India’s dependence on China for its manufacturing and trade has been a long-standing concern for policymakers and businesses alike. The Covid-19 pandemic and the border tensions in 2020 have only exacerbated the challenges and risks of relying on a single source of supply and demand. Can India Inc. extricate itself from China and diversify its economic ties with other countries? Here are some of the key issues and developments in this regard.
The trade imbalance
India’s trade deficit with China reached a record high of over $100 billion in 2022, according to data from the Chinese customs. Despite the ban on 220 Chinese apps, the boycott calls, and the tariff barriers, India’s imports from China grew by 21.7% year-on-year to $118.5 billion, while its exports to China declined by 37.9% to $17.48 billion. The main items that India imports from China are electrical machinery, telecom equipment, organic chemicals, plastics, and fertilizers. The main items that India exports to China are iron ore, cotton, organic chemicals, and ores.
The trade imbalance reflects the structural differences in the two economies, as well as the lack of competitiveness and innovation in India’s manufacturing sector. China has a dominant position in many global value chains, especially in electronics, pharmaceuticals, and renewable energy. India, on the other hand, has a large services sector, but lags behind in industrialization and technological upgrading. To reduce its trade deficit with China, India needs to boost its domestic production capacity, enhance its quality standards, diversify its export basket, and tap into new markets.
The investment opportunities
Despite the political and diplomatic strains, China remains a major source of foreign direct investment (FDI) for India. According to data from the Department for Promotion of Industry and Internal Trade (DPIIT), China was the fifth largest FDI source for India in 2020-21, with inflows of $2.77 billion. The cumulative FDI from China from April 2000 to March 2021 was $30.79 billion. The sectors that attracted the most FDI from China were automobile, electrical equipment, services, metallurgical industries, and chemical industries.
However, India has also tightened its FDI norms for countries that share a land border with it, including China, in order to prevent opportunistic takeovers of Indian firms amid the pandemic-induced economic slowdown. The new rules require prior government approval for any FDI from such countries in any sector. This has created uncertainty and delays for many Chinese investors who had planned or committed to invest in India’s booming start-up ecosystem, e-commerce platforms, digital payments services, and infrastructure projects.
On the other hand, India has also opened up new avenues for attracting FDI from other countries, especially those that are part of the Quad alliance (the US, Japan, Australia, and India) or the Indo-Pacific region. India has signed several bilateral and multilateral agreements with these countries to enhance cooperation in areas such as trade, defence, energy, health care, education, and innovation. India has also launched various initiatives to promote domestic manufacturing and exports under the Atmanirbhar Bharat (self-reliant India) campaign. These include production-linked incentive (PLI) schemes for various sectors, special economic zones (SEZs), industrial corridors, and ease of doing business reforms.
The strategic implications
India’s economic ties with China are not only driven by commercial interests but also by strategic considerations. India views China as a rival and a threat to its national security and regional influence. China’s growing assertiveness in the Indo-Pacific region, its support for Pakistan’s nuclear and missile programs, its involvement in infrastructure projects in India’s neighbourhood under the Belt and Road Initiative (BRI), and its frequent incursions along the disputed border have raised alarm bells in New Delhi.
India has responded by strengthening its military capabilities, enhancing its diplomatic outreach, forging new partnerships with like-minded countries such as the US and Japan, and participating in multilateral forums such as the Quad and the Shanghai Cooperation Organization (SCO). India has also tried to balance its relations with China by engaging in dialogue on various issues such as trade disputes, climate change, counter-terrorism, and regional stability. However, the trust deficit between the two sides remains high and the prospects of a breakthrough are low.
The way forward
India’s economic dependence on China is a complex and multifaceted issue that cannot be resolved overnight. It requires a long-term vision, a pragmatic approach, and a coordinated effort from all stakeholders. India needs to pursue a dual strategy of decoupling from China where necessary and desirable, and engaging with China where possible and beneficial. India also needs to leverage its own strengths, such as its large domestic market, its young and skilled workforce, its vibrant democracy, and its cultural diversity, to create a more resilient and competitive economy. India’s economic future depends not only on how it deals with China, but also on how it shapes its own destiny.
