India’s Growing Dependence on China Challenges US Trade Strategy

Karishma Mehrotra
| Washington Post

New Delhi American companies looking to reduce their dependence on China have increasingly looked to India in recent years as a new manufacturing hub – and as a hedge against potential disruptions to Chinese supply chains caused by rising geopolitical tensions or another pandemic.

But with the rise in production of goods such as smartphones, solar panels and medicines, India’s economy has become even more dependent on imports from China, particularly for components used in these products, according to trade data and economic analyses.

This dynamic is a reality check for U.S. policymakers who are urgently promoting efforts to diversify supply chains, bypassing Chinese factories and “de-risking” their trade with China.

“If China continues to be a third party source of components and we just assemble them, then any country that brings them to India and manufactures them in India will not be able to reduce the risk,” said Sriparna Pathak, an assistant professor at Jindal University who studies India-China relations.

India’s imports from China are growing twice as fast as its overall imports and now account for almost a third of its imports in industries ranging from electronics and renewable energy to pharmaceuticals, according to the Global Trade Research Initiative (GTRI), an Indian think tank. These imports include finished products as well as intermediate goods for production.

Almost two-thirds of India’s imports of electronic components, such as circuit boards and batteries, now come from China, according to the Confederation of Indian Industry. And the volume of such Chinese imports has tripled in the past five years, according to GTRI.

India has long been a major exporter of pharmaceuticals, including to the United States. But while the domestic industry used to produce many of its own ingredients, it now relies on China for many important pharmaceutical products, such as acetaminophen. From 2007 to 2022, China’s share of India’s imports of chemicals and pharmaceuticals has grown by more than 50 percent, and in just the past five years, India’s imports of pharmaceutical ingredients and other intermediate pharmaceuticals from China have increased by more than half, according to the GTRI report.

To support India’s textile and apparel production, another major export industry, India has increased its imports of yarn and fabric from China. Even the auto industry – considered a success story in both domestic and export sales – has increased its imports of auto parts and accessories from China.

As in electronics, India has made significant progress in manufacturing solar panels, but it now relies even more on Chinese solar cells to power them.

After the United States restricted imports of Chinese solar panel materials over concerns about human rights and labor abuses, India’s exports of solar panels to the U.S. market surged in 2022, increasing their value by nearly 150 percent, according to U.S. government trade data. It grew even more the following year.

According to a BloombergNEF report from late last year, between 2021 and 2023, India was expected to source half, if not all, of its solar panel components — such as modules, cells, wafers and solar glass — from China.

Senior Biden administration officials said it’s unrealistic to think that Chinese inputs could be excluded from U.S. supply chains at this point. “We’ve taken a more practical approach that to effectively diversify, the first step is to get a foothold in the parts of that supply chain where you can diversify today. And from there, you can expand up the supply chain,” said a senior administration official, speaking on condition of anonymity to discuss sensitive China policies.

Referring to the significant presence of Chinese components in Indian solar panels, the official said, “We recognize that we are in the first round of a long game, but we are at a turning point because there is now a clear recognition, not only in the US and India, but among friends and allies, that over-reliance on a single source of clean energy in the economy is not sustainable and requires a concerted effort to reduce the risks. But that will take time.”

India still relies on Russia for oil, despite US sanctions imposed on Russia over the war in Ukraine. Most of India’s defence equipment also remains Russian, although New Delhi is switching to other suppliers.

Even as India has tried to make its own components for manufactured goods, it has remained dependent on China for know-how. Indian industry officials have pressed the government to ease visa restrictions on Chinese technicians so they can help Indians use Chinese machinery to make smartphones, as well as textiles and even shoes.

“The Chinese can help India gain a foothold on the lowest rungs of the global skills ladder. The rungs are growing: India needs to jump now,” wrote Ashoka Mody, an economist at Princeton University, in The Hindu. “The breathtaking irony of claiming self-reliance is lost on Indian officials at a time when India’s economic growth increasingly depends on foreign expertise, especially from China.”

Ironically, many Indian analysts say that in order to diversify beyond China, India will need to leverage this relationship.

“India needs China for at least half a decade, with the full support of the United States, to become a large-scale alternative,” said Pankaj Mohindroo, chairman of the India Cellular & Electronics Association, which has helped secure more visas for Chinese technicians.

The Indian government’s chief economic adviser, V. Anantha Nageswaran, has also suggested easing restrictions on Chinese investment. “To increase Indian manufacturing and bring India into the global supply chain, it is inevitable that India will plug into the Chinese supply chain,” his office said in a recent economic study. “Whether we do this by relying solely on imports or partly through Chinese investment is a choice India has to make.”

India closed the door to Chinese investment after a 2020 clash between the countries’ forces along the Himalayan border in Ladakh that left at least 20 Indian and four Chinese soldiers dead and sparked widespread boycotts of Chinese goods. There are now more than 50,000 troops on both sides of the disputed border, and dozens of rounds of negotiations have yet to yield a breakthrough.

Since 2020, Chinese investment proposals and those from neighboring countries have been assessed individually, a process that government and industry officials say is slow and tedious.

In recent months, however, the Indian government’s actions appear to have softened. For example, in August, India issued new guidelines to speed up the issuance of visas from China and other neighbors. A government official, speaking on condition of anonymity to discuss sensitive issues, told The Washington Post that at least 11 electronics investment proposals involving China have been approved since April, including from Chinese companies such as electronics maker Luxshare.

Chinese company Vivo has begun building a smartphone factory outside New Delhi to replace an older plant and help boost exports. China-founded fast-fashion conglomerate Shein will soon merge with India’s Reliance with an eye on the export market, and Chinese carmaker SAIC Motor has formed a joint venture with India’s JSW Group to produce 1 million electric cars in India by 2030, initially for the domestic market but eventually for sale abroad.

Pointing to the economic and security developments, Zhang Jiadong, director of the Center for South Asia Studies at China’s Fudan University, recently wrote in the Global Times that “although the improvement in Sino-Indian relations came later than expected, it has finally happened.”

However, economic analysts say the improvement does not herald a sharp increase in Chinese direct investment in India’s manufacturing sector, even as imports of intermediate goods from China are rising rapidly.

“Even if India were to open up to investment from Chinese companies, Chinese capital would not flood the Indian market,” said Lin Minwang, deputy director of the Center for South Asia Studies at Fudan University, citing the Indian government’s “hostility to Chinese investment.”

For example, Chinese carmaker BYD has been blocked from expanding into the Indian market, while Chinese smartphone makers Vivo, Oppo and Xiaomi have faced investigations in India for tax evasion and money laundering, including the arrest of several of their executives.

Analysts, however, agree that supplies from China remain crucial to India’s manufacturing aspirations.

“No matter what we say, the fact is that China is the largest producer of components. There is no getting around that,” said Indrani Bagchi, a foreign policy expert and director general of the Ananta Centre in New Delhi. “And we are not in the business of stifling our industrial growth.”

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Anant Gupta assisted in preparing this report.