Biswajit Dhar

The Economic Survey for 2023-24 sprang a surprise by making a strong pitch for Chinese investments in India, indicating a turn from the government’s anti-China stance of the past four years during which relations hit a new low.

Though the Survey’s views are attributed to the chief economic advisor (CEA), the finance minister subsequently lent support, signalling a clear policy shift.

The CEA and his team tried to soften the shock of the sudden change in stance by harping on the ‘China plus one strategy’, which involves reducing the excessive dependence on China-led production networks.

However, several developments, including some amendments in India’s tariff structure included in the recent budget proposals are pointers to improving economic relations between the neighbours.

The relations fell to a low in 2020 following Chinese incursions in the Galwan valley. India swiftly responded by taking a slew of measures aimed at restricting participation of Chinese companies in India.

The first of these came in March 2020 through the announcement that companies of a country “that shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country” would be subject to government scrutiny before they can invest in the country. Alongside, a large number of Chinese apps were banned.

However, the major problem was India’s high degree of import dependence on China. This was being viewed with concern especially because of the security implications of importing increasing quantities of Chinese electronic goods and critical components. For instance, in 2018-19, over 90 percent of India’s mobile and personal computer imports were from China.

Equally disconcerting was the high level of import dependence on active pharmaceutical ingredients, or intermediates for several critical medicines produced in India. China was almost the only source for streptomycin, ciprofloxacin, amoxicillin and rifampicin, used for treating bacterial infections.

This import dependence in critical materials was a symptom of the failing health of India’s manufacturing sector, whose share of the GDP has been stuck around 16-17 percent for decades.

Though recommendations were being made for strengthening manufacturing at least since 2006, the first steps towards this end were taken only in the wake of the Galwan conflict. The production linked incentive (PLI) scheme was initiated covering the electronics and pharmaceutical sectors.

Over time, the scheme was extended to cover 14 industries, including ones for the green energy transition and for ushering in ‘Industry 4.0’, or new-age smart manufacturing.

Though the PLI scheme was expected to reduce import dependence on China, its tardy implementation meant that this objective was not realised. In most industries—with the notable exception of mobile phones—planned augmentation of capacities has not been realised. Moreover, it is too early to say whether the capacities in place can stand up to global competition.

Meanwhile, imports from China have increased rapidly. The department of commerce reported between 2020-21 and 2023-24, Chinese imports had increased nearly 56 percent, while Chinese customs administration reported the country’s exports to India had increased 65 percent.

Interestingly, both authorities reported that India’s exports to China had decreased—by 21 percent in the Indian count and 16 percent by the Chinese calculation. So, it was China decreasing its dependence on India.

It is in the backdrop that the policy shift towards Chinese foreign direct investment (FDI) proposed in the Economic Survey should be read. The Survey makes three arguments in favour of attracting FDI from China.

First, it argues that FDI inflows “from China can help in increasing India’s global supply chain participation along with a push to exports”. Second, it says that relying on Chinese FDI “seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past”.

Finally, the Survey opines that “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”.

Thus, in just four years, the official sentiment seems to have deviated from the narrative of an Atmanirbhar Bharat becoming a global manufacturing hub on its own strength to one that will be partly dependent on Chinese capital for global engagements.

More importantly, the views expressed in the Economic Survey appear to have resonated in the Union Budget proposals in two ways. First, the finance minister made no mention of the PLI scheme in her speech when the general expectation was that she would prioritise its re-orientation.

Second, critical minerals such as lithium, nickel, cobalt and vanadium, among others, used for the production of batteries, space vehicles and nuclear reactors, can now be imported duty-free, while import duty on mobile phones have been reduced from 20 percent to 15 percent. These are possibly the first steps to incentivise Chinese producers to invest in India.

Does this imply that the commendable ambitions written into the PLI scheme and Atmanirbhar Bharat Abhiyan to transform India into a strong, independent and globally competitive manufacturing hub are passé? The answer may become apparent in the next few months.

(Views are personal)