Chinese investments will not benefit India

High cost of doing business and geopolitics limit opportunities

The Economic Survey 2024 suggested that India should welcome Chinese foreign direct investment (FDI) to boost manufacturing, increase exports, reduce imports from China, and strengthen our role in global value chains (GVC).

Suppose India allows such investments will the promised gains to manufacturing, exports, imports, and GVC actually happen? Manufacturing: Let's understand the impact of Chinese investment on manufacturing with the example of Mr Yang (an imagined name), the CEO of a large Chinese firm making solar modules.

Mr Yang wants to manufacture solar modules in India and compares the costs at each production stage in China and India. The production process starts with obtaining quartz minerals and processing them into high-purity polysilicon ingots, which are then converted into polysilicon wafers. The wafers undergo chemical and laser treatments and silver etching to create solar cells, which are finally assembled into solar modules.

Mr Yang's analysis shows that starting production in India from raw materials, such as quartz minerals, would be at least 40 per cent more expensive than in China. This cost difference reduces to 25 per cent if he uses imported polysilicon wafers and decreases to 3 per cent if he uses solar cells imported from China.

Despite his interest in India, Mr Yang finds that producing solar modules from raw materials is too costly. He might consider starting from the wafer stage if India offers additional support, like land and capital at concessional rates. Otherwise, he would likely use imported solar cells to produce solar modules, as many Indian firms currently do.

This is similar to India's smartphone sector, which relies on imported subassemblies, and the electric vehicle (EV) battery industry, which depends on imported lithium cells. Most manufacturing happens abroad in both cases, and more than 85 per cent of the components are imported.