(Bloomberg) -- India’s ambition to be a manufacturing hub means it needs to attract Chinese businesses to set up factories and boost exports from the country, the nation’s top economic adviser said, an approach that would require the government to ease its restrictions on Chinese businesses.
In its annual Economic Survey report released Monday, the office of the chief economic adviser argued that to boost its manufacturing sector, India has two options: increasing imports from China, or attracting more foreign direct investment from the country.
The latter would be more beneficial since India’s trade deficit with China is already quite large, according to the report. Replacing “some well-chosen imports with investments from China” would also help in developing domestic technical know-how, it said.
Economic ties between India and China have deteriorated since deadly border clashes between the nuclear-armed neighbors in 2020. Prime Minister Narendra Modi’s government imposed strict rules on Chinese businesses seeking to invest in the country, banned hundreds of Chinese apps and slowed visa approvals.
Even so, India remains heavily reliant on Chinese-made goods needed in manufacturing, with the restrictions undermining Modi’s ambitions to make India a factory hub, especially in electronics production. The government has pledged billions of dollars in subsidies to support sectors such as semiconductors and cars, and attracted companies like Apple Inc. to set up facilities in the country.
“India faces two choices to benefit from China plus one strategy: it can integrate into China’s supply chain or promote FDI from China,” according to the report. “Among these choices, focusing on FDI from China seems more promising for boosting India’s exports to the US, similar to how East Asian economies did in the past.”
The Economic Survey is authored by the office of the Chief Economic Adviser V Anantha Nageswaran, a senior official in the Ministry of Finance, and usually published a day before the annual budget speech.
With the US and Europe looking to reduce their reliance on Chinese goods, it would be more effective for India to have “Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them,” according to the report.
The Economic Survey highlighted examples from emerging markets like Turkey and Brazil, which raised import tariffs on Chinese electrical vehicles, while at the same time taking measures to attract FDI from China into the sector. That comes on the back of heightened concerns of excess capacity at Chinese factories, which threatens local firms and workers.
“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 report said. “Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make.”
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