Policymakers in India are once again grappling with an old economic problem with renewed vigour: what to do about China. Should we give in to the increasing trend of becoming a cog in the Chinese wheel, or should we create our own wheel through the judicious use of Chinese investments?
Loosening the rules on Chinese investments in non-strategic sectors has distinct advantages that shouldn’t be cast aside due to the overarching bogey of ‘security concerns’. They are important, of course, but can be handled while simultaneously addressing economic needs.
In May 2020, the Indian government issued ‘Press Note 3,’ a short statement mandating that investments from countries sharing a land border with India would be permitted only after securing the Indian government’s express approval. Before this notification, foreign direct investment (FDI) from any country was automatically allowed, subject to sector-specific limits.
Given that about 99 percent of the FDI from India’s neighbours over the previous two decades came from China, it was clear who the 2020 press note was aimed at. Tensions along the border between the two countries had been mounting, and the new FDI rules didn’t help matters. In June 2020, the armed forces of India and China engaged in their most violent conflict in 45 years.
Since then, relations have been icy at best, although they appear to be thawing now. The Indian government used the opportunity of Covid-19 pandemic-related relief measures to announce a slew of measures aimed at making India ‘Atma Nirbhar’ or self-reliant. The focus was to enhance the ‘Make in India’ campaign. The problem policymakers are now facing is that these measures haven’t really worked—at least not as originally envisaged.
Also read: Linking trade and tensions—why India must reassess its approach to Chinese investments
Let Chinese firms ‘make in India’?
Even as Prime Minister Narendra Modi has sought to incentivise manufacturing in India through various Production-Linked Incentive (PLI) schemes, the components for this manufacturing have increasingly come from China, with Indian companies only engaged in assembling those parts.
Indian imports from China surged from $65.2 billion in the financial year ending March 2021 to $101 billion in the year ending March 2024. The current financial year looks set to exceed that figure, with imports in April to July 2024 already reaching $35.8 billion—nearly 10 percent higher than the same period last year.
With this trend unfolding, the latest Economic Survey in July raised the question of whether India should further integrate into China’s supply chain or allow Chinese FDI into the country to develop a robust supply chain of its own. This sparked a nationwide debate.
Commerce Minister Piyush Goyal, however, categorically denied that India was re-evaluating the amendment of Press Note 3. So far, only a handful of Chinese investment proposals have been approved by the Indian government. A prominent example is a joint venture between China’s SAIC Group and India’s JSW Group to manufacture electric cars under the brand JSW MG Motor India.
This joint venture also illustrates how such partnerships can breed innovation. The company has, after a gap of 10 years, reintroduced the concept of Battery as a Service (BaaS), a development that could significantly boost electric vehicle sales in India.
In late September, Sanjeev Sanyal, a member of the Economic Advisory Council to the Prime Minister, batted for allowing Chinese FDI in non-strategic sectors during an interview with ThePrint. His question was: if India is importing increasing amounts of parts from Chinese companies, why not allow those parts to be manufactured within India. This, he said, would create jobs and bring in capital and know-how. India needs all three.
From a strategic point of view, he said that while India doesn’t want companies like Huawei in its telecommunications sector due to well known security concerns, Chinese plants in India could even become ‘hostages’, should such a need ever arise.
In his Economic Survey, Chief Economic Advisor V Anantha Nageswaran made a point that is of particular relevance to India:
“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,” he wrote.
This situation highlights both the opportunities and threats India faces from Western trade actions against China—a neat case study of which is the solar module industry.
Also read: Tensions high, but India’s lapping up Chinese goods. Why trade deficit’s hit record $101 bn
Hostage to third-party actions
Under the Uyghur Forced Labor Prevention Act, implemented in June 2022, the US effectively blocked imports of goods mined or manufactured in the Chinese province of Xinjiang. A significant part of these were solar modules. This presented an immediate opportunity for India, with solar module exports to the US surging from $37.5 million in January-July 2022 to $1.2 billion during the same period this year—a 3,100 percent jump.
The US accounts for up to 97 percent of India’s exports of solar cells and modules, highlighting the benefits of US trade actions against China for India.
But there are threats too. During this period, India’s solar cell imports from China surged sixfold to $661 million, while imports of solar modules tripled to $1.6 billion. Although the US’ actions currently benefit Indian solar module manufacturers, Indian power producers still prefer cells and modules from China. They are cheaper. This dependency reveals the precarious nature of India’s solar module exports.
In May this year, US President Joe Biden doubled import tariffs on Chinese solar cell components, which could also benefit India as American solar power producers look for alternative sources.
But given that the overwhelming share of India’s solar module exports go to the US—and only because the US chooses not to import from China—any thaw in US-China trade relations in the future would leave Indian solar module manufacturers out in the cold.
As more sectors become inextricably linked to Chinese imports, they will increasingly be hostage to international developments rather than domestic ones. One way to address this is by encouraging Chinese investment and manufacturing within India. Even if India does not want to amend Press Note 3, an easy interim solution could be to fast-track pending non-strategic investment proposals from Chinese companies.
Unless the Indian government squares its security concerns with its economic exigencies, India will remain just a cog in the larger Chinese manufacturing wheel, hostage to the actions of third-party countries.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Prashant)