Economic Survey 2024: India Emerges As Key Player Amid 'China Plus One' Strategy

Over the last five years, a significant transformation has occurred in global manufacturing as major multinational companies, including Apple Inc., seek to reduce their dependence on China, historically known as the 'world's factory', according to the 2024 Economic Survey report.

India's large domestic consumer market makes it an appealing destination for these companies, particularly in the electronics sector, where smartphone manufacturing and assembly are thriving, according to the report released on Monday.

This shift is driven by disruptions from Covid-19, escalating US-China tensions, and increasing business costs in China, the report stated.

To mitigate these risks, many companies have adopted a ‘China plus one strategy’, diversifying their supply chains to reduce their reliance on China for high-tech electronic products and components.

For instance, a 2023 survey by the Boston Consulting Group revealed that over 90% of North American manufacturers had relocated some or all of their production to countries like Mexico, Thailand, and Vietnam, indicating a strategic move away from China.

The Indian government's Production-Linked Incentive scheme, offering tax breaks and subsidies, significantly attracted investments. Although India may not see immediate benefits from the trade shift away from China, it has experienced a notable increase in electronic exports, according to the survey.

Rising domestic demand for smartphones boosted investment, with Apple assembling $14 billion worth of iPhones in India during fiscal 2024, accounting for 14% of its global production. Foxconn has started producing Apple phones in Karnataka and Tamil Nadu.

India's electronic exports to the US transitioned from a trade deficit of $0.6 billion in fiscal 2017 to a trade surplus of $8.7 billion in fiscal 2024, demonstrating substantial value addition, the survey stated. Mobile phones have seen the most significant growth, with exports to the US rising from $2.2 billion in fiscal 2023 to $5.7 billion in fiscal 2024.

India aims to deepen its integration into global value chains by adopting East Asian strategies of reducing trade costs and facilitating foreign investment. To minimise costs, the country is enhancing logistical efficiency, as reflected in its improved score on the World Bank's Logistics Performance Index. The PLI scheme also encourages high-quality foreign investment, the survey said.

In the medium term, India is focused on integrating its value chain with Western economies, particularly in renewable energy and advanced technology sectors such as artificial intelligence, semiconductors, and next-generation telecommunications. Agreements like the Australia-India Free Trade Agreement and the US-India Clean Energy Initiative are vital in this effort.

Exports of environmentally friendly technologies to the US, including solar water heaters and wind turbines, increased from $199.2 million in fiscal 2020 to $326.9 million in fiscal 2024. American and European renewable energy companies, such as First Solar and Vesta, have established operations in India to capitalise on the growing demand for green technologies.

As the global manufacturing landscape evolves, India will position itself as a key player by leveraging its market size, strategic initiatives like the PLI scheme, and efforts to improve logistical and investment frameworks. This approach aims to attract multinational companies looking to diversify their supply chains and reduce reliance on China, it said.

The 'China plus one' strategy does not necessarily lead to a complete shift away from China in global trade relations, according to the survey.

India faces two options to benefit from the 'China plus one' strategy— integrating into China's supply chain or promoting Chinese FDI, it said.

Focusing on Chinese FDI appears more promising for boosting India’s exports to the US, similar to the approach taken by East Asian economies. Relying on FDI is more advantageous than depending on trade, especially since China is India's top import partner, and the trade deficit with China is growing.

As the US and Europe shift their sourcing away from China, it is more effective for Chinese companies to invest in India and then export products to these markets, rather than India importing from China, adding minimal value, and re-exporting, the survey said.

A Rhodium Group research note highlights risk of economic coercion due to China's dominance in many product categories, where the Chinese government could restrict access to crucial inputs for political leverage.

The same research points out that countries like Brazil and Turkey have raised barriers to Chinese electric vehicle imports while attracting Chinese FDI in the sector. European nations are adopting a similar approach. Therefore, India must find the right balance between importing goods from China and attracting Chinese capital. This strategy will help India leverage the benefits of the 'China plus one' approach more effectively, according to the survey.

Countries like Mexico, Vietnam, Taiwan, and Korea, which benefited from the US’ trade diversion from China, also saw increased Chinese FDI. Thus, China remains significant even amid diversification efforts, it said.