Dance with the dragon!

In the middle of a long election process, fresh socio-economic data on India, released by international agencies, have provided an opportunity to relook into the effectiveness of a few existing policies and initiate a healthy debate for the benefit of the succeeding government. Let’s first focus on the following reports:

✼ The International Organisation for Migration (IOM) launched the World Migration Report 2024 on May 7, which revealed a significant increase in international remittance flow. International remittances surged by 650 per cent, from USD 128 billion to USD 831 billion between 2000 and 2022. India tops the list of remittance recipient countries.

✼ The World Happiness Report 2024 reveals that out of 143 countries mentioned there, India is ranked 126th, the same as last year. The rankings of India’s neighbouring countries include: China at 60th position, Nepal at 93rd, Pakistan at 108th, Myanmar at 118th, Sri Lanka at 128th, Bangladesh at 129th, and Afghanistan at the bottom of the list.

✼ In the first week of April, the first batch of over 60 Indian construction workers left for Israel as part of a mobility agreement that the Indian government has signed with the country. Following the Israel-Hamas conflict, there were media reports that said the Israeli construction industry was looking at recruiting 100,000 Indian workers to replace the 90,000 Palestinians. Around 18,000 Indian caregivers are currently employed in Israel, reports The Telegraph.

✼ The US authorities "encountered" with over 200,000 illegal Indian immigrants in the last five years, with the highest cases of 96,917 reported in 2022-23, according to details furnished in Parliament by the Ministry of External Affairs (MEA) while citing data from American homeland security.

✼ In 2023, India received USD 125 billion remittance from workers engaged in foreign countries. This constitutes over 3 per cent of India’s GDP. India was followed by Mexico (USD 67 billion), China (USD 50 billion), the Philippines (USD 40 billion), and Egypt (USD 24 billion), reports Business Today.

✼ Though India has made virtue out of necessity by exporting labour, India’s merchandise exports have, on the other hand, shrunk during 2023 from USD 452 billion to USD 429 billion — a decline of around 5 per cent, reports The Wire.

✼ As per a report by The Diplomat, since 2016, net FDI inflows have fallen from about 1.7 per cent of GDP to a little over 0.5 per cent. FDI inflows shrunk by 21 per cent to USD 41.31 billion in 2023. Data (Refer to Chart 1: Remittance and FDI inflow in India during 1995-2023 ) show that since 1995, India’s remittance inflow has always remained above the inflow of FDI but, between 2020 and 2023, this gap has widened substantially.

✼ India’s trade balance for 2022 was USD -124.91billion, a 50.25 per cent increase from 2021. Increasing inflow of remittance from abroad helps the government to balance its swelling trade deficit.

✼ In the fiscal year 2023-24, China overtook the US as India's largest trading partner, with a total two-way commerce of USD 118.4 billion, as per the data from the economic think tank Global Trade Research Institute (GTRI). India's exports to China rose by 8.7 per cent to USD 16.67 billion while imports increased by 3.24 per cent to USD 101.7 billion. Conversely, exports to the US dipped slightly to USD 77.5 billion, and imports decreased by about 20 per cent to USD 40.8 billion, reports Economic Times. GTRI has also warned that India may become a dumping ground for Chinese products such as Electric Vehicles (EVs), batteries and other new technology items with the US raising tariffs on these imports from Beijing.

✼ According to GTRI, India's imports from free trade agreement (FTA) partners upped 38 per cent during 2019-24 fiscal years to USD 187.92 billion. On the other hand, the country's exports to the FTA partners rose 14.48 per cent to USD 122.72 billion in 2023-24, from USD 107.20 billion in 2018-19, reports The Businessline.

This piece will try to analyse the above developments from the perspective of four major policy issues of the government, namely, (i) Make in India Programme; (ii) China Plus One policy; (iii) India’s decision to withdraw from China-led Regional Comprehensive Economic Partnership (RCEP); and (iv) Production-Linked Incentive (PLI) schemes.

Make in India programme

‘Make in India’ initiative began in September 2014, immediately after Narendra Modi became the Prime Minister. The initiative aims to encourage businesses all over the world to invest and manufacture their products in India. The main goal of the initiative is to turn India into a manufacturing powerhouse similar to China. Under this initiative, the manufacturing sector was estimated to contribute 25 per cent of the national GDP by 2022 from barely 15 per cent in 2014.

It is claimed that to align with its stated goals of the ‘Make in India’ initiative, the government has established a transparent, predictable, and easily understandable policy framework for foreign direct investment (FDI). In addition, the FDI policy regime has been constantly liberalised over the years. The government’s task was to guarantee that India remained a positive and attractive location for investment.

Recent data, (refer to Chart 1), suggest that this initiative has failed to attract substantial investment to revive the manufacturing sector in India. B Nagarjuna (2022) made an analytical study on the impact of the Make in India initiative on FDI inflows, by collecting data on FDI inflows for 12 years from 2009-2010 to 2020-2021 and dividing it into two groups: 2009-2010 to 2014-15 as a period ‘before Make in India’ and from 2015-2016 to 2020-2021 as a period ‘after Make in India’. The study reveals that while average FDI inflows are greater in the period after the ‘Make in India’ than that of the period preceding it, there has been no significant difference in FDI inflows as a percentage of GDP between the two periods.

The failure of the ‘Make in India Programme’ looks very evident if we refer to Chart 2. It reveals that India’s share of manufacturing value added as a percentage of GDP was 16 per cent in 2005 which declined to 13 per cent in 2022. In 2018, its share was 15 per cent. Since 2013, India’s share has remained below the global average. But during this period, China remained far ahead of India with a share of 32 per cent in 2024 and 28 per cent in 2022. This failure of the much hyped ‘Make in India’ programme has compelled India to export unemployed labour, even to battle grounds of Gaza, to balance its trade deficits.

China Plus One policy

Coined in 2013, China Plus One (C+1) is a global business strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations. Officials and companies in Japan and the United States had begun mulling a diversification strategy away from China as early as 2008. However, it was only towards the end of the last decade, when US-China trade tensions were at their peak, that C+1 gained steam as an alternative strategy for transnational corporations (TNCs).

In late July 2022, a grouping of 18 economies, including India, the US, and the European Union, unveiled a roadmap for establishing collective supply chains that would be resilient in the long term. The roadmap also included steps to counter supply chain dependencies and vulnerabilities. This can also be viewed as a part of the overall China plus one strategy.

Chart 2 reveals that India’s China Plus one policy has failed to attract FDI to the Indian shore. Apparently, India has failed to present itself as a viable alternative to China. The recent decision by Elon Musk is a case in point. It may be recalled that Elon Musk's visit to China sparked controversy in India after he cancelled a scheduled trip here, prompting accusations of snubbing. Musk's China visit raised eyebrows, as he was expected to meet Modi in India and announce a major investment.

Withdrawing from RCEP

It may be recalled that after the 2019 elections and Prime Minister’s visit to the USA in September, a sudden change in India-China relationship was observed. On November 4, 2019, at the third Regional Comprehensive Economic Partnership (RCEP) summit in Bangkok, India decided to withdraw from one of the world's largest regional free trade agreements (FTAs). RCEP is an FTA among 15 countries in the Asia-Pacific region, including major economies such as China, Japan, South Korea and members of the Association of Southeast Asian Nations (ASEAN). These countries together represent around 30 per cent of global GDP and population. India has also not joined China’s mega partnership programme Belt and Road Initiative (BRI).

In addition to this, since 2020, a traders’ body, Confederation of All India Traders (CAIT), has urged traders to boycott Chinese goods. In June 2020, a representation was also received from a Member of Parliament calling for banning/boycotting of all Chinese goods in light of developments at the Line of Actual Control (LAC) in Ladakh. According to CAIT, the core sectors where Chinese goods have been replaced by Indian goods are FMCG goods, consumer durables, toys, consumer electronics, electrical appliances, kitchen articles and accessories, gift items, personal consumables, confectionary items, home furnishing, tapestry, utensils, footwear, watches, furniture and fixtures, garments, fashion apparels, cloth, home decoration goods, Diwali pooja goods including clay diyas, wall hangings, etc.

In response to these calls for the ‘Boycott of Chinese goods’, the Ministry of Commerce and Industry, in a press note dated December 15, 2021, stated that ‘..To support and expand domestic capacities, Government has implemented policies to promote domestic manufacturing like the production linked incentive (PLI) schemes in line with Atmanirbhar Bharat policy.”

Production linked incentive

It is reported that despite being the top supplier of medicines across the globe, the Indian pharmaceutical industry is highly dependent on China for raw materials. Indian drug-makers import more than 80 per cent of their total Active Pharmaceutical Ingredient (APIs) or bulk drug requirements from China. In fact, in the 2018-19 fiscal, the central government told Lok Sabha that the pharmaceutical industry imported bulk drugs and intermediates worth USD 2.4 billion from China. In March 2020, the government approved the Production Linked Incentive (PLI) scheme to boost the domestic production of raw materials for making medicines in India. So far, the government hasn’t officially released any figures on the units of APIs produced under the scheme, reports News18.

To enhance India’s manufacturing capabilities and exports, the Union Budget 2021-22 announced the Production Linked Incentive (PLI) scheme for 13 key sectors for a five-year period. While PLI has provided the much-needed catalyst for electronics manufacturing, there is still a long way to go to create Indian brands and manufacturing from the ground up. What qualifies as manufacturing is mostly the assembly of kits imported from China and the ASEAN region. A majority of the components used in electronic items are not manufactured locally in India. According to industry experts, PLI helps India with assembly line manufacturing. The next phase of the PLI should focus on making components locally.

Observations

In 2022, India’s total trade deficit was around USD 124 billion, out of which trade deficit with China alone exceeded USD 101 billion. Though most of the above policies were initiated to boost India’s domestic industry and make it less dependent on China, actual trade data indicate (refer to Chart 3: India China Bilateral Trade (USD billion) between 2015 and 2022) India’s increasing dependence on China. Chart 2 also indicates that the above initiatives have failed to improve the share of manufacturing value added as a percentage of GDP. Unless this is achieved, it will be difficult to boost merchandise exports to India’s trading partners, including China.

The India-China economic relationship got a boost after China joined the World Trade Organisation (WTO). In 2001, when China joined the WTO, India-China bilateral trade amounted to just USD 3.6 billion, with a trade deficit of only USD 0.19 billion, reports Financial Express. India had exported USD 10 billion worth of goods to China in 2005, and enjoyed a trade surplus with its neighbour between 2003 and 2005. After 2005, Chinese goods dominated trade flows, steadily magnifying the trade deficit for India. In 2014, the India‐China bilateral trade stood at USD 70.65 billion, with a trade deficit of USD 37.8 billion. India’s import from China in 2022 was 6.8 times compared to its export to China. In the coming months it is likely to increase.

The current strategies to limit Chinese imports have not shown any positive result. The other alternative could be to invite China to produce goods meant for the Indian market in India itself. This will also encourage Chinese FDI and the transfer of required technology. With China facing a negative population growth in two successive years and India with a huge number of unemployed youth, Indo-China joint venture is expected to be a win-win proposition for both the countries. But before finalising such a deal, Indian negotiators must ensure that such Chinese ventures in India do not become the extended ‘sweat shops’ of mainland China.

In the first decade of this century, top analysts were very bullish on the possible Indo-China cooperation. India and China, the two big countries, were said to be taking over the world. A new term Chindia was also coined. According to Shashi Tharoor (2008), ‘elephant and dragon were dancing’. Even after one decade (2018), the Chinese Foreign Minister, Wang Yi, commented: “The Chinese dragon and Indian elephant must not fight each other but dance with each other.”

India cannot afford to constantly fight with its big neighbour. One should learn from the experience of Pakistan. Since its birth, Pakistan has fought with its big neighbour, India. Now the country is ruined.

Let the spirit of cooperation and the peaceful co-existence between India and China — the two great ancient civilisations — guide the future relations of these nations. Dragon and elephant will surely dance. Give them a chance.

Views expressed are personal