In today’s Finshots, we dive into a dilemma highlighted by the latest Economic Survey ― How can India integrate into the global supply chain without leaning too heavily on China?
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The Story
India is in a bit of a conundrum. And it’s not us saying this, but the latest Economic Survey that the Finance Minister rolled out a few days ago. And the big questions that are driving India’s dilemma are simple.
One, Can India boost its manufacturing and join the global supply chain without over-relying on China? And two, can it balance trade and investments with China while keeping a wary eye on the relationship between the two countries?
Okay, maybe these aren't such simple questions after all. And the answers? Well, they might be a little tricky too.
But is there a way to solve this, you ask?
To figure that out we’ll have to rewind a bit.
See, India's relationship with China has been a mixed bag. On one hand, we've been importing everything from China, from basic items like plastics and textiles to high-end electronics and machinery. Chinese companies have also invested heavily in Indian startups, technology and infrastructure.
But with the “Atmanirbhar Bharat” initiative, India aimed to reduce its reliance on imports, especially from China, and promote domestic production. This move was partly driven by concerns over China's extensive investment strategies, which often led to control over key resources in other countries.
Take the Belt and Road Initiative, for example. It’s China’s grand plan to create new trade routes connecting it with the rest of the world. And although it sounds ambitious, there's a twist.
China poured in a whopping $1 trillion into energy and transport projects, like power plants and railways in other countries. It loaned them large sums of money to help build the necessary infrastructure. This seemed like a golden opportunity for low-income countries like those in Africa because they had access to cheap capital to build their own infrastructure.
However, this led to a situation where indebted countries found themselves in a bit of a debt trap. It seemed like China was ensnaring these nations in a web of debt and then taking control of critical infrastructure like ports. For instance, Sri Lanka leased the Hambantota Port to China for 99 years after defaulting on its debt when it ran into financial troubles.
Now, you could argue that this is just how business works. If you lend someone money, you’ll obviously expect it back. But since this debt trap diplomacy narrative seemed to be gaining popularity, many countries began to reconsider their stance on their deals with China.
The pandemic really cranked up the pressure on concerns about Chinese investments. By April 2020, India had tightened the reins on Chinese FDI (foreign direct investment), making government approval a must for any investment. Things took a turn for the worse later that year when border clashes between Indian and Chinese troops killed soldiers from both sides. Since then, India has been on high alert, banning hundreds of Chinese apps over privacy worries and keeping travel between the two nations on a tight leash. In short, the country has been extra cautious about its trade and non-trade ties with China.
And that might make it look like we've severed ties with our neighbour. But the truth is quite the opposite.
Our reliance on Chinese imports has actually surged, topping $100 billion in FY24. On the flip side, our exports to China are only about 16% of that amount, which means we’re staring at a hefty trade deficit of around $85 billion.
Yeah, it’s a bit of a head-scratcher. And that’s exactly the kind of paradox the Economic Survey is pointing out.
But this isn’t a problem unique to just India. For years, economies in the global north, like the US and the EU, have leaned heavily on China for its low-cost manufacturing. China’s got a grip on everything from electronics and rare earth elements to Active Pharmaceutical Ingredients (APIs). It’s a major player in high-tech stuff too — think telecom gear, drones and EV batteries.
China’s dominance in these areas gives it some serious sway in global markets. But the pandemic shook things up and exposed the risks of relying too much on one country.
That’s where the China Plus One Strategy (C+1) comes in. The idea was to spread the manufacturing load to other countries, including India. For instance, the US is actively “friendshoring” India, which basically means diversifying trade away from China to nations with fewer geopolitical risks. American companies are moving their electronics and tech production to friendlier countries, mainly in the Asia-Pacific region. While these countries are stepping up, they’re still not quite closing the gap yet.
That’s because, despite some changes, China’s hold on global manufacturing is still pretty tight. For example, the slump in China’s property sector resulted in a steel glut. With all the extra steel it had in hand, China started offloading it to overseas markets. Countries snapped up the cheap steel, which ended up putting a squeeze on local producers in those markets. And this kind of manufacturing trade surplus has made it tough for other emerging economies to keep up.
To counter China's cheap imports, some countries leaned on import restrictions. But often, Chinese products are so competitively priced that even tariffs can’t offset the advantage.
On top of that, China dominates crucial supply chains in many sectors. For instance, it processes over three-fourths of the world’s lithium, a key component in batteries.
So, for India to suddenly ramp up and compete with China is no small feat.
Even though India is the fastest-growing G20 country and its growth rates are surpassing China’s, its economy is still just a fraction of China’s. Plus, C+1 means that other countries, like Vietnam, are also vying for a piece of the pie. Vietnam is known for its prowess in manufacturing electronics and garments, thanks to lower labour costs and simpler regulations. To put things into perspective, India’s import duty on information and communication technologies is 10%, much higher than Vietnam’s average of around 5%. Besides, India’s infrastructure is still catching up to its manufacturing ambitions. And that can translate into longer shipping and road delivery times, which drives up transit costs.
One more thing you have to understand is that India’s goal to become a manufacturing hub is more about achieving self-sufficiency first rather than jumping straight to become a global export leader. David Roche, founder of Independent Strategy, a research firm, put this beautifully in an interview with CNBC.
He pointed out that China became a manufacturing powerhouse by setting up Special Economic Zones (SEZs). These zones were designed with perks like tax breaks, simplified regulations and solid infrastructure to attract foreign companies and investments. This influx of advanced technology and manufacturing know-how not only boosted exports but also strengthened domestic industries, giving China a significant edge in global markets.
India has SEZs too, but its economic strategy is more about building up its domestic market. While there are export-oriented industries, the overall focus is on meeting local needs and growing the internal market. This difference in strategy means India and China are following quite different paths to economic development.
So, without integrating into China’s existing supply chain, getting India plugged into the global supply chain could be a tall order.
But we could definitely take a leaf out of China’s book to boost our growth as a manufacturing hub. And guess what? The Economic Survey hints at a similar approach.
It points out an interesting tactic used by Brazil and Turkey. They've hiked duties on Chinese electric vehicles while simultaneously wooing Chinese FDI in the same sector. It’s like trying to have your cake and eat it too!
This balancing act goes beyond just tariffs and trade restrictions. It's a broader strategy which suggests that swapping out some Chinese imports for Chinese investments could help India build up its own manufacturing muscle and trim that trade deficit. For example, instead of just importing smartphone components from China and assembling them here, why not focus on direct investments from China’s component supply chain companies, so that we manufacture these parts locally? Essentially, following Brazil and Turkey’s lead could help us add more value domestically and strengthen our manufacturing sector.
Sure, it’s not a perfect solution, especially with all the economic and geopolitical complexities involving China. And it definitely doesn't remove China from the equation. But sometimes, you have to make do with less-than-perfect options.
Will India find a way to crack this challenge? Only time will tell.
Until then…
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