Economic Recalibration as India Surpasses China in FDI and Strengthens Manufacturing Base

By: Muskan Agrawal

With tens of thousands of soldiers facing off along their contested Himalayan borders for the fifth consecutive year, India and China show few signs of easing their military tensions, despite ongoing appeals for stabilized relations. Meanwhile, trade between the two nations continues to flourish.

China’s ramping up of its infrastructure projects in the Himalayas in recent years, including roads, bridges, and other military-related constructions, to strengthen its deterrence capabilities has become a major concern for India. The relationship between these two Asian giants took a significant downturn following a deadly clash in June 2020. Both nations have since kept an estimated 50,000 troops each, backed by heavy artillery and fighter jets, stationed at various hotspots along their long, poorly demarcated border. 

India’s Foreign Minister, Subrahmanyan Jaishankar, recently admitted that relations with China are far from normal. Despite diplomatic efforts no meaningful de-escalation along the border has taken place. Soldiers have withdrawn from some conflict areas since 2020, but significant disputes remain unresolved. Numerous meetings between military commanders over the past four years produced minimal progress. 

Despite the ongoing border tensions, India's imports from China steadily increased, even after New Delhi imposed stringent restrictions on economic interactions with China following the 2020 clash. These measures included heightened scrutiny of Chinese investments, a near-complete ban on Chinese visitors, halting major Chinese projects, and banning apps like TikTok. India’s trade deficit with China is sharply rising with Rs.8.24 trillion imports recorded in FY 2023-24 versus only Rs.1.47 trillion exports to China.

Prime Minister Narendra Modi has been pushing to position India as an alternative manufacturing hub to China, attracting companies like Apple to set up production facilities. However, many industries and new factories in India still rely on Chinese imports for essential machinery and components. The strategy to reduce dependence on Chinese imports has largely failed, highlighting the challenges of decoupling from the world's largest manufacturer. 

Despite the steady rise in Chinese imports, Foreign Direct Investment (FDI) in India has been significantly outpacing that of China. In 2023, India's FDI surpassed China's by a margin of over 115%. This surge in FDI highlights India's growing appeal as a prime investment destination, driven by its large consumer market, favorable economic policies, and strategic initiatives to enhance the ease of doing business. The dramatic difference in FDI figures between the two nations underscores a shift in global investment patterns. While China has traditionally been a magnet for foreign investment, recent geopolitical tensions, trade disputes, and regulatory challenges have prompted investors to seek alternative markets. India's democratic framework, coupled with its focus on innovation and sustainability, offers a stable and promising environment for long-term investments.

This trend signifies a potential recalibration of global economic strategies, where India is increasingly being viewed as a key player in the global supply chain. As foreign investments continue to flow into the country, India is poised to not only enhance its economic growth but also strengthen its position on the global economic stage. Through the promotion of domestic manufacturing, FDI is set to play a crucial role in driving India’s industrial and economic transformation.