China is already a big player in exporting capital-intensive products. This has made it harder for India to build its own manufacturing industry without depending on Chinese imports
India's manufacturing sector witnessed a setback in September as growth dipped to an eight-month low. The HSBC India Manufacturing Purchasing Managers' Index (PMI) dropped to 56.5 from 57.5 recorded in August month. This was primarily owing to the slowdown in factory production and new export orders.
But beyond the declining figure, there is another major concern threatening India's ambition to become a global manufacturing hub–China's well-established dominance in the sector.
While India aims for self-reliance in manufacturing, decoupling from the dragon nation remains a big challenge. This is evident as China’s presence in India’s exports has only grown since 2019.
While India's export levels continue to witness a steady rise, a large part of the same experienced an increase in imports from China in 2023. "About 68 per cent of India’s exports (per four-digit HS code, which also feature imports from China of atleast $100 million) saw the share of imports from China rising in CY23, up from 59 per cent each in both CY19 and CY15," Elara Securities said in its report.
On the global front, China is already a big player in exporting capital-intensive products. This has made it harder for India to build its own manufacturing industry without depending on Chinese imports. The amount of capital-intensive products the country imports from China has increased massively.
While the country tries to move away from China and focus on self-sufficiency, the dragon still plays a big role in India's manufacturing scene.
As per data, out of 197 export items, more than 60 per cent of these are now seeing a larger share of imports coming from China. "About 133 of such items saw percentage share of imports from China rise from 59 per cent CY19 to 68 per cent in CY23," the brokerage firm said.
For instance, just last year, India imported 47 times more from China compared to what it exports, a big jump from 14.5 times in 2019 and 9.6 times in 2010 in the integrated circuit segment.
Last year, China had placed restrictions on critical raw materials like germanium and gallium, which are often used in the production process of high-tech products such as semiconductors, smartphones and electric vehicles (EVs).
For the EV industry, this move came at a rather troubling time, as automakers were just starting to bounce back from pandemic-induced production stoppage. While there was no direct impact on the industry as such, western auto players did find it hard to survive in the following years owing to a surge in production costs. As for China's EV space, the imposed restrictions proved out to be a boom. This was quite evident when the sales of BYD (Chinese EV brand) surpassed that of Tesla at one point of time.
Now, given the increasing share of Chinese imports in Indian exports, the associated risks are becoming more apparent. As per the brokerage firm, nearly 48 per cent of India’s mobile component imports, excluding PCBs and displays, come from China. If the dragon nation were to impose restrictions on these components at any point, it could significantly impact India's export levels.
Right now, only 0.1 per cent of FDIs (Foreign direct investments) in India come from China. And if we see import levels, about 15 per cent of the country's total imports are from China.
Meanwhile, the dragon nation still accounts for a big chunk of India’s trade deficit, making up nearly 36 per cent. While it is worth noting that the trade gap with China has consistently dropped from a peak of 47.1 per cent in 2017, the deficit has actually grown by 5.6 per cent since 2020, despite the push for 'Atmanirbhar Bharat.'
China is a major player in global manufacturing and while India needs to protect its domestic market, it might be smart to take a more practical approach towards allowing investments from China. If India doesn’t allow more Chinese investments, its trade deficit will likely keep growing, even with programs like "Make in India" and the PLI (Production Linked Incentive) schemes, according to the report.