Changing ties: Eco Survey bats for more FDI from China to tap export market

Cites Apple, Foxconn success stories on China Plus One; Calls to strike a balance between importing goods and FDI from China

It is termed the most talked-about “frenemyship” in Asia or a not-so-successful “Hindi Chini Bhai Bhai” bonhomie. In the age of the China Plus One, the Economic Survey aims to redraw the relationship with the neighbouring superpower to India’s advantage.

While the neighbour is mentioned 132 times in the Survey, it is proposing a two-dimensional strategy to benefit from China Plus One, either by integrating into China’s supply chain or by promoting foreign direct investment (FDI) from China, calling FDI “advantageous”.

The Survey cited examples of Apple and its supplier Foxconn shifting to India to derisk themselves, due to disruptions caused by Covid-19, growing tensions between the US and China, and rising costs of doing business in China.

 

“The domestic consumer market is what makes it attractive for companies to set up their operations in India,” it said.

Apple assembled $14 billion worth of iPhones in India during 2023-24 (FY24), constituting 14 per cent of its global iPhone production, while Foxconn has started production of Apple mobile phones in Karnataka and Tamil Nadu.

“India faces two choices to benefit from the China Plus One strategy: it can integrate into China’s supply chain or promote 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 to benefit from the China Plus One approach appears more advantageous than relying on trade,” it said.

China was India’s largest trading partner in FY24 and has been India’s largest import partner for the past 18 years. The trade deficit with the neighbouring country was also the highest in FY24.

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 said.

“While 100 per cent FDI is permitted under the automatic route in most manufacturing sectors, further reforms are necessary to attract more foreign investment in the manufacturing sector. These include streamlining complex labour laws to balance investor-friendly policies with worker protections, strengthening the intellectual property rights regime to safeguard research and development investments, and enhancing environmental regulations to ensure sustainable industrialisation," said Anindya Ghosh, partner at IndusLaw, adding that India’s active participation in trade deals will play a vital role in its China Plus One strategy.

The Survey further suggested that there is a need to come up with innovative ways to promote outbound shipments by focusing on FDI from China. The Survey points out that India must strike a balance between importing goods and FDI from China.

“Data shows that foreign investment from China hasn't been robust, although India’s dependence on Chinese goods has been persistent and has been rising for close to two decades,” it added.

During the January-March quarter of 2024, the FDI equity inflow from China stood at $1.7 million, with a share of a mere 0.01 per cent of the total inflows, government data showed.

FDI equity inflows between January 2000 and March 2024 stood at $2.5 million. Four years ago, the government made prior approval mandatory for foreign investments from countries that share a land border with India, including countries such as China, to curb opportunistic takeovers of domestic firms following the pandemic.

The Survey further said that Chinese domination over global supply chains across product categories is a key global concern, especially in the wake of supply disruption accompanying the war in Ukraine.

“Even though India is the fastest-growing G20 country and is now recording growth rates that outpace China’s, India’s economy is still a fraction of China’s,” it said.

Further, developing countries will have to figure out a way of meeting the import competition from China and, at the same time, boosting domestic manufacturing capabilities, sometimes with the collaboration of Chinese investment and technology. For instance, countries such as Brazil and Türkiye recently raised tariffs on the import of electric vehicles from China but also took steps to attract Chinese FDI in the sector.

“India has a similar decision to make, given its large bilateral trade deficit with China. It makes India vulnerable to potential abrupt supply disruptions. Replacing some well-chosen imports with investments from China raises the prospect of creating domestic know-how down the road,” the Survey said, adding that to boost Indian manufacturing and plug India into the global supply chain, it is inevitable to enter China’s supply chain. This can be done by relying solely on imports or partially through Chinese investments.