The Economic Survey 2024 argued India should welcome Chinese Foreign Direct Investment (FDI) to boost its manufacturing exports. Welcoming Chinese money and firms is the hot new narrative being discussed in India about China. Does India need to increase its reliance on China for rapid progress?

But the Economic Survey favouring China is not an isolated example. Other examples include Chinese companies being allowed to build factories in key sectors in India, top Indian businesses requesting more visas for Chinese engineers, and another corporate preparing to launch a Chinese brand in India.

In the last 20 years, India’s imports from China have grown ten-fold. Now, India is moving from just importing to engaging more with Chinese firms on its soil. What will be the impact of this approach? Will it make India critically dependent on China in more sectors. How this approach will be viewed globally when both the US and the EU are raising import tariffs on Chinese electric vehicles and other products?

Let’s explore how India’s dependence on China has significantly increased over the past 20 years and what China’s growing presence in India might mean.

India and China had equal trade during 2003-05. Chinese trade records submitted to WTO reveal that India even had a small trade surplus with China during this period. However, soon after China raced ahead with its exports to India rising ten times in two decades. From $10 billion in 2005 to $101 billion now. Meanwhile, India’s exports to China crawled from $10 billion to $16 billion in 2019 and stagnated at that level since then. Low exports and high imports resulted in a cumulative trade deficit exceeding $387 billion in the past six years.

Over the past 15 years, China’s share in India’s industrial imports has risen sharply from 21 per cent to 30 per cent. China is now India’s leading supplier country across all industrial product categories. Industrial goods include all products except agriculture, ores, minerals, petroleum, gems and jewellery products.

Here are the category-wise details of China’s share in India’s current imports: electronics, telecom, and electrical products (38.7 per cent), machinery (38.5 per cent), chemicals and pharmaceuticals (28.7 per cent), products of iron, steel, and base metals (16.6 per cent), plastics and articles (25.1 per cent), textile and clothing (41.5 per cent), automobiles, other vehicles (23.2 per cent), and medical, leather, paper, glass, ships, aircraft, etc (17 per cent).

India’s imports from China are set to grow further at a sharper pace as Chinese firms expand their operations in India, often sourcing imports from their parent firms. These firms are key players in India’s energy, electronics, telecommunications, and transportation sectors.

Major supplier

In the renewable energy sector, they supply a significant portion of the solar panels used in India’s ambitious clean energy projects. Similarly, they are crucial partners in constructing coal-fired power plants, a mainstay of India’s current energy mix.

Chinese firms dominate the market for port cranes, with estimates suggesting over 250 ZPMC cranes currently operating in Indian ports, including the vital Jawaharlal Nehru Port. They supply coaches, technology, and electrical systems for various metro projects across major Indian cities. Chinese are investing in electronics, compressors, heat exchangers and white goods manufacturing.

The transportation sector has a growing Chinese footprint. MG Motors and BYD Auto are already established car manufacturers in India, while major players like Great Wall Motors and Leap Motors are planning their entry. A notable example is the joint venture between SAIC Motors, owner of the MG brand, and India’s JSW Group. This ambitious partnership aims to sell over one million electric vehicles by 2030, aspiring to replicate the transformative ‘Maruti Suzuki moment’ of the 1980s in the Indian auto sector.

As China strengthens its foothold in Indian industry, domestic manufacturers, particularly in the auto and electric vehicle space, must brace for disruptions and increased competition. Joint ventures with Chinese control are likely to become more commonplace, raising concerns about technology transfer and intellectual property. The entry of top Chinese automakers will undoubtedly impact not just car manufacturers but also firms working in the entire EV value chain, including battery development. The reliance on imported machinery and substantial royalty payments for complex machinery are already diminishing the global competitiveness of Indian products. JVs without technology transfer may perpetuate permanent dependence on Chinese know-how.

Here is how to cut imports from China. The increase in India’s imports from China isn’t solely due to a technology gap. Approximately 90 per cent of these imports involve low to medium technology items, areas where expertise and technology are accessible. To address this, India could adopt a two-step approach: initially setting up industrial labs to reverse-engineer products, and then sharing this knowledge with both small companies for niche products and larger companies for mass production.

This strategy could enable India to locally produce a wide range of goods currently imported in large volumes, such as machinery for textiles, mining, metalwork, and agriculture, as well as taps, valves, pumps, transmission shafts, ball bearings, compressors, moulds, cranes, motors, building materials, doors, windows, nuts, bolts, and stationery items.

For high-tech products, India needs long term commitments in deep manufacturing, beyond superficial fixes focused on assembly of imported inputs. Japan and Korea prioritise manufacturing high-value parts such as chips, cameras, memory units, and PCBs for use in a broad array of electronics products, rather than simple assembly. Achieving deep manufacturing requires patience. China took more than two decades to undergo a transformation.

The strategic implications of dependence on a geopolitical rival cannot be ignored. Japanese and Korean firms used this strategy, but they were never a strategic or security threat.

Allowing Chinese firms to ‘Make in India’ risks overwhelming domestic industries, potentially leading to the closure of many Indian businesses. This could transform India from a manufacturing hub into merely a trading nation, dependent on Chinese firms for critical supplies and economic growth.

The worst outcome will be psychological. India will lose its confidence in manufacturing. We should never forget, both nations had equal trade in early 2000. India must now assess the sectors it opens to Chinese firms, the depth of their participation, and the long-term consequences for its economy and security. We need wider debate and consensus on this issue.

The writer is founder, Global Trade Research Initiative