Blaming India’s Self-Imposed Manufacturing Decline on China Will Not Help

American economist Noah Smith recently wrote a blog about how “China is trying to kneecap Indian manufacturing”, adding to the narrative that China views India as a geopolitical rival and potential economic threat, leading to it blocking investments and technologies from reaching India.

This narrative coincides with the heated debate in India sparked by the Modi government’s decision to let the US$23 billion Production Linked Incentive scheme lapse. Both Smith’s argument and the policy debate hinge on a single phenomenon: India’s manufacturing sector has been a major disappointment. While the goal was to raise the share of manufacturing in India’s economy to 25 per cent by this year, it unexpectedly declined to 14.3 per cent last year.

Blaming India’s manufacturing failure on China is nonsensical. China was once India’s closest partner, supplying capital, talent, intermediate goods, management expertise and the essential components for industrial growth.

As recently as a decade ago, Chinese companies were steadily growing their presence across India. Companies such as Oppo, Vivo and Xiaomi – essentially the major Chinese mobile phone manufacturers – still maintain significant operations in India.

Few may remember that as late as in October 2019, the joint communique following the second informal summit in Chennai between Chinese President Xi Jinping and Indian Prime Minister Narendra Modi said both sides would explore a “manufacturing partnership”. This unusual initiative was proposed by Xi, and showed significant political will and policy commitment.

Modi and Xi exchanged gifts at the end of the summit.

In September 2019, I helped to coordinate the sixth India-China Strategic Economic Dialogue in New Delhi as part of the Chinese side led by He Lifeng, then head of the National Development and Reform Commission, and accompanied by more than 10 senior officials from departments including hi-tech, industry, infrastructure, environment, agriculture, energy and policy research. Such high-level, implementation-oriented involvement reflected a genuine intent for practical cooperation, not lofty rhetoric.

No other country could contribute more significantly to India’s industrialisation than China. It was China that had the industrial capacity to set up the cutting-edge factories needed and Chinese engineers who knew how to run them. Where India has achieved success, such as with consumer electronics, it was because Chinese workers came to India and showed locals what to do. This isn’t an exaggerated claim from a Chinese perspective. Rather, it reflects the reality on the factory floor.

But things took a sharp downturn in 2020. In April that year, India announced that any investment from neighbouring countries would require government approval. After the Galwan Valley clash in June 2020, India banned hundreds of Chinese apps in the name of national security and began to cut many Chinese companies out of the market. Moreover, Indian tax authorities even began arresting Chinese executives living in the country.

Take BYD, the Chinese electric vehicle (EV) giant, as an example. In 2023, the company proposed investing US$1 billion in an EV factory in India. After the proposal was rejected, BYD opted for an import-only strategy and decided not to establish a local unit. Meanwhile, BYD has been creating tens of thousands of jobs elsewhere.

Many Production Linked Incentive schemes were deliberately designed to reduce India’s dependence on China, presenting India as an alternative for the global market. Multinational companies were encouraged to move from China to India, aligning with the US decoupling agenda.

Some observers attribute India’s confrontational stance to geopolitical factors. But the real issue lies more in specific policy choices – namely, the Modi government’s decision to link economic matters directly with border disputes as a weapon for retaliation. Essentially, India has responded to border tensions by taking Chinese business interests hostage.

Under these conditions, even if the Chinese government and businesses sincerely wanted to assist India’s industrialisation, there were no viable avenues, as all the restrictions were imposed unilaterally by India.

It was only after the Trump administration started to pressure India on tariff issues that it finally began looking to improve trade and investment ties with China. But restoring trust will not be easy. A popular saying among the Chinese business community captures the sentiment perfectly: money made in India stays in India; good luck trying to bring it home.

This scepticism isn’t driven by border disputes or diplomatic tensions; it is primarily the result of a serious trust deficit created by the Modi administration and its draconian policies.

In contrast, a new manufacturing supply chain network is emerging from China and extending into the rest of South Asia and Southeast Asia – Bangladesh for clothing, Vietnam for consumer electronics, Indonesia for batteries and refined products, Malaysia for cars and semiconductors, and so on.

The reasons Chinese companies are flocking to Southeast Asia are clear: the Regional Comprehensive Economic Partnership, geographic proximity, integrated transport (freight rail, direct flights), more mature supply chains, and a critical mass of Chinese business communities and related services. These factors greatly reduce the risk and friction costs for Chinese firms.

Despite the boom in Chinese overseas investment, most Chinese businessmen simply bypass India, due to challenges in securing foreign direct investment approval, obtaining visas, ensuring operational compliance and the risks of repatriating profits. Even amid a thaw in Sino-Indian diplomatic relations, India may still not be the preferred investment destination for the Chinese business community.

For sure, manufacturing growth is of the greatest importance for super-populous economies like China and India. And China is perhaps the only country that could really help create a manufacturing boom for India. Blaming India’s self-imposed plight on China will not help.

Editor: Chang Zhangjin