Policy Makers on Two minds on China
Context of the Debate:
The Economic Survey for FY24 suggested allowing more Chinese investments in India to stimulate economic growth. However, Trade Minister Piyush Goyal dismissed any rethinking on this matter, temporarily ending the debate. Despite this, recent developments indicate a renewed focus on India-China economic relations, highlighting the tension between economic opportunities and geopolitical concerns.
Recent Developments That Encourage the Debate:
- Fast-Tracking Chinese Visas: Business visas for Chinese nationals have been expedited.
- Ladakh Border Troop Disengagement: A reduction in military tensions at the border signals better diplomatic ties.
- Government Statements: Discussions on strengthening economic ties with China suggest reconsideration of existing policies.
- Post-Galwan Clash Restrictions & Challenges with Press Note 3:
FDI Goals and Trends:
India aims to achieve $100 billion in gross FDI inflows annually, up from the current $70 billion. However, FDI equity inflows declined to a five-year low of $44.42 billion in FY24. Recovery is underway, with April-September FY25 inflows rising by 45% to $29.8 billion. Increasing FDI, especially from China, could help meet this ambitious target.
In response to the Galwan Valley clash in 2020, India issued Press Note 3, requiring prior approval for FDI from neighboring countries. This policy was aimed at preventing opportunistic takeovers but has led to several challenges:
- Limited Approved Chinese Investments: Between April 2020 and September 2024, only $127.2 million of Chinese FDI was approved.
- Ambiguities in the Beneficial Ownership Clause: Unclear guidelines affect investments from global funds with minor Chinese participation.
- Sectoral Restrictions: Stakeholders argue for streamlined approvals and clear sector-specific guidelines.
Divergent Opinions Among Policymakers on Increasing Chinese FDI into India:
- External Affairs Minister S. Jaishankar: Advocates a sector-specific approach, emphasizing the need for clearly defined terms of engagement.
- Finance Minister Nirmala Sitharaman: Stresses the importance of national interest and safeguards, citing India’s sensitive geopolitical position.
- 16th Finance Commission Chairman Arvind Panagariya: Suggests restricting Chinese FDI in sensitive sectors while opening up non-sensitive areas, mirroring global practices.
Need & Opportunities in Chinese Investment:
- Critical Sectors: Investments in construction equipment, manufacturing, batteries, and electric vehicles could reduce India’s import dependency on China.
- Economic Benefits: Strengthening domestic production capabilities and reducing the trade deficit.
- China Plus One Strategy: Offers India a chance to attract global companies diversifying from China.
Key Challenges in Allowing Chinese Investment:
- Trade Deficit: India’s trade deficit with China reached $50 billion in FY25 H1, raising concerns over supply chain vulnerabilities.
- Balancing Act: India must weigh the benefits of Chinese FDI against geopolitical sensitivities.
- Geopolitical Concerns: Ensuring national security while engaging economically with China remains a challenge.
Leveraging FDI from China: A Strategy to Address Trade Deficit & Economic Survey FY24 Insights
Chief Economic Advisor V. Anantha Nageswaran emphasized leveraging FDI from China as a strategy to tackle India’s growing trade deficit. Key insights include:
- Boosting Domestic Production: Encouraging Chinese companies to invest in India for export-oriented manufacturing.
- Learning from East Asia: Following Vietnam’s and South Korea’s models to increase exports through FDI.
- Sustainable Export Growth: Shifting focus from value-added imports to localized manufacturing for global markets.
The Case for FDI Over Trade Integration
The Economic Survey FY24 highlights that focusing on Chinese FDI provides a more sustainable path for enhancing exports. East Asian economies like Vietnam and South Korea have successfully boosted exports by welcoming Chinese FDI, showcasing a potential model for India.
Two Pathways in the “China Plus One” Strategy
- Integrating into China’s Supply Chains: India could position itself within China’s supply networks to support global companies diversifying their sourcing.
- Promoting FDI from China: Attracting Chinese investments can boost domestic production and enable exports to Western markets, particularly the United States.
Understanding the “China Plus One” Strategy
The “China Plus One” strategy encourages multinational companies to diversify supply chains beyond China. Drivers include:
- COVID-19 Disruptions: Revealed vulnerabilities in over-reliance on China.
- Geopolitical Tensions: Heightened US-China trade disputes.
- Rising Costs in China: Increased labor and operational expenses.
Companies like Apple are already shifting production to India and Vietnam, creating significant opportunities for India to attract investments.
India’s Opportunity in the Strategy: By adopting a balanced approach, India can
- Reduce its trade deficit with China.
- Attract investments in critical sectors like manufacturing, technology, and automotive components.
- Strengthen its position as a global manufacturing hub.
