India must plug itself into China’s supply chain, attract FDI: Economic Survey

India faces two choices to benefit from China plus one strategy: it can integrate into China’s supply chain or promote foreign direct investment (FDI) from China among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past, the Survey emphasised.

“Choosing FDI as a strategy to benefit from China plus one approach appears more advantageous than relying on trade. This is because China is India’s top import partner, and the trade deficit with China has been growing. As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them,” the Survey said.

Chief Economic Advisor V Anantha Nageswaran during the press briefing on Monday said that Chinese over-capacity is one of the risks for India’s private sector investment in the country. The Economic Survey also said that Chinese overcapacity is leading to prices collapsing globally and driving other national producers out of business, especially in product categories where China dominates.

The border standoff after the Galwan clash in 2020 had seen several measures announced by the government to limit Chinese influence on the Indian economy. The most prominent was the amendment brought about in the FDI policy under Press Note 3 (PN3). The modification in PN3 brought the investment in India from land bordering countries under the government route.

As per official figures, India approved only a quarter of the total 435 foreign direct investment applications from China till June last year since the modification in press note 3 was introduced in April 2020. However, China contributes only a fraction of the total FDI equity inflows into the country. China stands at the 20th position with only 0.43 per cent share or $ 2.45 billion in total FDI equity inflow reported in India from April 2000 to December 2021, as per the Commerce and industry ministry.

The Survey said that global trade is going through a particularly challenging phase of uncertainty and there are increased efforts by the US to de-risk and de-couple from China. But China’s overwhelming dominance in the supply of processed critical minerals and materials for energy transition renders a true decoupling between the two nations “neither easy nor likely”, it added.

Global trade decoupling

“In 2023, Mexico became the largest goods trade partner of the US, surpassing China and Canada, with a total trade of $798 billion. Vietnam’s trade with China and the US has recently seen an increase. US imports from Vietnam doubled from $46 billion in 2017 to $114 billion in 2023. During the same time, Vietnam’s imports from China rose from $58 billion to $111 billion,” the Survey said.

Other key instances of decoupling and de-risking are European economies shifting their energy imports from Russia to Norway and the US, the Survey said. The EU’s pipeline gas imports from Russia declined from 150.2 billion cubic meters in 2021 to 42.9 billion cubic meters in 2023, it said.

“While the US and China are gradually decreasing their reliance on global markets, this does not seem true for the rest of the world. Research by the Bank for International Settlement (BIS) shows that despite its policies, the US remains reliant on Chinese inputs. The rise in trade through Mexico and Vietnam results from Chinese firms re-routing their supply through these countries (or by locating themselves in these countries),” the Survey said.