In recent years, India has significantly altered its approach to foreign direct investment (FDI), especially from China, in the wake of heightened security concerns. Following the border tensions in 2020, the Indian government imposed stringent regulations on Chinese investments, requiring them to undergo government approval, thereby eliminating the possibility of automatic approval under the Foreign Investment Policy of India. This move was seen as part of a broader strategy to safeguard national security and reduce economic dependence on China, which remains India’s largest source of imports.

However, in a surprising twist, the Economic Survey 2023-24, a critical document guiding India’s economic policy, has advocated a more nuanced approach towards Chinese investments. The Survey emphasized the potential benefits of partnering with China to boost India’s manufacturing sector and enhance supply chain resilience. This marks a significant shift in India’s foreign investment policy, suggesting that Chinese investment, if strategically managed, could serve as a powerful tool to reduce import dependency and foster domestic production.

The Economic Survey 2023-24 has made headlines by advocating for a renewed focus on Chinese investment in India, particularly in the context of the manufacturing sector. The Survey argues that in the current global economic climate, characterized by supply chain disruptions and shifting geopolitical alliances, it is imperative for India to rethink its approach to foreign investments, especially from China.

The Survey presents two primary options for India: integrating into China’s supply chain ecosystem or promoting Chinese investments within India. Of these, the Survey favors the latter, suggesting that encouraging Chinese investment could significantly enhance India’s manufacturing capabilities, reduce import dependency, and create jobs—one of the key objectives of the 2024-25 fiscal year budget.

This proposition has sparked considerable debate within industry circles, with opinions divided on the merits and risks of such a strategy. However, the Economic Survey’s rationale is grounded in the recent trends observed in global manufacturing and supply chain management.

Global Shift: China+1 Strategy and Its Implications

The COVID-19 pandemic exposed the vulnerabilities of global supply chains, many of which are heavily reliant on China. As a result, businesses and governments worldwide have been exploring alternatives to mitigate risks associated with this dependence. The “China+1” strategy, wherein companies seek to diversify their manufacturing bases beyond China, has gained traction. Countries like Vietnam, Thailand, and Indonesia have emerged as attractive destinations for companies looking to relocate or expand their operations outside China.

India, with its large domestic market and growing manufacturing capabilities, was expected to be a significant beneficiary of this shift. However, the country’s restrictive policies on Chinese investment have somewhat hindered its ability to fully capitalize on the China+1 strategy. Foreign investors, particularly those reliant on Chinese supply chain networks, have found it challenging to establish or expand operations in India due to the absence of their trusted Chinese partners.

This is where the Economic Survey’s recommendation gains relevance. By allowing Chinese investment, India could not only attract more foreign companies looking to diversify away from China but also integrate more effectively into the global supply chain, thereby strengthening its manufacturing sector.

Learning from ASEAN: Case for Chinese Investment

The experience of ASEAN (Association of Southeast Asian Nations) countries offers valuable insights into the potential benefits of Chinese investment in manufacturing. Over the past few years, ASEAN has emerged as a major hub for global supply chains, partly due to significant Chinese investments in the region.

China is currently the third-largest investor in ASEAN, with its investments primarily concentrated in the manufacturing sector. In 2023, Chinese investment in ASEAN’s manufacturing sector reached $6.2 billion, accounting for 42% of total Chinese investment in the region. Countries like Singapore, Thailand, Indonesia, and Malaysia have been the primary beneficiaries, with Chinese companies establishing production facilities to serve both regional and global markets.

Interestingly, while U.S. investments in ASEAN’s manufacturing sector have declined post-COVID, Chinese investments have surged. Between 2021 and 2023, U.S. investment in ASEAN manufacturing fell from $19.4 billion to $6.5 billion, while Chinese investment doubled from $3.8 billion to $6.2 billion. This shift underscores China’s growing influence in global manufacturing and its ability to adapt to changing economic conditions.

For India, this presents both a challenge and an opportunity. The challenge lies in competing with ASEAN for foreign investment, particularly in the manufacturing sector. The opportunity, however, is in leveraging Chinese investment to build a robust manufacturing base that can serve both domestic and international markets.

Reducing Import Dependency: A Strategic Imperative

One of the key arguments in favor of encouraging Chinese investment in India is its potential to reduce the country’s reliance on imports, particularly from China. Despite India’s efforts to boost domestic manufacturing through initiatives like “Make in India” and the Production Linked Incentive (PLI) scheme, the country continues to depend heavily on imports for critical components, especially in sectors like electronics.

For instance, electronic components accounted for nearly 39% of India’s total electronic goods imports in 2023-24, with a significant portion coming from China. While India’s electronic component manufacturing is on the rise, as noted by industry leaders like Sunil Vachhani of Dixon Technologies, there remains a substantial gap in the availability of key components.

By encouraging joint ventures and partnerships with Chinese companies, India could potentially bridge this gap. Chinese companies, with their advanced technology and expertise in mass production, could help India develop its domestic manufacturing capabilities, thereby reducing the need for imports. This would not only enhance India’s self-reliance but also position the country as a competitive player in the global supply chain.

Overcoming Resistance: The Case for Pragmatism

The idea of welcoming Chinese investment is not without its critics. Concerns about national security, economic sovereignty, and the potential for market domination by Chinese companies have been raised by various stakeholders. These concerns are valid, given the complex geopolitical relationship between India and China.

However, the Economic Survey suggests that these concerns can be managed through a carefully crafted policy framework that balances economic interests with national security considerations. By setting clear guidelines and maintaining control over critical sectors, India can leverage Chinese investment without compromising its strategic interests.

Moreover, the potential benefits of Chinese investment, particularly in terms of job creation and technological advancement, cannot be ignored. As the Survey points out, partnerships with Chinese companies could help India achieve its goal of becoming a global manufacturing hub, which is crucial for sustaining long-term economic growth.

Policy Recommendations

To successfully integrate Chinese investment into India’s economic strategy, several policy measures need:

• Targeted Incentives: India should offer targeted incentives to Chinese companies willing to invest in sectors that align with its strategic interests, such as electronics, renewable energy, and advanced manufacturing. These incentives could include tax breaks, subsidies, and streamlined regulatory processes.
• Strategic Partnerships: The government should encourage strategic partnerships between Indian and Chinese companies, particularly in sectors where India lacks technological expertise. Joint ventures could be promoted through special economic zones (SEZs) or industrial corridors, where both parties can collaborate on production and innovation.
• Regulatory Safeguards: To address security concerns, India should establish a robust regulatory framework that ensures Chinese investments are subject to rigorous scrutiny. This could involve setting up a specialized committee to review and approve Chinese investments, focusing on sectors that are critical to national security.
• Supply Chain Integration: India should work towards integrating its manufacturing sector with global supply chains, including those involving Chinese companies. This would involve improving infrastructure, enhancing logistics capabilities, and adopting international standards in production and quality control.
• Diplomatic Engagement: India should engage in diplomatic dialogue with China to address any bilateral issues that may arise from increased economic cooperation. Building trust and maintaining open communication channels will be essential for ensuring the success of this policy shift.

The Economic Survey 2023-24 marks a significant turning point in India’s approach to Chinese investment. By advocating for a pragmatic and strategic partnership with China, the Survey opens the door to new opportunities for India’s manufacturing sector. While the challenges are considerable, the potential benefits in terms of job creation, technological advancement, and reduced import dependency make this a proposition worth considering.

As India navigates the complexities of its relationship with China, it must strike a balance between economic pragmatism and national security. With the right policies and safeguards in place, Chinese investment could become a catalyst for India’s economic transformation, helping the country achieve its goal of becoming a global manufacturing powerhouse.

The decision to embrace or resist Chinese investment will shape the future trajectory of India’s economic development and its role in the global economy. As the world continues to evolve, India’s ability to adapt and make bold decisions will determine its success in the years to come.