India sees limited success in capturing ‘China Plus One’ strategy; Niti Aayog lists reasons

India’s efforts to capitalise on the "China Plus One" strategy, a global manufacturing diversification trend spurred by geopolitical tensions and supply chain disruptions, have yielded limited success, according to a report by government think tank Niti Aayog.

While India has made strides in positioning itself as a viable alternative to China, other Southeast Asian nations, including Vietnam, Thailand, and Malaysia, have outpaced it in attracting multinational corporations.

Cheaper labour, simplified tax laws, lower tariffs and pro-activeness in signing Free Trade Agreements (FTAs) are seen as crucial factors in helping these countries expand their export shares.

The ‘China Plus One’ strategy gained momentum in recent years as countries and companies sought to reduce dependence on China. The US has heightened tariffs and imposed export controls on Chinese goods, prompting many global firms to reconsider their manufacturing bases.

While India has to be wary of China dumping its products in Indian markets, the situation also offers the country a chance to enhance its domestic manufacturing capabilities, particularly in high-tech industries, according to the report.

"However, India has seen limited success so far in capturing the China Plus One strategy so far," said the report - 'Trade Watch Quarterly'.

India’s efforts to position itself as a global manufacturing hub are further complicated by geopolitical risks. Escalating tensions in the Middle East—conflicts in Syria, Yemen, and the Israel-Hamas war—threaten critical maritime trade routes, like the Strait of Hormuz, through which a significant portion of the world’s oil flows.

The report warns that disruptions in the region could cause oil prices to spike. A $10 per barrel increase in crude oil prices, it estimates, could worsen India’s Current Account Deficit by 0.5% of GDP.

“India’s dependence on the Middle East for both energy and agricultural exports makes it vulnerable, with key markets such as Iran for basmati rice and tea seeing sharp declines,” the report said.

Despite these headwinds, India’s economy remains on a strong growth trajectory. After achieving 6.7% growth in FY24, projections for FY25 remain robust at 6.5-7%, bolstered by public investments and increasing integration into global supply chains.