Impact of Chinese FDI on India’s Manufacturing and Economy

Source- This post on Impact of Chinese FDI on India’s Manufacturing and Economy has been created based on the article “Chinese investments will not benefit India” published in “Business Standard” on 16 August 2024.

UPSC Syllabus-GS Paper-3- Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Context- The Economic Survey 2024 proposed welcoming Chinese foreign direct investment (FDI) to enhance India’s manufacturing sector, boost exports, reduce imports from China, and strengthen India’s role in global value chains (GVC). This article examines the potential outcomes of such a policy.

Foreign direct investment (FDI) has not significantly boosted India’s manufacturing. In FY24, FDI was just $41 billion, under 1% of GDP, and less than 20% of it went into manufacturing, mostly for simple assembly. High costs and complex regulations have deterred foreign investment in this sector.

What will be the likely impact of Chinese Foreign Direct Investment (FDI) Benefit India’s Manufacturing, Exports, Imports, and Global Value Chains (GVC)?

1) Manufacturing-Manufacturing solar modules in India is 40% more expensive than in China. Costs are lower with imported polysilicon wafers (25%) and solar cells (3%). Without additional support like affordable land and capital, production will stay costly, forcing India to rely on imports. High costs in India are due to expensive inputs and less support compared to China’s generous subsidies.

2) Exports– The Economic Survey 2024 suggested that Chinese FDI could boost India’s manufacturing and exports. However, this may be challenging. The US recently imposed high tariffs on solar panels from Chinese firms in various countries and may target the Chinese auto industry next. India’s situation may face similar trade barriers.

3) Imports– India imports 30% of its industrial goods from China, including electronics and machinery. Even with more domestic production, imports from China, especially for electronics and EV batteries, have risen. Chinese firms may continue importing key components from China to reduce costs, so overall imports could still increase.

4) India’s GVC integration struggles-Despite free trade agreements with ASEAN, Japan, and South Korea allowing tariff-free trade on most industrial products, India has struggled to integrate into global value chains (GVCs).

5) Experience of Neighbours-Many ASEAN countries are seeing a rise in imports from China and negative impacts from local Chinese manufacturing. For example, when Chinese EV companies started producing in Thailand, local auto parts orders dropped by 40%, leading many local manufacturers to cut back. India, with similar EV policies, is likely to face the same issues.

6) Geopolitical strategy changes-India is working with the US and other partners to reduce dependence on Chinese supply chains through the Indo-Pacific Economic Framework and the Supply Chain Resilience Initiative. Allowing more Chinese FDI would undermine these efforts to diversify away from China.

Read More- Strengthening China-India Relations

What should be the way forward?

A) Need for Structural Changes– There is a need to reduce business costs, improve infrastructure, and streamline the ease of doing business from start to finish.

B) Policy Recommendation -There should be a clear and consistent policy on China that outlines India’s long-term strategy for security, economic, and trade matters.

Question for practice

How will Chinese foreign investment affect India’s manufacturing, exports, imports, and global value chains?