The Economic Survey 2024 states that India should focus on getting more FDI from China to boost exports to the US and other Western countries. This would help India keep its growing trade deficit with Beijing under manageable levels. Taking this as the context, let’s dive into the reasons and the ways in which India can attain this objective.

China and the US are the two main global powerhouses of the present era. The evolution in their relationship has been catalysed by geopolitical and geo-economics factors. In the 20 years following China’s admission to the WTO in 2001, trade between the US and China has surged. Although Chinese and American businesses have profited from this trade, Washington grew more concerned about the dangers Beijing’s state-led development poses. This finally culminated in the ‘Trump Tariff-War’ between the countries in 2019. It was upheld by President Biden, who added new ‘sanctions’. The situation was further aggravated by supply chain disruptions during the Covid-19 pandemic, which led to increased support for the China Plus One strategy.

Meanwhile, India has emerged as a prominent player in the global scene, acting as the leader of the Global South. While the India-US relationship has evolved post the 2008 nuclear agreement to being strategic partners now, the Sino-Indian relationship has seen a downward trend, especially post the Galwan clash in 2020. In response to this and the Covid-19 pandemic, India mandated government approval for investments from countries that it shares a land border with, such as China. This was done to prevent opportunistic takeovers during the pandemic.

Even after taking this into account, it is irrefutable that complete decoupling from China at this point is nearly impossible. It holds the comparative advantage in auxiliary technologies and production know-how to manufacture for US-based companies in the information technology industry. However, under the China+1 strategy, American multinational corporations that rely on Chinese intermediaries for their upstream activities have been looking to diversify their operations. At the same time, it’s undeniable that India can’t quite shake off its craving for Chinese products, much like its addiction to spicy street food. In fact, India’s manufacturing sector seems to thrive on a steady diet of Chinese companies setting up shop on its soil.

The prevalence of the China+1 strategy, friendly ties between India and the US and the present undeniable dependence of the US and India on China provides scope for the formation of international joint ventures (IJVs) between Indian and Chinese companies. IJV refers to the coming together of two or more business partners from different jurisdictions to exchange resources, share risks, and divide rewards from a joint enterprise. One of the partners is typically, though not always, situated physically within the joint venture’s jurisdiction.

By the formation of IJVs, Chinese firms can mitigate the US restrictions and tariffs and export their products to the US with greater ease. This is due to the relatively softer geopolitical relationship between India and the US compared to that between the US and China. Chinese intermediary firms are looking to expand global supply chains and view India as a potential partner. At the same time, India is primarily focused on quadrupling its electronics hardware manufacturing industry under the Production Linked Incentive (PLI) scheme to attract more manufacturers to make in India.

Collaborations picking up

This collaboration, driven by a shared goal to expand technological capabilities and make supply chains more resilient, resulted in an interesting dynamic where Chinese multinationals and Indian firms are coming together to collaborate. For example, Apple intends to relocate 18-20 per cent of its iPhone production to India by FY 2025-26 while Chinese brands like Xiaomi have already started manufacturing in India. Let’s call it a tripartite game between the US, India and China.

This became evident in January 2023 when India granted initial permission for Chinese intermediary firms that produce goods for Apple to establish joint ventures with Indian firms. India is expediting the approval process for Chinese investments in the electronics and automobile industries, which is contingent on Chinese partners holding minority stakes and not having Chinese nationals in key management roles.

However, a crucial point to note is that the production cost for IJVs would be relatively higher due to India’s higher production costs compared to China’s, as well as the costs associated with forming a joint venture. Incentives driving Chinese firms to form joint ventures with Indian counterparts, despite higher production costs, are to access the US and Western markets with greater ease and hedge against the future risk of trade barriers.

Nevertheless, India faces a significant challenge in the form of high tariffs on components in the electronics manufacturing sector, which will increase IJVs’ production costs, hinder their ability to expand electronics exports and undermine their global competitiveness. This leads to an inverted duty structure (another concerning issue for India, quite recognised in the Budget though).

The competitiveness and scale of industries are significantly impacted by tariffs. India’s average tariffs stand at approximately 7.5 per cent, surpassing those of China (4 per cent), Malaysia (3.5 per cent) and Mexico (2.7 per cent). This tariff disparity translates to a cost disadvantage of 5-6 per cent for Indian electronics exports. To bridge this cost gap and enhance production efficiencies, India must overhaul its tariff structure.

Bottomline: For India to shine as a manufacturing powerhouse and IJV partner, the government must streamline tariffs on crucial imports. Pairing this with enhanced PLI support, business-friendly land acquisition, environmental clearances, and labour laws will set the stage for robust growth and global competitiveness.

Rahangdale is a Research Fellow at NIPFP, Huria is an Assistant Professor at IIFT, Delhi, and Harichandan is an Assistant Professor at IIM Sirmaur, Himachal Pradesh

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