Analysis: India’s Efforts to Compete with China’s Manufacturing Power Face a Reality Check by Reuters

Title: India Looks to Strengthen Ties with China Amid Manufacturing Ambitions

By Shivangi Acharya and Sarita Chaganti Singh

NEW DELHI – India’s efforts to establish itself as a major manufacturing hub are facing challenges, as the nation needs to improve relations with its long-time rival, China, in order to attract global companies looking for alternatives to Chinese supply chains.

Relations between the two most populous countries have been tense since a border confrontation in the Himalayas in 2020, which has hampered the flow of investment, technology, and talent even as demand for electric vehicles, semiconductors, and artificial intelligence has surged.

The Indian government’s increased scrutiny of Chinese investments during this period effectively deterred billions of dollars from companies like BYD and Great Wall Motor, which imposed additional regulatory challenges on Indian businesses with Chinese connections.

However, with manufacturers struggling to expand, New Delhi is contemplating relaxing some restrictions. This shift comes amid various government incentives aimed at boosting domestic production.

"There is a recognition that participation in key global supply chains, especially in high-tech sectors like solar cells and electric vehicles, often requires engagement with Chinese supply chains," explained Sushant Singh, a lecturer at Yale University with expertise in public policy.

Even companies that have advocated for strict measures against Chinese imports recognize the necessity of importing certain components from China. Naveen Jindal, head of Jindal Steel & Power and a member of parliament, acknowledges that while he supports tariffs on Chinese steel, a balanced trade approach is essential.

"A significant number of steel companies rely on equipment and technology sourced from China," Jindal noted. "China remains a leader in steel production, excelling in specific areas."

After four years of restrictions on Chinese investments and visas, Prime Minister Narendra Modi’s administration is contemplating a strategic closer alignment with China to revitalize the "Make in India" initiative.

An official involved in government discussions indicated that the administration is considering revising investment rules introduced in 2020 for countries that share a land border with India, aiming to attract more investment.

The proposed changes include allowing investments from companies with up to 10% Chinese ownership without requiring government approval, which could facilitate global companies with Chinese partners to invest more easily in India.

To mitigate security risks, the government plans to implement a monitoring framework for post-investment evaluations, overseen by relevant authorities.

Analysts suggest that encouraging additional Chinese investment is crucial for India to integrate into high-tech supply chains relating to solar energy, electric vehicles, and battery production. This initiative is currently being advanced by Modi’s office, with ongoing discussions to address various concerns among government ministries.

Following industry advocacy, India has also streamlined the visa process for Chinese nationals, expediting approvals for engineers in sectors that receive federal support for local manufacturing. Reports indicate that nearly 2,000 short-term visas were granted to Chinese professionals who constituted a majority of applications in recent months.

Pankaj Mohindroo, head of the Indian Cellular and Electronics Association, noted that while the visa process has become more rational, practical changes are still developing, though a mindset shift has occurred.

Indian Foreign Minister Subrahmanyam Jaishankar stated that the country is open to business with China, though he emphasized the need for clarity regarding the sectors and conditions under which commerce occurs.

In the wake of the border incident in 2020, India adopted a more welcoming stance toward foreign investments from firms linked to Apple, resulting in a notable shift. This proximity has led to 14% of Apple’s global iPhone assembly being relocated to India for the fiscal year 2023/24, with mobile exports increasing by 42% to a record $15.6 billion during the same period.

Despite these changes, concerns remain about whether India’s production capabilities can match the scale and efficiency of Chinese facilities. Chief Economic Adviser V. Anantha Nageswaran emphasized the inevitability of India needing to connect with Chinese supply chains.

"We must decide whether we will rely solely on imports or also involve Chinese investments," Nageswaran said earlier this year.

A significant drop in foreign investment in India has prompted a reevaluation of trade restrictions. Despite political tensions, demand for Chinese goods in India remains strong; imports have surged by 56% since the 2020 clash, and India’s trade deficit with China has nearly doubled to $85 billion. China continues to be India’s largest source of goods and the primary supplier of industrial products.

Mohindroo concluded, "We can benefit from allowing some Chinese investment and technology into our country without compromising on national security."