‘Make in India’ success runs through Chinese factories, manpower. What can the govt do?

Prime Minister Narendra Modi

The Narendra Modi-led government’s ‘Make in India’ flagship scheme, which was launched in September 2014, has emerged as a policy conundrum for the ruling dispensation.

The scheme’s implementation may increase India’s reliance on China, at least in the short term.

Indian authorities’ remarks in recent times indicate that the success of the key production-linked incentive (PLI) scheme hinges on a large extent on machinery and manpower from China, despite the fact that Asia’s largest economy has been in diplomatic crosshairs of New Delhi over protracted border disputes.

The Modi government has come around to the idea of the challenges posed by its reliance on China to make the indigenous scheme successful in its third consecutive term.

At least three senior government officials across ministries told Moneycontrol that India would require raw materials and skilled manpower from China in a bid to boost manufacturing in high-profile PLI sectors, including electronics and steel.

New Delhi has been trying to limit cheap imports from countries such as China with the use of several policy measures, including tariff hikes and quality control orders.

But domestic businesses, faced with unique challenges, may first need China to boost manufacturing in key PLI sectors.

India’s PLI scheme — unveiled in the 2021-22 budget with an outlay of Rs 1.97 lakh crore — aims to implement the vision of becoming ‘Atmanirbhar’ by enhancing local manufacturing capabilities and exports.

Automobiles, specialty steel, solar photovoltaic (PV) modules, electronics are among the 14 crucial sectors that were brought under PLI’s ambit.

However, attempts to realise India’s full self-reliance potential necessitates dependence on China amid the diplomatic chill over long-drawn border disputes.

For instance, Indian steel companies are facing difficulties in importing machinery and experts from China for over six months, leading to a lukewarm response for the sector’s incentive-linked scheme.

“Steel companies have invested only 60 per cent of the total assured amount of Rs 21,000 crore signed as contracts under the PLI scheme. They have cited difficulties in importing machinery from China and also obtaining visa clearances on time for Chinese experts,” an official told Moneycontrol.

From trade to tools, several factors stand in the way of India's attempts to decouple from China.

High demand for Chinese skills 

The Centre has set up an online portal to fast-track visas for technicians, including for Chinese vendors, for sectors related to the PLI scheme.

The move to expedite the process to issue short-duration visas to technical experts from China comes amid delays in facilitating their entry.

India started restricting business ties with Beijing since the diplomatic ties got strained over border standoff in eastern Ladakh’s Galwan valley in mid-June, 2020.

Chinese vendors are integral to several PLI sectors.

“In that light, Chinese technicians are required to visit India and train workers in the country,” another official said.

Similarly, China provides technical know-how to companies such as Foxconn in Taiwan, despite the growing diplomatic tensions over the ‘One China Policy’ and the East Asian nation’s steadfast refusal to bow to Beijing’s diktats.

India’s trade authorities are easing restrictions on entry of workers from Beijing amid a recent probe initiated by the Ministry of Corporate Affairs (MCA) into e-commerce platform Snapdeal for its alleged regulatory violations. The probe is said to be a part of the broader investigation into more than 700 firms with investments from Chinese entities.

China tops India’s imports

China has occupied the top spot as India’s import source nation, accounting for about 15 per cent share in total inbound shipments in April-June for the current fiscal. In contrast, exports made up only 3.4 per cent during the corresponding quarter.

A report by Global Trade Research Initiative (GTRI) in April pointed out that over the last 15 years, China's share in India's industrial product imports has increased significantly, from 21 to 30 per cent — much faster than the South Asian nation’s total import growth.

Data showed that India’s import of industrial goods from China soared by 215.3 per cent, rising from $25.3 billion during 2007-10 to $79.7 billion in 2020-22. Correspondingly, Inbound shipments from the rest of the world grew by 94.5 per cent.

The sectors that had the highest imports in terms of value were electronics, telecom and electrical products at $67.8 billion, followed by machinery and chemicals and pharmaceuticals.

Each of these sectors has a dedicated PLI scheme.

Increasing reliance on Beijing is worrying at a time when India’s trade gap with China widened to $85 billion in the previous fiscal from $83.2 billion in 2022-23.

Even as India’s total imports dropped 5.7 per cent year on-year in 2023-24, imports from Beijing rose during the same period by 3.3 per cent.

The growth in India’s imports from China in the previous fiscal has been sharp. In 2019-20, imports stood at $65.26 billion — a spike of around 56 per cent.

This data point is a cause for concern because India has been pulling out all stops to reduce its import dependency on cheaper goods from China and has gone on an overdrive to increase the competitiveness of domestic manufacturing, primarily through PLI schemes.

Industry’s dependence on China

Indian industry is at odds with the PLI scheme, as it seeks access to cheaper raw materials and trained manpower.

A case in point: Indian solar module manufacturers are dependent on Chinese manufacturers to help scale up operations and meet targets set under the PLI scheme for High Efficiency Solar PV Modules (Tranche-II).

Domestic companies are more keen on importing Chinese solar modules as their prices have dropped by over 50 per cent since 2022. This year, solar module manufacturers have sought visas for around 60 technicians from Beijing.

The PLI scheme for solar PV modules, with an outlay of Rs 24,000 crore, aims to achieve manufacturing capacity of 1 Giga Watt (GW) scale in the sector.

Tata Power’s chief executive officer (CEO) Praveer Sinha said once India starts domestic manufacturing of indigenous solar modules, the reliance on imports will decline. According to him, Indian companies rely on Chinese imports to ensure “security of supply”.

Similarly, Subrahmanyan Pulipaka, CEO, National Solar Energy Federation of India (NSEFI), told Moneycontrol that imports from China are helping the industry move towards increasing its share in renewable energy.

“Our dependence on China will come down drastically in the next two-three years,” Pulipaka said.

Irrespective of the PLI scheme, China continues to loom large in India’s industrial landscape.

Altogether, 65 Chinese technical staff from China Railway Rolling Stock Corp were granted work visas to work for Bengaluru Metro Rail Corporation Limited (BMRCL) in India in March 2024.

“The expertise of Chinese engineers is required to help in testing and operating the first train. Many of them are required to guide and assist in manufacturing the remaining trains at the Titagarh Wagons in West Bengal in the near future,” said Maheshwar Rao M, managing director, MD, BMRCL.

A road ministry official, requesting anonymity, revealed that several Indian companies rely on Chinese-made boring machines for underpass and tunnel construction in the hills.

“China has a dominating presence in the heavy equipment machinery segment. It is not possible to replace the sources of these types of equipment overnight. We will have to depend on Chinese equipment till Indian firms like BHEL [Bharat Heavy Electricals Ltd] or BEML [Bharat Earth Movers Ltd] start manufacturing these large machineries,” the official added.

A risky business?

Relying on China to boost the ‘Make in India’ scheme comes with its own set of risks.

In the wake of the Galwan clashes in 2020, New Delhi adopted a raft of measures to pivot away from Beijing, including amending its foreign direct investment (FDI) policy for land border countries and a ban on TikTok — a short-form video hosting service owned by Chinese internet company ByteDance — and scores of Chinese-made apps citing a risk to national security.

Though chief economic advisor (CEA) Anantha Nageswaran’s Economic Survey 2023-24 pitched for more FDI from China, GTRI’s founder Ajay Srivastava opposed it on the grounds that it could expose India to supply chain vulnerabilities and geopolitical risks.

"The idea that Chinese companies could invest in India and then help boost the country’s exports to Western markets might be beneficial only in the short term since it risks undermining New Delhi’s long-term economic security and strategic autonomy," Srivastava had said.

The survey had referred to India’s ballooning trade gap with China for prescribing more capital from the neighbouring nation in a bid to lower the import dependency.

India's domestic manufacturers also risk losing out in the long term due to a greater dependence on Chinese imports.

In a report released in June, the Confederation of Indian Industry (CII) requested the government to review its trade ties with China citing that the country’s dependence on electronics components imports from Beijing poses significant risk to the long-term sustainability of the domestic manufacturing ecosystem.

In the report, titled ‘Developing India as the Manufacturing Hub for Electronics Components and Sub-Assemblies’, CII requested the central government to offer a 6-8 per cent financial support for select electronic components and sub-assemblies to mitigate cost disadvantages and boost the competitiveness of domestic manufacturers.

The industry body warned that the PLI scheme for large-scale electronics manufacturing, which was introduced in April 2020 to offset cost disadvantages, may soon lose its effectiveness in the face of “tariff-induced cost” and that the existing financial support is “grossly inadequate to negate the overall disability as compared to China and Vietnam”.

Data from the commerce ministry shows that India’s imports of electronic components from China grew 17.8 per cent to $8.15 billion during April-June — the highest among all countries and in one of the most successful sectors for the PLI scheme.

Jayant Dasgupta, former Indian Ambassador to the World Trade Organisation (WTO), however, is of the opinion that though reliance on imports from China has been steadily increasing, an uptick in domestic manufacturing should ease the dependency in the near term.

“Imports from China are a temporary stop-gap measure to boost the domestic manufacturing industry. As indigenous production picks up, imports will likely contract,” Dasgupta told Moneycontrol.

The former diplomat urged the government to put in place checks and measures for national safety and security while importing products from China, and more significantly, electronic and telecom equipment.

The CII report cited above warned of the risks to domestic manufacturing. The industry body urged easing FDI restrictions imposed from 2020 on countries sharing land borders with India citing that the policy has outlived its utility and must be reconsidered with “adequate guardrails”.

Change of heart?

Public statements from ministers have consistently highlighted the importance of curbing cheap imports.

Earlier in January, External Affairs Minister Dr. S. Jaishankar called for greater use of locally manufactured products by domestic consumers at a time when cheap and subsidised imported items are “invading” Indian markets.

However, of late, there seems to be a gradual acceptance of China’s role in making India’s gains from PLI schemes more broad-based.

Indian authorities have publicly acknowledged the need to review the output-linked plan in a bid to expand its success beyond electronics and pharmaceuticals. PLI schemes for steel and textiles have been notable laggards.

“As we utilise PLI schemes, production should shift to domestic sources and dependence on China should come down relatively. China’s economy is slowing down hence they are selling goods at a cheaper rate. In electronics, our exports are increasing to the developed world, but we need inputs as well for that.” said one of the three officials cited above.

India’s falling FDI and rising imports are the likely triggers for wooing more investments from China.

The latest data from the Department for Promotion of Industry and Internal Trade (DPIIT) revealed that India’s FDI inflows contracted 3.5 per cent year-on-year in financial year (FY)24 to $44.42 billion — alarmingly, the lowest in five years.

The government appears to have made peace with the fact that the world’s China Plus One strategy may require Beijing’s inclusion, more so for India.

The official put the government’s thinking in perspective.

“No nation in the world has been able to decouple from China and the focus is on the extent of the local value addition. When India exports more, the requirement for inputs will also increase. In today’s world, no product can be fully made in one country.”