India Must Let Go Of Its China Grudge

Hello. Today, we argue that India needs to kiss and make up with China to put itself on track to become the world’s manufacturing hub. Then, we’ll close with Gupshup, a round-up of the most important headlines.

BTW: Which Indian state is home to the world’s first republic? (Answer at bottom)

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Analysis

India Must Let Go Of Its China Grudge

India can only become a manufacturing hub once it integrates itself into the global electronic and manufacturing supply chain. Unfortunately for India, that means lifting embargos on Chinese businesses and investment, which have been in place since a deadly border dispute in 2020.

China is the undisputed manufacturing leader, and that will not change for a while. 31.6 percent of global manufacturing happens in China, while just 2.9 percent happens in India. China’s presence in supply chains is deeply entrenched: seven of the ten busiest container ports are in China, the country produces 90 percent of global smartphones and 70 percent of computers, 85 percent of the world’s rare earth elements, and 15 percent of all of the world’s goods go through China at some point.

Indian leaders may be planning on waiting out China’s manufacturing prowess until eventually, the world builds its supply chains around India — Bloomberg Economics expects Indian growth to reach 9 percent annually by the end of the decade, while China’s will fall to 3.5 percent — but Modi doesn’t have time to kill. India’s youth face an estimated 40 percent unemployment rate, and have been dealt a decade of “jobless growth.” 

India officials lead their country as if multinational companies will be willing to build supply chains solely in India, however, there is no evidence this will ever happen. Even Apple, which is set to produce 25 percent of all iPhones in India in the next four years, has only been able to increase its Indian manufacturing by putting immense pressure on Chinese suppliers to set up plants in India and winning exceptions for those plants from Indian regulators. Outside of Apple, which is desperately trying to recover from an iPhone sale slump in China by expanding in India, no other company has shown this level of interest in India. 

India still imports heavily from China, which was the biggest source of major industrial products in 2023. India received 30 percent of its electronics, cars, chemicals, machinery, and textiles from China. India's ban on Chinese investments makes it harder to establish local production facilities that rely on Chinese technology and components, meaning that India just consumes from China without getting to share in manufacturing prosperity. India also misses out on abroad technical expertise that can come from Chinese businesses working with Indian ones.

Bloomberg columnist Mihir Sharma, in his piece “Modi’s Job Crisis Can’t Be Resolved Without China,” noted that post-COVID, China has been dealt losses in foreign investment. Had India made it easier to move plants from China to its country, China’s loss could have been India’s gain. But it wasn’t.

Ironically, India’s playbook to overtaking China would be working with China more, not less. It should be China that is reluctant to work with India, not the other way around. However, China has pushed for peace by trying to resume direct travel (direct passenger flights between India and China have been banned since 2020), but Indian diplomats have clarified that relations will not normalize until the Himalayan border dispute is resolved. On that issue, neither country is willing to budge.

To keep up with India’s ambitions, its foreign direct investment should be growing dramatically every year. Instead, it fell to a 16-year low: FDI into India fell over 60 percent year-over-year in 2023-24 to $10.6 billion. 

“India never misses an opportunity to miss an opportunity,” writes Seema Sirohi, a columnist for the Economic Times. India has the hard part figured out, something most nations would kill for: the world is knocking on its door asking to come in and give it jobs and wealth. The easy part is just opening the door, yet Indian leaders show no signs of doing so any time soon.

Macro

• Expect gold to see a boost during the festive season (BBG). The government cut a duty on overseas imports of gold which should boost demand into winter.

• The RBI predicts lower inflation to drive consumption and GDP growth (Economic Times). The RBI projects 7.2% GDP growth for the current fiscal year plus lower retail inflation over the last 2 months. A risk remains that food volatility increases over the next few months which the RBI is monitoring.

• India lends Maldives funds for upcoming Sukuk coupon payment (BBG). Maldives has a $24.6M debt payment coming up in October; the High Commission of India is giving another $50M loan to the island country. The State Bank of India also subscribed to T-bills for another year.

• India continues to tame rupee volatility with $689B FX reserves (BBG). Governor Das, whose term expires in December, used the large reserves to tame volatility throughout the week as the Fed cut rates heavily. FX reserves are at all-time highs and thus the rupee has been one of the least volatile currencies this year.

Equities

• India overtakes China in MSCI Global Index, will drive inflows (BBG). India has overtaken China in the MSCI AC World IMI Index with a 2.35% weighting compared to 2.24% for China. India is now the sixth largest globally by weight, narrowly behind France.

• IIFL shares jump as regulators lift restrictions on gold-backed lending business (BBG). Shares rose to the highest since March due to the expectation of growing assets under management after they halved to $1.5B earlier in the summer.

Alts

• Ambani’s Reliance is restarting Campa to battle Coke/Pepsi (Economic Times). Reliance is accelerating the growth of the Campa brand across various southern and northern states. Campa sells for half the price of larger labels to corner foreign brands.

Policy

• Trump, while occasionally criticizing India’s trade, overall plans to shift supply chains to India from China (Economic Times). Trump criticized India’s use of tariffs but overall praised the economy and plans to shift supply chains.

• China continues to lambast the upcoming Quad meeting (BBG). China’s foreign ministry accuses the group of being dedicated to undermining China’s interests and “reeks of military confrontation.”

• SEBI allows mutual funds to buy or sell credit default swaps (Economic Times). This is expected to increase liquidity in the corporate bond market and provide an outlet for equity liquidity. In the past, policy was restricted to only buying the same amount of CDS as bonds held as protection against capital downturns

Oh, and Bihar is home to Vaishali, which was established as the world’s first republic in the 6th century BCE. Each family would nominate a representative, forming a governing body of 7,000 members to collectively lead the city-state.

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1 USD = 83.88 Indian Rupee