How India’s unspoken strategy to drive out Chinese firms can backfire
- As much as foreign firms might complain about difficulties operating in China, India makes doing business there even more challenging
- New Delhi’s legal and bureaucratic scheme to squeeze out China risks adding to India’s budget woes and holding back manufacturing growth
It is commonly believed that it is difficult for Western firms to operate their business operations in China. However, it is even more challenging for firms to operate in India, especially for Chinese firms.
Bureaucratic friction is India’s forte to find fault with businesses that are out of favour and squeeze Chinese firms operating in the country. For instance, Indian tax rules are known to be complex, and complying with all the rules is seen as almost impossible.
Since this updated FDI policy took effect, India has approved fewer than a quarter of the 435 applications for investment from China. For example, after two years of failed attempts to obtain US$1 billion FDI approvals from India, China’s largest sport utility vehicle manufacturer Great Wall Motor announced its plan to exit India in July 2022.
The scheme has expanded into a US$24 billion programme focusing on 13 sectors including auto components, electronics systems and telecoms equipment, many of which are dominated by Chinese companies. The PLI scheme can create jobs for Indian workers, boost economic growth, promote exports, reduce the trade deficit and help improve the quality of Indian products.
However, this programme increases the fiscal burden on the government. In addition, it can distort the market and create inefficiencies as some sectors receive preferential treatment over others, leading to rent-seeking and lobbying. The net effect of the PLI scheme remains to be seen.
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Meanwhile, by discouraging Chinese imports and deterring Chinese firms from setting up manufacturing units in India, this strategic move can hinder India’s plan to grow its manufacturing sector.
Unless there is an immediate plan for India to develop domestic production of all major parts of Apple products, it will be a challenge for India to woo major brands to produce their products there.
Getting Western firms to produce in India is relatively easy as the United States and Europe try to distance themselves from China, but making them stay would take some rethinking.
Christopher Tang is a distinguished professor at the UCLA Anderson School of Management