India’s Chief Economic Advisor Anantha Nageswaran on Monday advocated that India needs to focus on getting more investments from Chinese companies to manufacture for exports from here in a bid to capitalize on the China plus one strategy adopted by the Western countries and reduce the trade imbalance between India and China.
“We need to strike the right balance between import of goods and import of capital (FDI). Brazil and Turkey, for example, raised barriers to imports of electric vehicles from China but incentivized FDI from China for electric vehicles in their countries. So this is a kind of balance we need to figure out as well,” Nageswaran told reporters at a press conference today.
India’s Economic Survey, tabled in Parliament on Monday, proposes FDI from China as a promising strategy to boost the country’s exports. “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,” the survey said.
The proposal comes as many Chinese companies, including automobile majors such as BYD, Great Wall and SAIC are finding it difficult to pump in more money to set up or expand their base in India. Investments from China have been facing a stringent approval process in India after the border tussle at the Galwan Valley between both countries in 2020. While FDI proposals into several sectors are cleared through automatic routes with most countries, those from China, and other land-sharing neighbours, require security clearances.
India’s automotive market could be lucrative for China, given the country’s immense scale and nascent electric vehicle market. India recently surpassed Japan to become the world’s largest passenger vehicle market in the world. Electric vehicle penetration in India is still in the low-single digits and provides a bid opportunity for Chinese players, which specialize in making low-cost vehicles.
The opinion is likely to be controversial, given that China is viewed with both suspicion and envy by most Indians, and Chinese brands have often been subjected to boycott calls on Indian social media.
It also runs counter to the ‘mainstream’ opinion on how India can leverage western companies’ desire to diversify away from China. Most policy experts have urged India to offer itself as a competitor, rather than a partner, to China by offering itself as an alternative manufacturing destination for western companies.
The biggest success of this strategy has been with Apple, which rapidly scaled up its manufacturing operations in India after Sino-US relations took a hit during Donald Trump’s first tenure as president.
Meanwhile, China has been desperate to retain access to western markets, such as North America and Europe, even as these countries have put up protective trade barriers alleging that Chinese companies are trying to kill off their local industry through predatory policies. Chinese companies see themselves as the natural successors of western, Korean and Japanese companies and believe that they will dominate the world in coming years.
To counter this, the US and Europe have slapped tariffs of 50%-100% on Chinese-made automobiles in recent months. To overcome the tariffs, Chinese automakers have invested heavily in third-party countries such as Mexico and in Europe as products made in these countries are not subject to these tariffs at present.
They have also tried to invest in India, but have faced similar hostility, and firms such as BYD have found it difficult to get approvals for their mega plans in India. Chinese car player Great Wall Motors, for example, had plans to invest $1 billion in India and set up operations by acquiring the General Motors’ plant in Talegaon. However, the company had to shelve its plans as the automaker could not get approval from the Indian government for FDI.
Chinese companies have, in recent months, adopted a different strategy of tying up with powerful local business groups who can help overcome their regulatory troubles. MG Motor recently reduced its shareholding in the Indian business to a minority stake and onboarded an Indian partner to run the business. Autocar Professional has exclusively reported that another Chinese electric car brand Leap Motors is planning to enter India by the end of this year in partnership with Stellantis.
Meanwhile, the support for Chinese companies contained in the Economic Survey is likely to be a big boost to their plans for getting a grip over the Indian market.
Separately, Nageswaran also warned that the ‘Make in India’ thrust – under which the government of India is trying to get local and foreign firms to set up manufacturing operations in India – will end up making India more dependent on China as most of the equipment used for setting up factories is made in China.
“The drive for enhanced manufacturing capacity within India may also make us more dependent on capital goods from China because Chinese capital goods makers have eliminated competition in Europe elsewhere. So we have no alternative sources to depend on,” he said.
The Indian government came up with the Make in India program to reduce the import of goods – such as electronics, automobile components and other manufactured items – from countries such as China, and to have them manufactured locally.
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