India’s Growing Reliance on China Poses Challenge for U.S. Trade Strategy

The Washington Post / Karishma Mehrotra

13:49 JST, September 3, 2024

NEW DELHI – American businesses looking to reduce their reliance on China have increasingly been eyeing India in the past few years as a new manufacturing hub – and as a hedge against potential disruptions in Chinese supply chains caused by rising geopolitical tensions or another pandemic.

But as India has amped up its production of goods like smartphones, solar panels and medicine, the Indian economy itself has become even more dependent on Chinese imports, in particular for the components that go into these products, according to trade figures and economic analysts.

This dynamic serves as a reality check for U.S. policymakers, who have been urgently promoting efforts to diversify supply chains away from Chinese factories and “de-risk” the commercial relationship with China.

“Unless China stops being the third party from where components come in and we just assemble, that de-risking is not going to happen for any country coming in and producing in India,” said Sriparna Pathak, an associate professor at Jindal University focusing on India-China relations.

India’s imports from China have been growing twice as fast as those overall and now make up nearly a third of Indian 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 manufacturing.

Nearly two-thirds of Indian imports of electronic components, such as circuit boards and batteries, now come from China, the Confederation of Indian Industry says. And the volume of such Chinese imports has tripled during the past five years, GTRI reports.

India has long been a large exporter of pharmaceuticals, including to the United States. But while the domestic industry used to make much of its own ingredients, it now relies on China for many of its important pharmaceutical inputs, for instance for paracetamol. From 2007 to 2022, China’s share in Indian imports of chemicals and pharmaceuticals grew by more than 50 percent and over just the past five years, Indian imports from China of pharmaceutical ingredients and other intermediate drug products are up by more than half, according to the GTRI report.

To support the production of Indian textiles and garments, another important export industry, India has been ramping up imports of yarn and fabric from China. Even the automobile industry – considered a success story for both domestic and export sales – has been increasing its imports of vehicle parts and accessories from China.

As with electronics, India has made significant strides in producing solar panels but now relies even more on the Chinese solar cells that go in them.

After the United States restricted imports of Chinese solar panel material due to concerns about human rights and labor abuses, Indian exports of solar panels to the American market spiked in 2022, increasing in value by almost 150 percent, according to U.S. government trade figures. The next year saw an even sharper increase.

During that time, however, India sourced between half and all of its solar panel components – such as modules, cells, wafers and solar glass – from China between 2021 and 2023, according to a BloombergNEF report at the end of last year.

Senior Biden administration officials said it is not realistic to think that inputs from China can be excluded at this moment from American supply chains. “We have taken a more practical view that in order to effectively diversify, the first step is to get a foothold in the parts of this supply chain where you can diversify today. And then from there you can grow upstream,” a senior administration official, speaking on the condition of anonymity to discuss sensitive strategies toward China, said.

Addressing the significant presence of Chinese components in Indian-made solar panels, the official said, “We recognize we are in the first inning of a long game, but we are at an inflection point in that there is now a clear recognition, not just in the U.S. and India but among friends and allies, that being overly reliant on one source for the clean energy economy is not sustainable and requires a concerted effort to de-risk. But it’s going to take time.”

India also continues to rely on Russia for crude oil, despite U.S. sanctions imposed on Russia because of its war in Ukraine. Much of India’s defense equipment also remains Russian, though New Delhi has been shifting to other suppliers.

Even as India has tried to produce its own components for manufactured goods, it has remained dependent on China for expertise. Representatives of Indian industry have pressed the government to loosen restrictions on visas for 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 secure a foothold on the lowest rungs of the global skills ladder. Those rungs are rising: India must jump now,” wrote Ashoka Mody, an economist at Princeton University, in the Hindu. “The breathtaking irony of invoking self-reliance is lost on Indian officials precisely when India’s economic growth increasingly depends on foreign expertise, particularly from China.”

Many Indian analysts urge, ironically, that to diversify from China, India may need to lean into the relationship.

“India needs China for at least half a decade with the full support of the U.S. to be able to build itself as a big-scale alternative,” said Pankaj Mohindroo, the chairman of India Cellular & Electronics Association, which helped push for more visas for Chinese technicians.

The Indian government’s chief economic adviser, V. Anantha Nageswaran, has proposed also loosening restrictions on Chinese investments. “To boost Indian manufacturing and plug India into the global supply chain, it is inevitable that India plugs itself into China’s supply chain,” said the recent economic survey prepared by his office. “Whether we do so by relying solely on imports or partially through Chinese investments is a choice that India has to make.”

India shut the doors to Chinese investments after the countries’ troops clashed along the Himalayan border in Ladakh in 2020, leaving at least 20 Indian and four Chinese soldiers dead and igniting widespread boycotts of Chinese goods. Now, more than 50,000 troops are poised on either side of the disputed border, and dozens of rounds of negotiations have yet to produce a breakthrough.

Since 2020, Chinese investment proposals and those from other neighboring countries been evaluated in a case-by-case process, which government and industry figures say is slow and tedious.

In recent months, however, Indian government actions seem to show a softening. In August, for example, India issued new guidelines to expedite visas from China and other neighbors. A government official, speaking on the condition of anonymity to discuss sensitive matters, told The Washington Post that, since April, at least 11 electronics investment proposals involving China have been approved, including from Chinese companies like the electronics component manufacturer Luxshare.

The Chinese firm Vivo has begun building a smartphone manufacturing plant outside of New Delhi to replace an older facility and help boost exports. Shein, a fast-fashion conglomerate founded in China, will soon tie up with India’s Reliance with an eye on the export market, and the Chinese automaker SAIC Motor 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 economic as well as security developments, Zhang Jiadong, the director of the Center for South Asian Studies at China’s Fudan University, recently wrote in the Global Times that “although the improvement in China-India relations has come later than expected, it has finally arrived.”

But these improvements do not portend a dramatic increase of direct Chinese investment in Indian manufacturing, even as imports of intermediate goods from China boom, according to economic analysts.

“Even if India opened up investment from Chinese companies, Chinese capital will not flood into the Indian market,” said Lin Minwang, deputy director of the Center for South Asian Studies at Fudan University, citing the “unfriendliness of the Indian government toward Chinese investment.”

The Chinese automaker BYD, for example, has been blocked from expanding in India, and Chinese smartphone makers Vivo, Oppo and Xiaomi have all faced investigations in India in cases of tax evasion or money laundering, including the arrest of several executives.

Still, analysts agree that Chinese supplies remain crucial for India’s manufacturing aspirations.

“No matter what we say, the fact is that China is the largest manufacturer of components. There is no getting away from that,” said Indrani Bagchi, a foreign policy expert and CEO at the Ananta Centre in New Delhi. And “we’re not in the business of dragging our own industrial growth down.”