India must leverage domestic advantages to benefit from China Plus One strategy, write CEA, co-authors

Chief Economic Adviser V Anantha Nageswaran.

As the West increasingly looks towards India to friend-shore its supply chains, New Delhi must double down on its efforts to encourage foreign companies to make in India by utilising its advantages — a large domestic market, macroeconomic stability and policy consistency, according to a Press Information Bureau article on October 3 co-authored by Chief Economic Adviser V Anantha Nageswaran.

The article, titled ‘China plus one: Will the dragon now make way for the elephant’, was written by Nageswaran along with Meera Unnikrishnan, a young professional in the Ministry of Finance, and Anuradha Guru, adviser in the Department of Economic Affairs.

Nageswaran and his co-authors say that while India’s gains have been substantive, integration into a global value chain (GVC) does not happen instantly. And, a diversion in interest from China does not imply a reduction in the country’s value chain primacy in the short to medium term.

“Rather, a shift away from China is likely to happen over time,” the article said, adding that so far the tilt has benefitted nations like Vietnam, Taiwan and Malaysia more than India as they had a first-mover advantage being far more integrated with GVCs.

However, India, unlike these East Asian economies, offers the prospects of a large local market. While this makes the decision to set up local manufacturing units easier for foreign firms, India’s young, expanding middle class also provides these firms with significant potential demand to tap, according to the article.

The China Plus One Strategy refers to a policy direction primarily adopted by Western nations encouraging their companies to minimise supply-chain dependency on China by diversifying the countries they source parts from.

Nageswaran and his co-authors point out that though the rupturing of global value chains (GVCs) during the pandemic gave the West an opportunity to look away from China towards countries such as India, Vietnam, Malaysia and Mexico, the first instance of a deliberate movement of trade away from Beijing can be traced back to the US-China trade war, which began in 2018.

Growing Interest
“India’s chemicals, pharmaceuticals and metal sectors immediately benefitted from tightening US-China trade, thanks to their competitive advantage,” the article said, adding that though electronic exports were not immediate beneficiaries they have shown tremendous gains over time.

India’s electronic exports to the US shifted from a trade deficit of about $300 million in 2017 to a surplus of $3.12 billion in 2022. This also indicates a rise in value addition. Within electronics, the largest increase to the US came from mobile phones, exports of which grew by 48% between fiscal years 2020-21 and 2021-22.

Nageswaran, Unnikrishnan and Guru said that the interest shown by large conglomerates from the electronics, renewable energy and automobile sectors to set shop in India underscores how the country’s manufacturing sector is benefiting from the Western shift in interest away from China.

“A case in point is Apple, whose new plant in Tamil Nadu began production of the latest iPhone 15 last month. Similarly, Tamil Nadu also roped in two new factories from the Denmark-based Vesta, the world’s largest wind turbine manufacturer,” the article added.

Global giants, including Tesla, are said to be betting on India becoming a key manufacturing hub as they look to diversify their manufacturing capabilities beyond China. According to several media reports, these companies have been exploring opportunities to set up factories in India to take advantage of the country’s growing domestic market.

Nageswaran and his co-authors believe that over the medium term, India’s value chain integration with the West would target areas such as renewables and high-end technology, including artificial intelligence, semiconductors and next-generation telecommunication.

“These areas have been included in agreements such as the Australia-India FTA (Foreign Trade Agreement) and US-India Clean Energy Partnership. Trade contours in these areas have already begun to take shape…On the ground, major US and European renewables manufacturers such as First Solar, Vesta and Scatec have begun operations in India to seize the green transition opportunity,” they wrote.