Opinion Economic relations with China could open up space for manoeuvre

Over the past few years, FDI flows to developing economies have been slowing down. In 2023, they fell by 6 per cent, and in 2024 by 2 per cent as per the Global Investment Trends Monitor by UNCTAD. In India, FDI flows had hit a record high of $84.8 billion in 2021-22. Capital flows slowed thereafter, touching $71.2 billion in 2023-24 and in the first nine months of this year (April-December), stood at $62.4 billion. Some countries have, in the recent past, been more successful than India in emerging as an attractive investment destination, especially for global firms looking to diversify away from China as part of their China Plus One strategy. A Niti Aayog report had also noted that while “India has seen limited success so far in capturing the China Plus One strategy… Vietnam, Thailand, Cambodia, and Malaysia have become bigger beneficiaries of the strategy.”

In an attempt to attract foreign investments, the government is now reportedly looking to either “dilute or neutralise some of the restrictions” it had imposed on trade and investments from China following clashes between Chinese and Indian soldiers in Galwan in 2020. A report in this paper suggests a “gradual opening up to China”. This could involve facilitating investments by Chinese firms with domestic partners. A recent example of how this could play out may be instructive — the JSW Group has acquired a stake in MG Motors from the Chinese firm SAIC Motor. Indian industry is also said to be pushing for the easing of some restrictions that had been imposed, especially on visas for Chinese workers and technicians, along with the lifting of certain tariff and non-tariff barriers. This will be beneficial as Chinese personnel may be helpful in setting up facilities and in training staff.

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That the government is considering all its options at a time of global uncertainty is welcome. A capital-scarce country needs to actively facilitate foreign investments, especially in the manufacturing sector. It must also actively ease tariff and non-tariff barriers to ensure deeper integration with global supply chains. The Economic Survey 2023-24 had also made this case, arguing that “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”. Moreover, with the Trump administration waging a tariff war — reciprocal tariffs are set to be operational from April 2 — this may be an opportune moment to ease restrictions. Unlike the West, which has now all but turned its back on globalisation, India stands to benefit from welcoming both trade and investment flows. The high GDP growth that the country witnessed during the mid 2000s was facilitated by higher exports and FDI. The government would do well to move forward on this.