The government has taken several steps, such as the IBC and PLI schemes, to bolster its case as an attractive investment and manufacturing destination to corporations and countries with a China Plus One strategy.
For long, China has been the centre of global supply chains. But over time, rising labour costs prompted many companies to diversify their manufacturing away from China, a strategy that came to be known as China Plus One.
Many Southeast Asian countries took advantage of this trend and became suppliers to China-linked production networks.
In the last two years, changing geopolitics and US-China trade war pushed many companies to further diversify their operations. COVID-19 reinforced this trend.
It is not that companies are abandoning China altogether. While utilising their China base, they are linking some of their operations to neighbouring countries.
This helps diversify production, expand markets and reduce political risks. In this way firms can continue production and exports even when the main site in China faces disruptions and uncertainties.
The strategy has been beneficial to all parties involved, the diversifying firms, the ‘plus one’ host economies and China itself.
Firms benefit through risk diversification and cost reduction. The ‘plus one’ economy benefits from investment and technology inflows. China benefits by moving resources higher up the value chain.
Many in India hope that we can also become a hub of global manufacturing taking advantage of this China Plus One strategy by companies, as well as the ‘decoupling’ from the China sentiment expressed by a few countries in the context of an assertive Beijing.
Over the years, the Indian government has tried to improve the ease of doing business with reforms such as the Insolvency and Bankruptcy Code. More recently, it has announced incentives for a few sectors through the Production Linked Incentive (PLI) scheme, mainly to attract companies diversifying from China.
The PLI intends to provide about Rs 2 lakh-crore over five years to 13 industrial sectors. The list includes automobiles and components, pharmaceuticals, electronics, white goods, textiles, telecom and networking, food processing, PV modules, special steel, mobiles, medical devices etc.
These moves are in the right direction; now we need to do more to increase our pace to reap more benefits from a China Plus One strategy. At one level, New Delhi wants to decouple the Indian economy from China. But it has not signed any major trade deal in the last few years. New Delhi does not want to be part of the Regional Comprehensive Economic Partnership (RCEP) and has increased average external tariffs.
Countries such as Vietnam are part of the ASEAN and the RCEP and have also signed an FTA with the European Union (EU). So it is easy for companies to link production and export processes.
Other countries such as Bangladesh and Cambodia take advantage in the EU and other markets due to their least developed country (LDC) status. India has lost even GSP (generalised system of preference, a status which allows duty-free export for certain products) in the US market.
Our FTA negotiations with the EU are frozen since 2013, but Pakistan gets GSP-plus facility from the EU. On the top of this, the Aatmanirbhar Bharat narrative has confused investors further, as it is not really clear how this is different from Make in India.
The good news is that some de-escalation at the Line of Actual Control (LAC) with China has begun. Even if it is going to take many more months or perhaps years, we have started moving in the right direction. The India-China border issue is not going to be resolved in a hurry. However, for long India and China did not allow border disputes to affect other bilateral engagements. This was the time when our bilateral trade increased from $200 million to about $100 billion.
At the moment, there is a huge trust deficit between New Delhi and Beijing. Still, bringing some normalcy in economic matters may be helpful in other matters as well. After all, we cannot totally cut ourselves off from a huge growing neighbouring economy. Some of the technology and investments required in many of the PLI sectors is readily available with firms operating from China.
But at the same time, simple calculations are not enough to capture current Chinese strategies in South Asia and beyond. A confident China is shifting its priorities from strategic calculations to wider economic interests. Militarily less worried by Asian countries, China’s main interest is to integrate most Asian economies into its economic orbit.
It is doing so through many means, including trade, investment, development aid and the Belt & Road Initiative (BRI) projects. Despite geopolitical worries, the EU has signed a bilateral investment agreement with China. Similarly, the US signed its own phase one trade deal with China.
To make India’s China plus one strategy successful, New Delhi needs to take bold decisions in its external economic engagements and shed a cautious approach to external liberalisation.
This may include re-thinking on joining the RCEP, and re-starting and initiating FTA negotiations with the EU and the UK respectively. Further FDI reforms may be needed, particularly in the financial sector, real estate, healthcare and e-commerce. India also needs to change its approach towards Bilateral Investment Treaties (BIT). No major investing country has agreed to the 2016 model BIT so far.