PYQ Relevance[UPSC 2019] “China is using its economic relations and positive trade surplus as tools to develop potential military power status in Asia.” In the light of this statement, discuss its impact on India as her neighbour. Linkage: China’s trade surplus enables strategic leverage that affects India’s security and economic autonomy. The article highlights how India’s dependence on Chinese inputs limits effective economic counterbalancing. |
Mentor’s Comment
This article examines India’s evolving economic engagement with China amid global supply chain reconfiguration. It highlights a strategic paradox: while India seeks to reduce dependence on China, selective Chinese capital and manufacturing linkages may be essential for India’s export competitiveness, industrial upgrading, and integration into global value chains.
Why in the News?
India is considering removing the post-2020 restrictions on Chinese FDI imposed after the Galwan clash. This signals a shift away from a security-first approach that sharply reduced Chinese investment. Despite China’s FDI stock falling to 14th place by 2024, India’s trade dependence on China remains high, revealing a contradiction between geopolitical mistrust and India’s need for Chinese capital and components for manufacturing and exports.
Why were Chinese FDI curbs imposed in 2020?
- Security Concerns: Introduced after the Galwan Valley clash to prevent opportunistic takeovers of Indian firms during economic distress.
- Policy Instrument: It mandated government approval for FDI from countries sharing land borders with India.
- Immediate Outcome: Sharp decline in new Chinese investments despite stable trade volumes.
How has Chinese FDI in India changed since 2020?
- FDI Ranking Decline: China’s rank in India’s FDI inflows fell from 18th (2023) to 22nd (2024).
- FDI Stock Position: China’s cumulative FDI stock in India placed it at 14th position in 2024, down from 9th in 2014.
- Stock Value: Chinese FDI stock in India stood at approximately $4.25 billion in 2024, significantly lower than Hong Kong ($192 billion) or Singapore ($102.6 billion).
Does trade data indicate economic decoupling?
- Trade Deficit Persistence: India’s trade deficit with China remained above $80 billion.
- Import Dependence: China continued to dominate India’s imports of electronics, telecom components, and industrial inputs.
- Smartphone Components: Over 60% of smartphone manufacturing components in India originate from China.
Why is China critical to India’s manufacturing ambitions?
- Scale Advantage: China supplies intermediate goods at volumes and prices unmatched by alternative suppliers.
- Export Enablement: Chinese inputs support India’s exports to the U.S. and EU, particularly in electronics.
- PLI Limitation: Production-Linked Incentive schemes increased assembly but not upstream component manufacturing.
Can India replace China in global supply chains without China?
- Substitution Constraint: No single country can replace China’s integrated supply chain ecosystem.
- Regional Spillovers: Vietnam and Thailand rely heavily on Chinese components despite hosting relocated manufacturing.
- Cost Impact: Higher tariffs on Chinese inputs raise costs and reduce export competitiveness.
What does global data suggest about pragmatism over protectionism?
- U.S. Case: Despite tariffs, China accounted for over 22% of U.S. smartphone imports in 2024.
- EU Dependence: European Union imports from China rose steadily between 2019 and 2023.
- Policy Insight: Trade restrictions altered routes but not dependence.
Conclusion
India’s economic strategy requires selective engagement rather than exclusion. Chinese FDI and manufacturing linkages can support India’s export growth, technology absorption, and supply chain resilience. A calibrated, security-screened investment framework aligns better with India’s long-term industrial objectives than blanket restrictions.
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