FDI from China: Could this be India’s next big economic win?

India's recent rise as a global economic superpower has drawn significant interest from investors worldwide. According to the Economic Survey 2023-24, investors continued showing their interest in the Indian economy despite geopolitical tensions, elevated borrowing costs, and an uncertain global macroeconomic environment. India’s gross foreign direct investment (FDI) inflows in FY24 stood at $71 billion, slightly lower by 0.6% from $71.4 billion in FY23.

While countries such as Singapore, the United States, and Japan remain among the top contributors to foreign capital inflow in India, an interesting trend has been observed recently—Chinese FDI has started to make notable inroads in the country.

The Economic Survey suggests that India should find a “balance between importing goods from China and importing capital (FDI) from China.

“Replacing some well-chosen imports with investments from China raises the prospect of creating domestic know-how down the road,” the Survey said.

Attracting investments from Chinese companies could boost India’s exports to the US and Europe, the Economic Survey proposes.

The prospects of Chinese investments in India have raised speculations over the government’s approach towards FDI inflows from the neighbouring country.

The current state of FDI in India

According to Invest India data, FDI inflows in India have been consistently increasing since FY15, when they stood at $45.14 billion. At $71 billion in FY24, FDI inflows surged over 57%.

India remains one of the largest and most attractive markets globally owing to its growing middle class, availability of cheap labour, and policy reforms that have opened the economy to global players and provided a favourable investment environment.

The services sector has enjoyed the lion's share of FDI inflow in India. However, the foreign inflow has been increasing to the manufacturing sector in recent years.

The IT, manufacturing and infrastructure sectors have been witnessing significant inflows recently and they are expected to see the momentum continue.

Chinese FDI in India

India's economic relationship with China remains complex. While China's FDI has been small in India, experts have been advocating increasing Chinese investments.

The Economic Survey outlining the significance of Chinese FDI in India will prompt experts to keep a close watch on the government’s approach to inflows from the northern neighbour.

The Economic Survey suggests that India can benefit from China's plus-one strategy by integrating into China's supply chain or promoting FDI from China.

"As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them" the Economic Survey explains.

India’s dilemma over FDI from China

While increasing Chinese FDI in India may have several economic benefits, it poses several challenges, from strategic concerns to national security.

India's strategic relationship with China has been rocky in recent years. Since 2020, India has tightened its scrutiny of Chinese investments and banned several apps amid growing concerns over data security.

Amid the changing geopolitical landscape, India's stand against China has the potential to have global ramifications. While India has the opportunity to reap the benefits of China plus one strategy, it needs to carefully manage the risks associated with Chinese FDI in India.

To sum up

India can rein in its growing trade deficit with China and emerge as the top exporter to the US and Europe, allowing more Chinese FDI in India. However, there are challenges to navigate.

India needs to find ways to strike a balance between India’s growth objectives and Chinese investment interests. It has a chance to ensure a major economic win by allowing more Chinese FDI in India, and it needs to find ways sooner rather than later as the West could find alternatives for its import needs.