India should plug into Chinese supply chain to boost manufacturing: Economic Survey 

Chinese overproduction — due to a demand-supply mismatch in that country — is driving its companies to explore additional overseas market and, in turn, “leading to prices collapsing globally and driving other national producers out of business”, especially in product categories that China dominates, such as steel. Moreover, its dominance is exerting “economic coercion” and monopolistic control over resources such as critical minerals, India’s Economic Survey 2023-2024 has pointed out. 

The survey has suggested that India should “plug itself into China’s supply chain”. 

It refers to the collapse of steel prices globally, putting the sector under pressure in developing economies like India. 

“The poor performance of China’s property sector since 2021 created significant overcapacity, leading to a collapse in global steel prices, which now puts significant pressure on producers in India, Vietnam, Brazil, and other countries,” the survey stated. 

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China’s manufacturing trade surplus has been ballooning since 2019 due to weak domestic demand and expanding industrial capacity. 

The mismatch between domestic supply and demand has widened in recent years, leading to Chinese companies exploring additional markets overseas. 

Estimates show that China’s steel product exports are surging again, by 27 per cent so far in 2024. It grew by 35 per cent in 2023. 

INDIA turns NET IMPORTER of STEEL

The survey notes that India became a net importer of steel - where shipments coming in or imports, exceeded exports - in FY24, after starting off the fiscal as a net exporter. Price difference between international and domestic market was seen as a major cause. This meant, shipments of steel that were imported were at prices lower than price of such shipments in the domestic market.

“India became a net exporter of finished steel over the past decade. In FY24, India started-off as a net exporter in Q1. However, in Q2 and Q3, it became a net importer. This was largelydriven by price differentials between international and domestic prices of finished steel,” the survey said.

Low prices in the international market led to reduced profit margins for exports and made imports more affordable, affecting the trade balance in steel. Imports grew 38.2 per cent last fiscal, while exports grew 11.5 per cent for the year.

“However, the import dependence on coking coal, an essential raw material for steel production went up from 56.1 MT in FY23 to 58.1 MT in FY24,” it noted.

Iron and steel contribute approximately 47 per cent of all inputs in the building & construction sector. It also serves as a critical input for the production of machinery and consumer goods.

Howerver, the survey mentioned that India domestic steel consumption and demand remained strong.

Consumption grew close to 14 per cent last fiscal. Finished steel production of India in FY24 - amongst the highest in recent years - grew at 13 per cent. . “The steel sector achieved its highest levels of production and consumption during FY24,” the Economic Survey said.

The survey puts in a favourable word for the PLI scheme too.

The PLI Scheme for speciality steel, approved in 2021, has attracted investment of ₹15,519 crore till May 24. In all there are 27 selected companies, who put in 57 applications. “This scheme will attract total investment commitment of ₹29,531 crore,” it said.

RISK of ECONOMIC COOERCION

China’s dominance in a large number of product categories “creates a risk of economic coercion”, where the government restrains access to crucial inputs for political leverage. This is most evident in the export of rare earth and critical minerals which are of high priority in green transition efforts. 

China’s dominance also led to monopolistic practices, restricting the emergence of newer manufacturing powers. 

This, in turn, has impacted and constrained manufacturing activities/ sector in emerging markets and developing economies (EMDEs). 

The Rhodium Group, in its study, observes that the “Chinese government can encourage companies to partner together, merge and consolidate, coordinate to gain market shares, raise prices, restrict access to products where they already have substantial market power, or favour domestic firms in their suppliers and client networks”.

While China still needs to import high-tech products from rich industrialised economies, it also imports very low-tech goods, where developing countries would have a comparative advantage. 

While EMDEs are resorting to import restrictions against China, it must also be noted that some Chinese goods are so cheap that no tariff can reduce their price competitiveness. Chinese products can move past these restrictions unnoticed since they are packaged in third countries. 

Chinese retaliation 

Meanwhile, China has started retaliating against import restrictions, further complicating the manufacturing landscape for EMDEs. 

In response to India’s anti-dumping probe against Chinese entities, China has been quietly blocking India’s access to solar equipment, the survey mentioned. 

Boosting Indian manufacturing  

“To boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain,” the survey states. This can be done by “relying solely on imports or partially through Chinese investments” — a choice that India has to make. 

Incidentally, countries like Brazil and Turkey have explored options where, on one hand, they have increased tariffs on select Chinese offerings like e-vehicles while also attempting to attract Chinese FDI in select sectors. 

“Given its large bilateral trade deficit with China, (It) makes India vulnerable to potential abrupt supply disruptions,” the survey noted, adding that replacing some well-chosen imports with investments from China has the prospect of creating domestic know-how down the road.