The recent Economic Survey by the Chief Economic Adviser (CEA) advocates for welcoming Chinese Foreign Direct Investment (FDI) in India. This recommendation, likely driven by declining FDI inflows and a growing trade gap with Beijing, is supported by the Economic Survey, which argues for increased Chinese investments to strengthen India’s global supply chain linkages. India's trade gap with China widened to $85 billion in the previous fiscal year from $83.2 billion in 2022-23. Additionally, data from the Department for Promotion of Industry and Internal Trade (DPIIT) shows that net FDI inflows into India contracted by 3.5 percent year-on-year in FY24, dropping to $44.42 billion—the lowest in five years.
One might view economic advisories like those from the CEA, PM-EAC, or NITI Aayog as think tanks, where their research and data work might serve as ideation balloons to test public and political reactions. This approach can provide deniability or cover to the legislature and government in case of any significant backlash. However, using such test balloons akin to track-two domestic and even international discussions is a legitimate objective for the government.
This latest Chinese-FDI idea contrasts sharply with India's efforts to de-risk Chinese supply chains. India's participation in the Indo-Pacific Economic Framework (IPEF) and the Supply Chain Resilience Initiative (SCRI) with the US and other partners explicitly aims to reduce dependency on Chinese supply chains. These initiatives are designed to diversify supply sources and enhance economic security by building more resilient and reliable supply networks that do not rely heavily on China. For instance, under the IPEF, India is working with partners such as the US, Japan, and Australia to enhance regional economic cooperation and establish alternative supply chains that reduce reliance on China. The SCRI aims to bolster supply chain resilience by fostering cooperation among member countries to address vulnerabilities and diversify sources for critical goods. Additionally, India has been strengthening its ties with other manufacturing hubs like Vietnam and Malaysia, and promoting domestic production through initiatives like the Production-Linked Incentive (PLI) scheme. Embracing increased Chinese FDI could undermine these strategic efforts, exposing India to greater risks and dependencies that the IPEF and SCRI seek to mitigate.
China is already India's largest import supplier across eight industrial product categories, and allowing Chinese firms to 'Make in India' presents significant implications and challenges. One major risk is the potential overwhelming of domestic industries, which could lead to the closure of many (smaller and lesser scaled) Indian businesses unable to compete with Chinese competitiveness. This shift could transform India from a global manufacturing aspirant into a trading nation, heavily dependent on Chinese firms for critical supplies and economic growth. Such dependence may undermine India's long-term economic security and strategic autonomy, creating vulnerabilities in key sectors and diminishing the nation's capacity to sustain and grow its industrial base independently.
Signals of India's economic shift regarding China extend beyond the recent FDI suggestion. Notably, India plans to offer short-term visas to Chinese technicians to support projects under the flagship production-linked incentive (PLI) scheme. Facilitating the entry of Chinese vendors is necessary to help Indian workers install and kick start the machinery sourced from Beijing. For example, solar plants in India, despite their massive investments, still are dependent on skilled Chinese labour to get them started.
In the era of globalisation, it is true that no country can feasibly produce every component on its own, making international collaboration essential. However, it is crucial to debate whether opening Indian sectors to Chinese FDI could compromise New Delhi’s long-term economic security and strategic autonomy. This move raises concerns about whether increased Chinese investment might undermine domestic industries and sovereignty. Furthermore, does this suggest a potential signal that to make initiatives like the Production-Linked Incentive (PLI) scheme more effective, Chinese inputs could be required ? In this context, allowing FDI might be seen as a strategic sweetener to attract investment and support the PLI's goals, even as it introduces new risks and dependencies.
This must be viewed in the context of the government's objective to expand the Indian manufacturing sector to achieve significant global influence. Policies need to strike a delicate balance between economic nationalism and globalisation.
Policies must navigate a delicate balance between economic nationalism and globalisation to ensure sustainable growth and strategic independence. Economic nationalism focuses on protecting and prioritising domestic industries, which can safeguard local jobs and promote self-reliance. However, in a globalised economy, complete isolation is impractical, as it can limit access to international markets, technology, and investment. Effective policies should therefore blend protectionist measures with openness to global opportunities, fostering an environment that supports domestic industries while leveraging global trade and investment for economic advancement. This balance is crucial to maintain competitiveness, secure economic stability, and achieve long-term prosperity without compromising national interests.
This balance is evident in the recent Union Budget announcement, where India focuses on boosting overseas investments by simplifying FDI norms and reducing the corporate tax on foreign companies from 40 percent to 35 percent. This comes at a time when the government targets FDI inflows of nearly $100 billion over the next five years and aims to further liberalise policies related to this route.
India should be cautious about Chinese investments due to potential security risks, despite suggestions to seek Chinese FDI for economic growth and exports. A rigorous filtering approach is necessary given past issues with Chinese corporate behaviour, including alleged tax evasion, cyber vulnerabilities, and the opaqueness of their entity governance.
Before making any decisions, India must realistically assess how much friction such Chinese FDI can be tolerated and how to fend off geopolitical challenges or economic pressures arising from this competitive collaboration with China. Or is this simply a case of keeping a frenemy closer?
Can Ni hao & Namaskar coexist in business ownership relationships ? In this new Indo-China FDI-bromance, the true test will be balancing mutual benefits with strategic caution, ensuring that economic ties do not overshadow national interests, or create further stress in the bilateral relationships. The key question remains: can India reduce imports from China by increasing FDI from the same nation?
