Why in the News?

India is reconsidering its restrictive stance on Chinese investments in electronics manufacturing to boost domestic production and strengthen global supply chain integration.

What’s in Today’s Article?

• China’s Blockade (Introduction, Background, Policy Recalibration, Dependency on China, Reasons Behind Rethinking, Challenges & Repercussions)

Introduction

• Nearly five years after adopting a restrictive stance toward Chinese investments in the wake of the 2020 Galwan Valley clashes, India is signalling a calibrated shift in its ‘China-out’ electronics strategy.
• In light of its ambitious goals to become a global electronics manufacturing hub, India is re-evaluating Foreign Direct Investment (FDI) rules and barriers previously imposed on China-based companies.
• The move comes amid changing global trade dynamics, evolving geopolitical realities, and India’s realisation that Chinese firms remain essential in upstream components critical for high-tech manufacturing.

Background of the Blockade

• In April 2020, India issued Press Note 3, mandating government approval for all FDI inflows from countries sharing a land border with India, effectively restricting Chinese investments.
• The policy was designed to prevent opportunistic takeovers of Indian firms during the COVID-19 pandemic and reflected a broader pushback following border tensions.
• This led to the exclusion of Chinese entities from key sectors such as telecommunications, electronic hardware, and infrastructure, even as India’s electronics assembly sector began expanding rapidly under the Production Linked Incentive (PLI) schemes.

Emerging Signs of Policy Recalibration

• Amid rising manufacturing needs and limited domestic capacity for advanced components, India has begun showing pragmatic openness to Chinese participation in select areas.
• Key Developments:

• Dixon Technologies, a major Indian contract manufacturer, received approval from the Ministry of Electronics and IT to form a joint venture with China-based Longcheer.
• The JV will produce smartphones, smartwatches, automotive electronics, and AI-powered PCs.
• NITI Aayog has recommended easing FDI norms for Chinese companies to attract investment and enhance exports.
• The Economic Survey 2023–24 also hinted at the need to revisit restrictions on Chinese firms, acknowledging their integral role in the electronics supply chain.

Structural Dependencies on Chinese Components

• Despite the policy blockade, India has continued to import large volumes of components from China:

• In FY2023-24, India imported over $12 billion worth of electronic parts from China and another $6 billion from Hong Kong.
• Together, these regions accounted for over 50% of all component imports, far exceeding inflows from South Korea, Taiwan, Japan, or ASEAN.

• This underscores a reality: while India has kept finished goods like smartphones from Chinese firms out of its domestic market, it remains reliant on upstream inputs from them to fuel its fast-growing assembly operations.

Policy Drivers Behind the Rethink

• India’s evolving stance is informed by multiple considerations:

• Manufacturing Ambitions:
• The government aims to make India a global electronics manufacturing hub.
• The Rs. 23,000 crore scheme for electronic components manufacturing envisages foreign collaboration, where Chinese expertise remains unparalleled.
• Global Supply Chain Realignment:
• The post-pandemic world, U.S.-China trade tensions, and “China+1” strategies have opened opportunities for India to step in as an alternative hub.
• The China+1 strategy is a business tactic where companies diversify their production and supply chains away from China.
• But that requires deeper integration into global supply chains, where Chinese firms are major stakeholders.
• Geopolitical Pragmatism:
• India has resumed issuance of tourist visas to Chinese nationals and facilitated diplomatic visits, including External Affairs Minister S. Jaishankar’s trip to China, where he stressed that “competition should not become conflict.”

Challenges and Repercussions

• Even as India contemplates easing restrictions:

• China has retaliated by pulling back workers and making it harder for Indian firms to import capital goods.
• There have been blockades on rare earth metals and magnets, key to manufacturing electronics, which India has struggled to circumvent.
• Chinese companies themselves face compliance bottlenecks, procedural delays, and security-related distrust in India.

• The challenge lies in striking a balance between strategic autonomy and manufacturing dependency.