Economic Survey pitches for more FDI from China to boost manufacturing and exports

New Delhi: Amidst strained ties with China, the pre-budget Economic Survey on Monday made a strong case for seeking foreign direct investments (FDI) from Beijing to boost local manufacturing and tap the export market.

As the US and Europe are shifting 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 the neighbouring country, the Survey said.

India faces two choices to benefit from 'China plus one strategy' - it can integrate into China's supply chain or promote FDI from China.

"Among these choices, focusing on FDI from China seems more promising for boosting India's exports to the US, similar to how East Asian economies did in the past.

"Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade. This is because China is India's top import partner, and the trade deficit with China has been growing," it added.

It also said that increased foreign direct investment inflows from China can help increase India’s global supply chain participation and push exports.

The Survey explained how increased FDI inflows from China can help in increasing India’s global supply chain participation along with a push to exports.

These economies have typically pursued two main strategies - reducing trade costs and facilitating foreign investment.

At present, the bulk of the FDI coming into India falls under the automatic approval route, however, FDI from countries sharing land borders with India needs mandatory government approval in any sector.

China stands at 22nd position with only 0.37 per cent share (USD 2.5 billion) in total FDI equity inflow reported in India from April 2000 to March 2024.

Countries which share land borders with India are China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

The Indian and Chinese militaries have been locked in a stand-off since May 2020 and a full resolution of the border row has not yet been achieved though the two sides have disengaged from a number of friction points.

The ties between the two countries nosedived significantly following the fierce clash in the Galwan Valley in June 2020 that marked the most serious military conflict between the two sides in decades.

India has been maintaining that its ties with China cannot be normal unless there is peace in the border areas.

Following these tensions, India has banned over 200 Chinese mobile apps such as Tiktok, Wechat, and Alibaba's UC browser. The country has also rejected a major investment proposal from EV maker BYD.

However, earlier this year the Competition Commission of India (CCI) cleared JSW Group's proposed acquisition of a 38 per cent stake in MG Motor India Pvt Ltd.

MG Motor India is a wholly-owned subsidiary of Shanghai-headquartered SAIC Motor.

The government is also looking at further streamlining processes for timely approval of visas for Chinese professionals and technicians whose expertise is required by the Indian industry to set up manufacturing capacity.

Certain Indian industry players have approached the government stating that they are facing problems in getting visas for Chinese professionals whose expertise is required for things like setting up machines in factories.

Though India has received minimal FDI from China, the bilateral trade between the two nations has grown multi-fold.

China has emerged as the largest trading partner of India with USD 118.4 billion two-way commerce in 2023-24, edging past the US. India's exports to China rose by 8.7 per cent to USD 16.67 billion in the last fiscal.

The main sectors which recorded healthy growth in exports to that country include iron ore, cotton yarn/fabrics/madeups, handloom, spices, fruits and vegetables, plastic and linoleum.

Imports from the neighbouring country increased by 3.24 per cent to USD 101.7 billion. The trade deficit has widened to USD 85 billion in the last fiscal from USD 83.2 billion in 2022-23.

According to the Commerce Ministry data, China was India's top trading partner from 2013-14 till 2017-18 and also in 2020-21. Before China, the UAE was the country's largest trading partner. The US was the largest partner in 2021-22 and 2022-23.