Focusing on FDI from China a better way to boost India's exports to US

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Opting for Foreign Direct Investment (FDI) as a strategy to leverage the China plus one approach will be more beneficial than depending solely on trade. This is due to China being India's leading import partner and the increasing trade deficit with China.

“As the US and Europe move their immediate sourcing away from China, it is more effective for Chinese companies to invest in India and export products to these markets directly. This approach is preferable to importing from China, adding minimal value, and re-exporting,” the Economic Survey 2023-2024, tabled on July 22, said.

Countries such as Mexico, Vietnam, Taiwan and Korea were direct beneficiaries of the US’s trade diversion from China. Even while these nations increased their share of exports to the US, they also displayed a concomitant rise in Chinese FDI.

“Therefore, the world cannot completely look past China, even as it pursues China plus one. India faces two choices to benefit from China plus one strategy: it can integrate into China's supply chain or promote FDI from China. 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 survey added.

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There has been a significant shift in global manufacturing in the last five years. Major multinational companies, including Apple, want to reduce their reliance on China, traditionally known as the "world's factory." This is 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 risk exposure to China.

The survey highlighted a study by the Boston Consulting Group, which revealed that over 90 percent of manufacturers in North America moved some or all of their production to other countries like Mexico, Thailand, and Vietnam, suggesting a move away from China.

The survey said that India's appeal lies in its large domestic consumer market, which makes it attractive for companies to set up operations there. In the electronics sector, there is a focus on smartphone manufacturing and assembly.

The government's PLI scheme, including tax breaks and subsidies, significantly attracts companies. The rise in India's domestic smartphone demand is also a key factor in companies' investing decisions.

Also read: Economic Survey pegs FY25 GDP growth at 6.5-7%

For instance, Apple assembled $14 billion worth of iPhones in India during FY24, constituting 14 percent of its global iPhone production. Foxconn has started production of Apple mobile phones in Karnataka and Tamil Nadu.
While India may not be an immediate beneficiary of the trade diversion from China, it has witnessed a substantial increase in its electronic exports over time. Implementing the PLI scheme has been a key driver of this growth.

India's electronic exports to the US have transitioned from a trade deficit of $0.6 billion in FY17 to a trade surplus of $8.7 billion in FY24, underscoring a significant increase in value addition.

Within the electronics sector, the category that has experienced the most growth is mobile phones, with exports to the US rising from $2.2 billion in FY23 to $5.7 billion in FY24.

“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,” as per the survey.

Given that GVCs are designed to minimise costs, countries like Malaysia, Vietnam, and Taiwan have focused on lowering their trade costs over time. For India, improving logistical efficiency has been a key focus. The second strategy, focused on investment facilitation, includes actions to increase and stabilise foreign investment.

“The PLI scheme, for example, encourages high-quality foreign investment by offering a market-linked incentive system for companies to comply with. Over the medium term, India is focusing on integrating its value chain with that of the West, particularly in sectors like renewable energy and advanced technology, including artificial intelligence, semiconductors, and next-generation telecommunications,” the survey said.