New Delhi: Government economists are increasingly joining calls for the Centre to be more open-minded about receiving foreign direct investment (FDI) from China. The belief is that money from our eastern neighbour can help deepen India’s contribution to world trade amid a rejig taking place in global supply chains.
Without naming China, NITI Aayog member Arvind Virmani said India should explore setting up factories in joint ventures (JVs) with companies from countries that export heavily to India, in order to start manufacturing such products locally and cut down on their imports.
“We don't need to mention the country; everybody knows that virtually, there's over-dependence on one country for manufacturing, which is kind of taking over global manufacturing for everyone," Virmani, who is a former chief economic adviser to the government of India and executive director of the IMF, said. "So, every country in the world is talking about de-risking and decoupling. I think of it as de-monopolisation. Monopolies are not good for the consumer.”
For such JVs, only those products could be considered that India doesn't produce locally now or in the near future, or cannot be imported from a country other than the monopolising trade partner, Virmani said.
China is the biggest source of imports for India with consignments touching $102 billion in FY24, accounting for 15% of overall imports, followed by Russia, UAE, the US and Saudi Arabia.
Experts said India could welcome investments from China and get value from its participation in the economy, but a transparent and consistent policy would be key to getting foreign capital.
“China welcomed foreign investments and offered all the wherewithal to make the country an export hub," said Biswajit Dhar, Distinguished Professor at the Council for Social Development, adding that global investors would be interested in their bottom line.
"It would be desirable for India to clearly spell out the strategy on Chinese investments into India because investors prefer policy consistency, coherence and transparency. Over-regulation may be avoided,” Dhar said.
Pointing towards the success stories of other East and South East Asian countries, Virmani said these countries attracted FDI at an early stage in their development because the anchor investor not only brings in technology, but also a host of other factors critical for success such as management skills, risk capital and demand.
Once such anchor investors come with capital, all you have to do is set up that system and start exporting and, of course, meeting domestic demand, Virmani said.
Virmani said the proposition of JVs would apply to any country that is currently monopolising trade with India for select products.
“Monopolies are not good for the consumer," he said. “Just imagine if one country controlled 50% of the manufactured exports of the world, it would be a total disaster. One little incident, the whole economy of the world would shut down.”
Virmani’s comments come after the 2023-24 Economic Survey proposed that FDI from China may be looked at in a more favourable light and that nations like Mexico, Vietnam, Taiwan and Korea, which were direct beneficiaries of America's trade diversion from China, had also displayed a concomitant rise in Chinese FDI, Mint reported on 23 July.
After the border tensions with China in 2020, India amended its FDI policy, making prior approval from the Centre mandatory for investments from countries that share a land border with India. Mint reported on 7 June 2023 that less than a quarter of the 435 proposals India received from China since April 2020 was cleared.
“If we judge import dependence on some products will continue and there are no alternatives possible in the next 10-15 years, then it is better to attract those companies exporting to India to set up manufacturing here," said Virmani. “Of course, attracting them doesn't mean giving them incentives. It means just making sure that they come here and produce and replace those imports.”
The government, Virmani said, can consider many ways of doing it, one of which could be setting up JVs with Indian companies.
“If it is a sensitive product, you can say it must be a JV with an Indian company. You can also say that there must be a phased manufacturing program of some sort. So there are a number of tools available to make this choice,” Virmani said, explaining that this has to be a carefully designed choice depending on the product, which cannot be applied broadly.
Having a local JV under the oversight of Indian regulators has advantage over imports, he said. “If they are producing it here, you can inspect, you can see what they are doing,” said Virmani.
Manufacturing and FDI are central to Prime Minister Narendra Modi’s vision of making India a developed country by 2047. At a NITI Aayog meeting in the capital last month, Modi urged chief ministers to prepare their own development blueprint and asked the federal policy think tank to make a suggested list of things that will facilitate FDI.
Virmani also explained that the union budget for FY25 presented earlier this month recognises the key role of fiscal stability of the government on growth. “When fiscal uncertainties are reduced, the risk for capital and investment is reduced, which reduces the risk premium on interest or the return on capital. So if risk factors reduce, then the capital cost also goes down. That is why the fiscal path is important from a growth perspective,” said Virmani.
