indian counterparts to manufacture supply chains, instead of intensifying competition. It said, “with the implementation of Make in India, the country’s needs for industrial chain support have increased, especially in technology and capital intensive products. This offers a new market and collaborator prospect for the China manufacturing sector“.
It focused on a IIFT (Indian Institute of Foreign Trade) study in April 2023, which said “Chinese imports boost Indian manufacturing and exports in key sectors.”
Even though an outcry was raised for a wide trade deficit with China, Global Times suggested localization of Chinese companies in India would be a better solution, instead of raising investment barriers against China.
For example, it noted that in the rapid growth of smartphone manufacturing in India, only a small percentage of components are procured domestically. China continues to be the biggest supplier of components and parts. Given this template, Global Times opined for manufacturing partnership with India. It is a better deal to reduce imports dependence.
Apple‘s slow pace of entry in India is another case in point. Currently, only 14 percent of Apple’s global production of iPhone has been shifted to India. Global Times argued that despite Apple’s efforts to encourage its suppliers to shift to India, discriminatory investment regulations and trade have dissuaded many Chinese component suppliers from shifting to India.
To this end, a complementary partnership with China to manufacture critical components will be a better option to develop the supply chain industry than relying more on imports. (IPA Service)