’FDI from China can help India increase value addition, exports’

At a time of intense scrutiny of Chinese investments in India, the latest Economic Survey has proposed to turn the issue on its head, suggesting India consider foreign direct investments from the northern neighbour to boost exports, cashing in on the China-plus-one strategy playing out globally.

Hosting Chinese component manufacturers in India could increase domestic value addition, particularly in electronics, though the same approach can be extended to other sectors, the survey said.

“It is imperative that India finds the right balance between importing goods from China and importing capital (FDI) from China… Choosing FDI as a strategy to benefit from the 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, 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 stated.

The survey also offered examples of Brazil and Turkey, which are emerging markets and developing economies trying the same solution. However, for India, such a move presents complexities, given the kind of geopolitical relations that the two nations share—which the survey called the Chinese conundrum.

Addressing this conundrum assumes importance today, given the balance of supply chains. Globally, China dominates critical supply chains in many fields. For instance, over three-fourths of the world’s lithium, a key ingredient in batteries, is processed by China.

Much like the rest of the world, India’s dependence on China has increased. Commerce ministry data shows India's imports from China rose 6.5% to ₹8.42 trillion in FY24, up from ₹7.9 trillion in FY23.

Industry consultants and experts, however, highlighted that a blanket investment strategy may not be the magic solution.

Sankalp Gurjar, assistant professor of geopolitics at Pune’s Gokhale Institute of Politics and Economics, said that promoting “conducive domestic business conditions without diluting national security interests” will be key to reducing imports from China, and building domestic value addition in industrial supply chain via China-driven FDI.

“This idea can only be successful if India is confident enough to attract Chinese companies who will want to invest and provide jobs. Fixing the domestic business climate will go hand-in-hand with foreign and strategic policy concerns,” Gurjar said.

Pankaj Mohindroo, chairman of electronics industry body India Cellular and Electronics Association (ICEA), added that a simplified FDI approach may not work, given the complex relations between the two countries.

“China has built itself based on trade relations with multiple geographies, and not just through investments. For India, the right way forward in order to improve domestic value addition in the electronics supply chain would be to enable automatic FDI from China-based ventures up to 49%, which is a suggestion that has been floated to the Centre by the industry already,” he said.

The move comes at a time when the Centre is said to be considering ways to improve how investments towards Indian entities from Chinese companies pan out. On Friday, a senior government official told Mint that the Union IT ministry is trying to understand how to handle investments from enterprises based in China.

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Biswajit Dhar, vice-president and distinguished professor at Council for Social Development, said that such a move could be of massive significance for Chinese entities, given the sheer size and volume of India's overall market.

Dhar added that the proposal is a clear move to acknowledge that India's supply chain cannot be developed in a silo. "There are nearly no businesses that can survive independently from China and its impact. A siloed environment is not the way in which economies can be built, and deglobalization and decoupling of economies is largely counterproductive. Such a step is imperative, if the value in India's manufacturing ecosystem is to be increased," he said.

On Thursday, an Economic Times report said the Centre is considering setting up an inter-ministerial panel that expedites approvals of investment attempts in Indian entities by Chinese ones. The proposal itself comes against the backdrop of Press Note 3—which restricted FDIs from nation’s that share India’s land borders, which includes China, based solely on case-wise government approval.

The approach outlined in Monday’s Economic Survey takes a considerably different stance, where sectors including electronics manufacturing may now be able to field direct investments from China’s component supply chain companies.

Earlier this year, the Centre stated at the Parliament that a total of 526 FDI proposals worth $11.9 billion were received and scrutinized under the above-mentioned Press Note 3, between April 2020 and December last year, as per government data. Of this, 124 proposals were approved, while 201 were rejected. A total of 200 investment proposals are pending with the Centre.

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Last week, Ashok Chandak, chairman of industry body India Electronics and Semiconductor Association (IESA), told Mint that attracting supply chain firms to make components in India can take place through production-linked incentives for components, revision of import duties strategically, and more. Now, as the survey indicates, FDI and special provisions to attract investments from China could be key in this regard as well.

Tabled a day before the Union budget 2024 by finance minister Nirmala Sitharaman, the Economic Survey offers an overview of the domestic economy as of FY24, and the way forward.