What TV doesn't, print can't; we deliver.
What TV doesn't, print can't; we deliver.
India set out on a mission to reduce import dependency through the ambitious Make in India Program in 2014. While the contours of the program and policy were somewhat ambiguous, the government followed it up with Atmanirbhar Bharat in 2020 during the peak of covid-19 pandemic. The program was then backed by the well-thought-out Production Linked Incentive Scheme (PLI). The PLI was meant to provide incentives for the producers to manufacture items, in sectors which were specifically chosen keeping in mind India’s strategic, geoeconomics and security concerns and to reduce India’s dependence on its not-so-friendly neighbour-China.
Around the same time as the Atmanirbhar Bharat Campaign launch, amid increasing border skirmishes with China, the government in April 2020, adopted a new FDI regulation called Press Note 3, which aimed to regulate the inflow of FDI into India from countries that share land borders with India. A well-intended document then at the height of border security concerns with China, may have outlived its purpose today. China’s share in global manufacturing and exports continues to rise and no manufacturing eco-system doesn’t produce or depend on component imports from China directly or indirectly. This is no different for India.
As such, we argue that a nuanced approach regarding Chinese FDI may be considered, in the light of rising imports from China to facilitate India’s manufacturing ecosystem. The article below, through a deep dive analysis of the trade and manufacturing data of India proves how dependent is India on China’s manufacturing eco-system including the manufacturing of mobile phones. As such, it may be beneficial for India to be pragmatic about Chinese FDI at least in select capital goods sectors, in the absence of which India’s trade deficit with China will continue to rise.
India-China: Aiming for decoupling, still intertwined
India’s Manufacturing strategy post the ‘trade war’ era has been based on the strategy of decoupling from Chinese imports and developing manufacturing self-sufficiency amid geo-political and security concerns. However, despite the intended de-coupling, per deep dive into trade data shows, that India’s dependence on China is only rising. About 68% of India’s exports (per four-digit HS code, which also features imports from China of at least USD 100 mn) saw the share of imports from China rising in CY23, up from 59% each in both CY19 and CY15. Also, China’s dominance in global exports as regards capital-intensive products is making it challenging for India to create a manufacturing ecosystem sans China. The ratio of capital-intensive imports to consumer goods imports from China rose to 7.26 in CY23, up from 5.17 in CY19.
Chinese FDI: In need of a fresh perspective
Amid China’s significant presence in global manufacturing, notwithstanding the need to protect the domestic market, there might be merit in being more pragmatic about foreign direct investment (FDI) from China, in the absence of which India’s trade deficit with China will continue to rise through the cycle of implementation of Make in India and Production Linked Incentive Schemes. The Government’s Economic Survey 2023-24 makes a similar case to enhance India’s presence in the global value chain. Currently, only 0.1% of India’s FDI inflows come from China, but 15% of its imports originate in China.
China accounts for 36% of India’s trade deficit, only 0.1% of its FDI
Although India’s trade deficit with China has come down from the peak of 47.1% in FY17 to 35.7% in FY24, compared with FY20 (prior to the launch of the Atmanirbhar Bharat Campaign in 2020), India’s trade deficit with China has risen by 5.6% during the same period. Note that the moderation in FDI from China into India began well before the implementation of Press Note 3 (click here for the press note), which made it mandatory to seek government approval for FDI originating from countries that shared land borders with India. Countries such as Vietnam, Mexico and Cuba have benefited from both China +1 and Chinese FDI as the country looked to diversify to other regions to remain relevant in global trade.
68% of India’s exports see a rising China import share
A deep dive into India’s 197 export items per four-digit HS code (wherein India also has an annual import value of at least USD 100mn from China) reveals interesting facts regarding the extent of dependency on China. About 133 of such items saw a percentage share of imports from China rise from 59% in CY19 to 68% in CY23. For instance, for commodities such as integrated circuits, the ratio China imports to what India exports in that category of HS code is a whopping 47, up from 14.5 in CY19 and 9.6 in CY10. Likewise, for transformers and converters, the ratio has risen from 0.4 to 0.7 during the same period.
A steep hike in tariffs by the US on Chinese EVs (100% hike), solar cells (50% hike), steel, aluminium, EV batteries and some minerals (25% hike) may intensify the inflow of Chinese products into India. In volume terms, already, this financial year, among key products, the imports of iron and steel products rose by 76% YoY, of rubber and articles by 82%, and cotton by 370%.
Capital goods imports from China – India outpaces the world growth
China accounts for ~20% of the capital goods exports to the world, making it an irreplaceable player in the global value chain. India’s recent capital formation cycle with the Make in India campaign (in particular, domestic manufacturing and assembly in electronics and hardware) has led to a rise in component and equipment imports from China. Capital goods imports from China have seen a 19.23% CAGR through FY19-FY23 versus 9.6% and 11.54% for consumer goods and intermediate goods, respectively. In the same period, Chinese capital goods exports to the world saw a CAGR of 8.4%.
While tariff protection and domestic manufacturing push are helping to limit consumer goods imports from China, the low entry barriers for capital goods and relatively inelastic demand have catapulted capital goods imports. With India’s capex cycle as well as domestic manufacturing cycle still nascent, we do not see this trend reversing any time soon.
The author is a research economist with interests in macroeconomics and public policy with core competency in Indian economy, policy, and politics.
