'There is a serious concern about security threat, but...': Arvind Panagariya on allowing Chinese investment in India

Arvind Panagariya, Chairman of the 16th Finance Commission, at BT INDIA@100 event, said that India might carefully allow Chinese investment to boost the manufacturing sector by balancing the security issue. He said that as the rest of the world is doing business with China, India should not hesitate to go ahead for more deeper trade deals.

"There is a serious possibility of security threat from Chinese investments. We need to be very careful in this regard. I hope those are identifiable. I am not a security expert to comment on this, but probably there is a vast area, where no such threat exists. The rest of the world is also buying goods from China. I think it is a good case for Chinese investments to come in those areas. To some degree, I sympathise with the position of the current Economic Survey, where there is no direct threat, the equipment could be penetrated. I think we should not hesitate from going forward after all we are trading with China also. We should not hesitate with FDI either," said Panagariya on Tuesday at BT INDIA@100 event being held at Bharat Mandapam in New Delhi. 

In the fiscal year 2023-24, China emerged as India's principal trading partner, with two-way commerce amounting to USD 118.4 billion, surging past the United States. India's exports to China experienced a notable 8.7 percent growth, totaling USD 16.67 billion. Meanwhile, imports from China saw a modest increase of 3.24 percent, reaching USD 101.7 billion. Consequently, the trade deficit expanded to USD 85 billion in the same period, up from USD 83.2 billion in 2022-23.

It is to be noted that the Economic Survey 2023–24 stated that it is inevitable that India plugs itself into China's supply chain to boost local manufacturing and plug itself into the global supply chain.

The survey said India will have to decide whether it has to rely solely on Chinese imports or allow Chinese investments into the country. 

The survey emphasized that adopting the China + 1 strategy does not necessarily indicate a complete shift in trade relationships away from India's northern neighbor. Citing examples such as Mexico, Vietnam, Taiwan, and South Korea, which experienced a boost in exports to the US due to trade diversion from China, the report highlights that these countries also observed an increase in Chinese Foreign Direct Investment (FDI).

It is noted in the report that while these nations managed to expand their export market share with the US, they simultaneously witnessed a growth in Chinese FDI within their borders. This indicates that completely disregarding China in pursuit of the China plus one approach may not be a viable option for global trade strategies.

The report underscores that for India to leverage the opportunities presented by the China + 1 strategy, it must consider two primary options: either align with China's supply chain or actively encourage Foreign Direct Investment from China. These decisions are pivotal for India to effectively capitalize on evolving global trade dynamics and enhance its economic prospects. 

Among the various options presented, the report emphasized the potential benefits of concentrating on Foreign Direct Investment (FDI) from China to enhance India's exports to the United States, aligning with the strategies employed by East Asian economies.

Furthermore, the report suggested that implementing FDI as a key strategy could prove advantageous due to China's status as India's primary import partner and the persistent increase in India's trade deficit with China.

With the United States and Europe diversifying their sourcing away from China, the report underscores the effectiveness of attracting Chinese investments in India, subsequently exporting the manufactured goods to these markets, as opposed to direct imports from China.

Earlier, Commerce and Industry Minister Piyush Goyal declared that there is no rethinking in the government to support foreign direct investments (FDI) from China as was pitched by the Economic Survey.

"There is no rethinking at present to support Chinese investments in the country," said Goyal, adding that the report always speaks about new ideas and gives out their own thinking. The Economic Survey is not at all binding on the government and there is no thinking on supporting Chinese investments in the country, he said.

In June 2020, a border clash in the Galwan Valley resulted in a significant deterioration of ties between India and China. Since May 2020, the Indian and Chinese militaries have been locked in a stand-off. Despite disengagement from various friction points, a comprehensive resolution to the border issue remains elusive. India contends that normalization of relations with China hinges on peace in the border regions.