As global companies seek alternatives to China for manufacturing, India's potential as a new hub is under the spotlight. Yet, the Economic Survey 2023-24, presented by Finance Minister Nirmala Sitharaman, suggests that India should temper its expectations.

Despite the ongoing complexities in India-China economic relations, India's unique strengths and government initiatives could still position it as a valuable player in global supply chains.

The survey underscores the intricacies of the India-China dynamic, particularly given China's dominance in global supply chains across various product categories. The war in Ukraine has exacerbated supply chain disruptions, making it clear that India cannot simply replace China in the global manufacturing landscape. While India's economy is growing faster than China's, it remains only a fraction of its size.

India's large domestic consumer market is a key attraction for companies looking to set up operations, especially in the electronics sector. The government's Production-Linked Incentive (PLI) scheme, offering tax breaks and subsidies, has played a significant role in drawing companies to India. For example, Apple assembled USD 14 billion worth of iPhones in India during FY24, accounting for 14% of its global production. Foxconn has also begun producing Apple mobile phones in Karnataka and Tamil Nadu. Although India may not immediately benefit from the trade diversion from China, it has seen a substantial rise in electronic exports, driven by the PLI scheme. India's electronic exports to the US transitioned from a trade deficit of USD 0.6 billion in FY17 to a trade surplus of USD 8.7 billion in FY24, with mobile phones leading this growth.

As India aims to deepen its involvement in Global Value Chains (GVCs), it looks to emulate the successes of East Asian economies. These countries have focused on reducing trade costs and facilitating foreign investment. For India, improving logistical efficiency has been a priority, reflected in its rising score on the World Bank's Logistics Performance Index. Additionally, the PLI scheme encourages high-quality foreign investment by offering market-linked incentives.

Over the medium term, India is focusing on integrating its value chain with the West, particularly in sectors like renewable energy and advanced technology. This strategy is being pursued through agreements such as the Australia-India Free Trade Agreement and the US-India Clean Energy Initiative. Consequently, exports in these sectors are increasing. For instance, exports of environmentally friendly technology to the US grew from USD 199.2 million in FY20 to USD 326.9 million in FY24. Leading companies in renewable energy, such as First Solar and Vestas, have established operations in India to capitalize on the growing demand for green technologies.

Despite the potential of the "China plus one" strategy, it is unlikely to result in a total shift of trading relations away from China. Countries like Mexico, Vietnam, Taiwan, and Korea, which benefited from the US's trade diversion from China, also saw a rise in Chinese Foreign Direct Investment (FDI). Therefore, completely bypassing China is not feasible.

India faces two choices: integrate into China's supply chain or promote FDI from China. Focusing on FDI from China seems more promising for boosting India's exports to the US. This approach is advantageous as 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 export products to these markets. This strategy not only adds value within India but also mitigates risks associated with economic coercion from China.

In conclusion, while India cannot wholly replace China in global manufacturing, it can strategically position itself by leveraging its strengths, improving trade logistics, and attracting foreign investment. Balancing imports from China with increased FDI from Chinese companies will be crucial in ensuring India's continued growth and integration into global value chains.

(With Inputs From Agencies)