India’s industrial surge meets hurdle

The complex dynamics of India's manufacturing sector were explored, revealing a critical paradox in a recent article by The Washington Post. 

American companies aiming to lessen their dependence on China have increasingly turned to India in recent years as an alternative manufacturing hub and a safeguard against potential disruptions in Chinese supply chains due to rising geopolitical tensions or future pandemics.

 However, despite India's growing production of items like smartphones, solar panels, and medicines, the country itself has become more reliant on Chinese imports, particularly for the components used in these products, according to trade data and economic analysts. This trend presents a significant challenge for US policymakers, who have been advocating for supply chain diversification away from Chinese manufacturing and efforts to "de-risk" commercial relations with China.

"Unless China is no longer the third-party source for components and we only assemble in other countries, de-risking won’t be achievable for any nation manufacturing in India," said Sriparna Pathak, an assistant professor at Jindal University specializing in India-China relations. India’s imports from China have been growing at twice the rate of overall imports and now account for nearly one-third of its total imports in sectors such as electronics, renewable energy, and pharmaceuticals, according to the Global Trade Research Initiative (GTRI), an Indian think tank. This includes both finished products and intermediate goods used in manufacturing.

The Confederation of Indian Industry reports that nearly two-thirds of India’s electronic components, like circuit boards and batteries, are sourced from China, with these imports tripling over the past five years, as noted by GTRI. India, traditionally a major exporter of pharmaceuticals, now relies on China for many key pharmaceutical inputs, such as paracetamol. Between 2007 and 2022, China’s share in Indian imports of chemicals and pharmaceuticals surged by over 50 per cent, with a more than 50 per cent increase in imports of pharmaceutical ingredients and intermediate drug products from China in the last five years, according to GTRI. 

To bolster its textile and garment production, India has significantly increased imports of yarn and fabric from China. Even the automobile industry, which has seen success in both domestic and export markets, has raised its imports of vehicle parts and accessories from China. Similarly, although India has made notable progress in solar panel production, it remains heavily dependent on Chinese solar cells for these panels.

Following US restrictions on Chinese solar panel materials due to human rights and labor concerns, Indian solar panel exports to the American market surged by nearly 150 per cent in 2022, according to US trade data. The increase continued into the following year. However, despite this growth, India has sourced between 50 per cent and 100 per cent of its solar panel components—including modules, cells, wafers, and solar glass—from China from 2021 to 2023, as reported by BloombergNEF. 

Senior officials in the Biden administration have acknowledged that it’s currently unrealistic to eliminate Chinese inputs entirely from American supply chains. “Our practical approach is to first diversify into parts of the supply chain where diversification is achievable, and then expand upstream,” a senior official said, speaking on condition of anonymity. Regarding the substantial presence of Chinese components in Indian-made solar panels, the official remarked, “We recognize we are at the beginning stages, but there is now a clear understanding among the US, India, and allied nations that excessive reliance on a single source for clean energy is unsustainable and requires a concerted de-risking effort, though this will take time.” India continues to depend on Russian crude oil despite US sanctions imposed over the Ukraine conflict, and much of its defence equipment remains Russian, though efforts are underway to find alternative suppliers. Even as India strives to produce its own manufacturing components, it remains reliant on Chinese expertise. 

Indian industry representatives have lobbied the government to ease visa restrictions for Chinese technicians to assist with operating Chinese machinery used in manufacturing smartphones, textiles, and even shoes. Ashoka Mody, an economist at Princeton University, noted the irony of promoting self-reliance while India's economic growth increasingly depends on Chinese expertise. “India must seize this opportunity to climb the global skills ladder,” he wrote in the Hindu. Ironically, some analysts argue that India may need to deepen its engagement with China to successfully diversify its supply chains. Pankaj Mohindroo, chairman of the India Cellular & Electronics Association, suggested that India requires China’s support for at least five more years, with backing from the US, to establish itself as a significant alternative. V. Anantha Nageswaran, India’s chief economic adviser, has also proposed easing restrictions on Chinese investments. 

The recent economic survey prepared by his office highlights that integrating into China’s supply chain—whether through imports or investments—is crucial for boosting Indian manufacturing. India had restricted Chinese investments following a deadly clash along the Himalayan border in 2020, which sparked widespread boycotts of Chinese goods. More than 50,000 troops remain stationed on either side of the disputed border, with numerous negotiation rounds failing to resolve the issue. Since 2020, Chinese investment proposals have been reviewed case by case, a process that industry figures describe as slow. However, recent developments suggest a shift. In August, India issued new guidelines to expedite visas from China and other neighboring countries. 

Since April, at least 11 electronics investment proposals involving Chinese companies, including Luxshare, have been approved. Chinese firms are making strides in India: Vivo is building a new smartphone manufacturing plant near New Delhi; Shein is partnering with Reliance for the export market; and SAIC Motor has joined forces with JSW Group to produce 1 million electric cars in India by 2030. Zhang Jiadong from Fudan University noted that while the improvement in China-India relations has been slower than anticipated, it has finally arrived. Nonetheless, this does not signal a dramatic increase in direct Chinese investment in Indian manufacturing, despite a rise in intermediate goods imports from China. “Even if India opens up to Chinese investment, it is unlikely that Chinese capital will flood the Indian market,” said Lin Minwang of Fudan University, citing the Indian government’s hostility towards Chinese investment.

Chinese automaker BYD has faced expansion barriers in India, and companies like Vivo, Oppo, and Xiaomi have been investigated for tax evasion or money laundering. Despite these challenges, analysts agree that Chinese supplies remain essential for India’s manufacturing goals. “China is the largest component manufacturer, and there is no escaping that fact,” said Indrani Bagchi, a foreign policy expert and CEO at the Ananta Centre in New Delhi. “We cannot afford to undermine our industrial growth.”