Not 'prudent' to think India can take up slack from China in manufacturing: Eco Survey

The dynamics of India-China economic relations continue to be extremely complex and intertwined, but India has to find the right balance between importing goods from China and importing capital (FDI) from China, the Economic Survey 2023-24 suggests.

The Survey suggests it may not be the "most prudent approach" to think India can take up the slack from China vacating certain spaces in manufacturing. "...recent data cast doubt on whether China is even vacating light manufacturing."

It says the Chinese domination over the global supply chains across product categories is a "key global concern", especially in the wake of supply disruption accompanying the war in Ukraine. "Even though India is the fastest-growing G20 country and is now recording growth rates that outpace China’s, India’s economy is still a fraction of China's," says the Survey tabled in Parliament today ahead of the Union Budget 2024-25.

The 476-page document also talks about China's near-monopoly over the production and processing of critical and rare earth minerals, saying it has caused a global concern. "It will also have significant repercussions for India’s renewable energy programme, which is vulnerable because of its massive dependence on imported raw materials."

Replacing some well-chosen imports with investments from China raises the prospect of creating "domestic know-how" down the road, says the survey. "It may have other risks, but as with many other matters, we don’t live in a first-best world. We have to choose between second and third-best choices."

It suggests that to boost Indian manufacturing and plug India into the global supply chain, it is "inevitable" that India plugs itself into China's supply chain. "Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make. It is increasingly seen that emerging economies are introducing import restrictions on Chinese goods while accelerating a push for free trade elsewhere to protect their domestic manufacturers."

The Survey says "protectionist measures" directed against Chinese products are emerging due to the "threat" that the overcapacity in China's manufacturing sector is posing. 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 in China has widened in the past few years, leading to Chinese companies exploring additional markets overseas," the Survey finds.

Notably, over the last five years, a seismic change has occurred in the global manufacturing realm, with major multinational companies, including Apple and others, looking to 'de-risk' themselves from China, traditionally known as the 'world's factory'.

This shift is primarily due to disruptions caused by COVID-19, growing tensions between the US and China, and rising costs of doing business in China. As a result, several companies have adopted a ‘China plus one strategy’ to reduce their reliance on China for high-tech electronic products and components. "As India looks to deepen its involvement in Global Value Chains (GVCs), it will look to the successes and strategies of East Asian economies. These economies have typically pursued two main strategies: reducing trade costs and facilitating foreign investment."