Why Chinese Investment Should Be Encouraged In India, Albeit Security Concerns? – Analysis
At present, Chinese investment is almost barred in India in the wake of security concerns. All Chinese investments are subject to government approvals. They are not permitted through the window of Automatic Approval under the Foreign Investment policy of India.
Nevertheless, recently there was a turnaround in the outlook towards Chinese investment in India. Leaving aside security concern, a new thought was evoked in favour of Chinese investment.
Economic Survey 2023-24 – one of the important official documents for economic policy – advocated Chinese investment in India with the perspective of growth in manufacturing. It emphasized that partnership with China was imperative to increase manufacturing and boost supply chain. It intended to unfold a new chapter in India’s foreign Investment policy, where focus should be made on FDI as an weapon to reduce imports . China is the biggest import source of imports 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 voltae-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 shouldn’t India be perturbed by Chinese investment ? There are strong argument in favour of Chinese investment. First, it paves the way to reduce imports from China. Second, the advance 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 has been ventilated by Indian manufacturers. Instead of resisting, Indian manufacturers vow for liberal entry of Chinese investors. According to Mr Sunil Vachhani of Dixon Technologies, “even though India’s electronic component manufacturing 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 shifted 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 spur In ASEAN. During 2021 to 2023, while USA 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 in manufacturing.
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 look to China represents a new chapter for India – China relation from the perspectives 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.
