As global companies seek alternatives to China for manufacturing, India’s potential as a new hub is gaining attention. However, the Economic Survey 2023-24, presented by Finance Minister Nirmala Sitharaman, advises that India should manage its expectations. The economic relationship between India and China is complex, and despite India’s unique strengths and government initiatives, it cannot simply replace China in global manufacturing.
China’s dominance in global supply chains is evident, and the Ukraine war has further disrupted these chains. Although India’s economy is growing faster than China’s, it is still much smaller in comparison. One of India’s major attractions for companies is its large domestic consumer market, particularly in the electronics sector. The government’s Production-Linked Incentive (PLI) scheme, which offers tax breaks and subsidies, has been a significant draw. For instance, Apple assembled $14 billion worth of iPhones in India during FY24, accounting for 14% of its global production. Foxconn has also started producing Apple phones in Karnataka and Tamil Nadu. While India may not yet fully benefit from trade shifts away from China, it has seen a notable increase in electronic exports due to the PLI scheme. India’s electronic exports to the US have shifted from a $0.6 billion deficit in FY17 to an $8.7 billion surplus in FY24, with mobile phones driving this growth.
Strategies for Deeper Integration into Global Value Chains
India is striving to deepen its involvement in Global Value Chains (GVCs) by drawing inspiration from East Asian economies, which have succeeded by reducing trade costs and attracting foreign investment. Enhancing logistical efficiency has been a major focus for India, reflected in its improved score on the World Bank’s Logistics Performance Index. The PLI scheme is also instrumental, offering market-linked incentives to attract high-quality foreign investment.
In the medium term, India aims to integrate its value chain with Western economies, especially in sectors like renewable energy and advanced technology. This strategy includes agreements like the Australia-India Free Trade Agreement and the US-India Clean Energy Initiative, which have boosted exports in these areas. For example, exports of eco-friendly technology to the US increased from $199.2 million in FY20 to $326.9 million in FY24. Major companies in renewable energy, such as First Solar and Vestas, have established operations in India to tap into the rising demand for green technologies.
The “China Plus One” Strategy
Despite the potential of the “China plus one” strategy, it is unlikely to result in a total shift of trading relations away from China. Countries like Mexico, Vietnam, Taiwan, and Korea, which benefited from the US diverting trade from China, also saw an increase in Chinese Foreign Direct Investment (FDI). Thus, fully bypassing China is impractical.
India has two main options: integrate into China’s supply chain or encourage FDI from China. Promoting Chinese FDI seems more promising for boosting India’s exports to the US. This strategy is advantageous since China is India’s top import partner, and the trade deficit with China is growing. As the US and Europe shift their sourcing away from China, it is more effective for Chinese companies to invest in India and export products to these markets. This approach not only adds value within India but also mitigates risks associated with economic pressure from China.
While India cannot wholly replace China in global manufacturing, it can strategically position itself by leveraging its strengths, improving trade logistics, and attracting foreign investment. Balancing imports from China with increased FDI from Chinese companies will be crucial for India’s continued growth and integration into global value chains.
