Recently, a turnaround in the outlook towards Chinese investment has been unveiled. Leaving aside security concern, a new thought was evoked in favour of Chinese investment.

Economic Survey 2023-24 advocated Chinese investment in India from the perspective of manufacturing growth. It focused that partnership with China was imperative to increase manufacturing and boost supply chain. The important factor attributing in favour of China is to reduce import. China is the biggest import source for India.

Under Make in India, focus on manufacturing was on making goods from beginning to finished products domestically. With the onset of COVID, a dramatic change in the world manufacturing was unfolded, leaving impact on India. Focus on supply chain received more attention. As a result, PLI (Production Link Incentive) scheme was overhauled in India and expanded to cover large number of industries with more doses of incentives.

Given China losing steam for global supply chain hub in COVID 19 and the global manufacturers tending towards alternative to China with a new concept of China+1 strategy, India gave a new thought to align manufacturing with Chinese investment as a boon and not a bane.

Survey suggested two options for India. One, it suggested to integrate into the realm of China supply chain or two, promote Chinese investment in India. Among the two choices, survey focused on Chinese investment in India. This baffled industry houses.

Survey revealed that several Asian countries followed the second option to increase production and reduce import dependence on China. It observed that as USA and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest and export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.

Survey made a volte-face. It pitted for a bold move for partnership with China to increase India’s manufacturing potential and export, which bode well for trigger in job creation – the main focus of the Fiscal Year Budget 2024-25.

Why should not India be perturbed by Chinese investment? There are strong arguments in favour of Chinese investment. First, it paves the way to reduce imports from China. Second, the advanced technology is likely to be transformed into India to support its supply chain template. Third, China+1 will yield more advantages to India to attract foreign investors shifting from China.

India has already made a debut in abating imports from China. Over the period of 2 years, Imports of major items from China began to slide. During 2021-22 to 2023-24, imports of electronic goods from China declined by 5.5 percent.

According to Deloitte of USA, “by encouraging partnership and joint ventures with neighbours, India can leverage their technical expertise, while maintaining control over critical sectors.”

Similar arguments for joint venture with China have been made by Indian manufacturers. Instead of resisting, Indian manufacturers plead for liberal entry of Chinese investors. According to Mr Sunil Vachhani of Dixon Technologies, “even though India’s electronic component manufactures are on the rise, key components still need to be imported”

Electronic component is the biggest item among electronic goods imported from China. Electronic component accounted for nearly 39 percent of total electronic goods imports in 2023-24

To this end, a lesson can be drawn from Chinese investment in ASEAN, which is tending to be the next supply chain hub in the world.

China is the 3rd biggest investor in ASEAN. Hamstrung by rising costs due to higher wages and operational costs, Chinese companies have been increasingly shifting their production network to ASEAN. It is forecasted that China is increasingly becoming the major source of foreign investment in ASEAN and reaching near to USA – the biggest investor in ASEAN.

Manufacturing sector accounts for the lion share of Chinese FDI in ASEAN. In 2023, Chinese investment in manufacturing reached US$6.2 billion, accounting for 42 percent of total Chinese investment in ASEAN. A larger share of the Chinese FDI in manufacturing went to Singapore, Thailand, Indonesia and Malaysia.

Despite USA being the biggest foreign investor in ASEAN, an opposite trend between Chinese and USA investment in manufacturing was unfolded after COVID. While US investment in manufacturing was in retreat, Chinese investment rose. In ASEAN. During 2021 to 2023, while US investment in manufacturing declined from US $ 19.4 billion to US$ 6.5 billion, Chinese investment doubled from US$ 3.8 billion to US$6.2 billion..

Why has India been left behind to attract foreign investment under the strategy of China+1? The noticeable obstacle is restriction on Chinese investment in India. Foreign investors, shifting from China, are hamstrung by lackluster supply chain, supported by their Chinese supply chain makers in China. Given the restriction on Chinese investment in India, Chinese supply chain makers are unable to shift to India as allies to the foreign investors. This could be one of the reasons as to why India trailed behind Vietnam to allure foreign investment, shifting from China.

The new stance to Chinese investment represents a new chapter for India-China relations from the perspective of economic partnership, amidst political tiff. According to a study by Indian Institute of Foreign Trade (IIFT), Chinese imports were boosting India’s manufacturing and exports in key sectors. (IPA Service)