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Friday, April 19, 2024

India’s Strategic Need for Economic De-Risking from the PRC


The PRC is India’s second-largest trading partner, only falling behind the United States, with Indian imports from the PRC having set a new high of $136.2 Billion and the trade deficit rising by 21% in FY 2023 in comparison with FY 2022. Though the bilateral trade has surged, there are a lot of complications not just in terms of interdependence with the PRC but also in safeguarding the national security of India. In this article, the author has attempted to analyze the People’s Republic of China (PRC) as an indication of India’s need to diversify its trading partners. The article discusses India’s initial efforts in this regard, as well as how other countries can view India as a viable alternative in the global production and supply chain network. Therefore, to reduce the dependence on the PRC, there is often a debate between de-risk and de-couple adoption strategies from the PRC. However, the line of differentiation between decoupling and de-risking is still gray in reality. Let’s debunk the balance between de-risking and decoupling-

Decoupling vs De-risking

Decoupling refers to a complete economic separation, that is, entirely eliminating trade, investment and migration, between the two or more countries. It is an abrupt act of disentanglement that causes an exponential increase in the economic cost and further severs the diplomatic ties between the disentangled countries. On the other hand, de-risking is based on mitigating risks associated with economic engagement by diversifying the supply chain and production. As pointed out by the Director General of the World Trade Organization, Ngozi Okonjo-Iweala, de-risking can also be viewed through the lens of the ‘re-globalization approach’[i] (deeper, more diversified, and deconcentrated international markets). This follows ‘interdependence without over-dependence’ to attain greater economic security along with safeguarding one’s strategic autonomy from a ‘systemic rival’ like the PRC which challenges the Western ecosystem from time to time. However, full-scale decoupling from the PRC is not possible in reality because the Indian economy and the PRC markets are highly interlinked and it will majorly lead to adverse effects in the global economy as these two Asian giants are pivotal for the global economy. Accordingly, diversification (de-risking) with a strategic preference for mitigating risks is the ideal and exclusive route rather than cutting off economic relations with a country.

Steps Taken by Some Companies to De-risk from the PRC

Some companies have implemented strategic measures to reduce their reliance on manufacturing in the PRC, including diversifying their supply chains and investing in alternative production facilities in other regions. These steps aim to mitigate geopolitical and economic risks while ensuring continuity in their operations. For instance, Foxconn, the Taiwanese Electronics Company, is a key supplier in Apple’s iPhone manufacturing operations and has significant manufacturing units located in the PRC. The Covid-19 added to the woes of the company with mistrust, miscommunication, lockdowns, large-scale labor unrest, security issues and severe logistical challenges. As the demand for iPhones increases worldwide and manufacturing centres are primarily in one country, the risks of excessive reliance on the PRC become apparent. This gave The company varied reasons to diversify its supply chains. Thus, Apple Inc. strategized to de-risk from the PRC which meant shifting its operations and diversifying its supply chains outside the PRC.

One major reason after Covid-19 was ‘Fat tail risk’ i.e. a low-probability, high-impact event that can significantly disrupt the global order or cause widespread instability. These events are difficult to predict due to their rarity and often fall outside traditional risk assessments and this rarity can be often seen in authoritarian regimes. The Russia-Ukraine war was unexpected and uncertain for the global markets and it impacted many critical supply chains that were not even geographically connected. This highlights that authoritarian regimes can be highly dicey with their unanticipated events disrupting the political and business ecosystems.

Another reason is the tensions between Taiwan and the PRC that prompted Apple Inc. to speed up its de-risking process. Apple Inc. sources 90% of Wafer production (ultra-specialized chip fabrication processes) from TMSC (Taiwan Manufacturing Semiconductor Company). According to Asia Nikkei (2022), Apple Inc. has asked Taiwan suppliers to label these components which constitute 50% of the global market supply as made in “Chinese Taipei” or “Taiwan, China” which suggests that Taiwan is a part of the PRC. On mentioning “Made in Taiwan” i.e., not complying with the PRC import rules then it can lead to delays, fines and even rejection of entire shipments under the rule. And Apple Inc.’s choice to deny Taiwan’s independent existence brought worldwide criticism.

The third reason is that the PRC, in Sep 2023, ordered its government officials to discontinue working with Apple’s iPhones and were directed not to bring these devices into the offices due to cyber security concerns. In the same year, the PRC banned the usage of memory chips made by Micron citing the same reason. This move by the PRC led Micron’s net income of $8.68 billion in 2022 to convert to a net loss of $5.83 billion in FY 2023. Apple Inc. generates $74 billion in revenue from the PRC which is roughly 19% of its total revenue. However, the PRC’s uncertain decisions and the risk of such bans lingered over Apple Inc.’s goals due to which the company started de-risking gradually from the PRC. Thus, all these complexities led Apple Inc. to turn its head towards setting up new manufacturing capacities in Vietnam for the production of MacBooks, iPads, and the Apple Watch. It has been estimated that Vietnam will meet 40% of the United States’ capacity for these three products. Along with that Foxconn is making India a manufacturing hub by setting up units in Tamil Nadu and Karnataka to assemble iPhones and expects to expand its production to 20% – 25% in 2024. Hence, these companies have opted to pursue additional de-risking strategies as their sole pathway forward.

Steps Taken by India to De-risk from the PRC

Coming to India, India’s economic ties with the PRC in major strategic sectors such as electronics, machinery, chemical products, and pharmaceuticals have been a growing concern for the Indian government. India’s increasing trade deficit with the PRC has been flagged as a security concern by the Indian government coupled with the long-standing and ongoing border conflict along the Line of Actual Control (LAC) in Galwan Valley, Arunachal Pradesh and Sikkim. These border disputes pose a challenge to national sovereignty and thus, India had to take concerted action to diversify India’s supply chain and also enhance its own potential with initiatives to boost self-sufficiency.

India acknowledges the need to minimize risk from the People’s Republic of China (PRC) due to perceived threats to national security. As a result, India is taking strategic measures to protect its sovereignty and economic interests. An example of this is the 2020 power outage incident in Mumbai where a US-based company, Recorded Future, reported a cyber attack by unknown Chinese entities on the server of the Indian Electricity Grid. This has raised serious questions about India’s internal security. In 2021, Union Minister RK Singh said, “India will not allow the import of power supply equipment from China without permission from the government.” He further added that Indian companies will have to seek permission to import power components from China or any other country. Even if there are any imports, then their testing will be done in certified laboratories of the Ministry of Power “to check for any kind of embedded malware/trojans/cyber threat and adherence to Indian Standards”. This was a major step in India’s de-risking from the PRC in the power sector.

Atma Nirbhar Bharat Abhiyan: From Imports to Exports

Furthermore, according to the United Nations Conference on Trade and Development’s (UNCTAD) report, India was among the top 15 economies that were affected by the slowdown of China’s manufacturing due to the Covid-19 outbreak. It has mainly impacted sectors like automobile, pharmaceuticals, chemicals and electronics and inversely impacted India’s GDP (from 6.6 % to 5.3%), as per Moody’s report of 2020. For this, the Indian Government has implemented the ‘Atma Nirbhar Bharat Abhiyan’ aimed at creating a ‘self-reliant India’ which encourages companies to manufacture in India rather than rely on imports completely. According to BVR Subrahmanyam, Vice-Chairman of Niti Ayog, India is at the “sweet spot” to capitalize on the Global strategy of de-risking from China and it will also contribute to its GDP growth projection i.e. 8% – 9% for 2030. This demonstrates that India can also tap into capitalizing on its potential and also provide a viable and optimal region to expand their activities.

Turning towards the supply chains, the PRC’s zero Covid policy, cross-border tensions and government scrutiny intensified the search for alternatives in the market. Hence, many businesses in India also started following the “China plus one strategy” i.e., companies search for alternate manufacturing options and supply sources apart from those in China to de-risk their businesses. For other countries and multinational enterprises, India is regarded to be an ideal country for long-term manufacturing bases and supply sources as India is currently at its peak of demographic dividend, hospitable business climate, unimaginable integration of digital technology in daily lives, the low per capita, wage rate, strategic location, huge domestic market, cheaper availability of land etc. Nevertheless, internal strengthening not only enables self-sufficiency but also acts as a magnet for foreign companies to invest and start operations in India.

Under this framework, the Production-Linked Incentive (PLI) scheme was launched in 2020 which was a financial initiative by the Indian government to boost domestic manufacturing and make India globally competitive. In simple economic terms, this scheme offers companies incentives on incremental sales from products manufactured in India, curbs cheaper imports and reduces import bills, improves cost competitiveness, attracts investments and embraces cutting-edge technology in key sectors. Thus, this ensures efficiency, taps economies of size and scale and enhances exports in the manufacturing sector.

The below table signifies that under this scheme, the Government of India has extensively allocated investments in 14 sectors which are called as “sunrise and strategic sectors” in 2021. It is estimated that this scheme will contribute approximately 1.7% to the GDP by 2027.

Sectors PLI Scheme outlay


Automobile and Auto Components 25,938
Aviation (Drones and Drone components)      120
Electronic System 55,645
Chemicals 18,000
Food processing 10,900
Medical Devices 3,420
Metals and Mining 6,322
Pharmaceuticals (Key Starting Materials/Drug Intermediaries & Active Pharmaceutical Ingredients, Drugs) 21,940
Renewable Energy 24,000
Telecom 12,195
Textile & Apparel 6,238
White Goods 10,683

Source: Invest India, PIB

In 2022, another scheme, National Logistics Policy (NLP) was launched to boost the country’s economy and make businesses more competitive. It aims to create a smooth, efficient, and eco-friendly logistics network using the best technology and the most skilled people. This network will lower logistics costs, improve its performance and add a desire for foreign companies to expand or reallocate their supply chains in India. Currently, the logistic cost for companies within the country is 13-14% of the GDP and the government has set a benchmark to reduce the cost by 8% of the GDP. So, it is significant for the government and businesses to speed up de-risking and also find what is best for our national interests.

Toy Industry:

In 2019-2020, the Chinese industry was having a complete monopoly over the Indian toy market. Only 20% of the toys sold in India were made locally whereas the PRC constituted 75% of the toy market share due to its low price and variety. Large-scale dumping of toys by the PRC has hindered the growth and development of India’s indigenous toy-manufacturing sector and innovation and hampered the livelihood and skillset of local manufacturers.

In regards to the safety standards, the government conducted a survey in 2019 which found that only 33% of that massive influx of toys from the PRC were safe. Most of the toys from the PRC have high levels of toxic phthalates (a group of chemicals used to make plastics more durable and also known as plasticizers) which can lead to a wide range of health disorders. The Indian Government took protectionist measures to support the Indian toy industry’s growth and to ensure quality control. The Bureau of Indian Standards (BIS) has published 10 Indian standards on safety aspects of toys related to physical safety, safety against chemicals, flammability and electrical safety, aiming to prevent the use of unsafe and toxic materials in the manufacturing of toys. Also, under China’s one plus strategy, the govt. has raised the import duty from 20% to 70% in 2023


Semiconductor chips are the lifeblood of the modern information age. It is essential for almost all “the sunrise and strategic sectors” of the economy like aviation, automobiles communications and so on. Under the mega PLI scheme, the Central Government approved on Feb 2024 to set up three Chip Fabrication Plants. The first semiconductor fabrication unit is established in Gujarat by Tata Electronics Private Limited in partnership with Power Chip Semiconductor Manufacturing Corp (PSMC), Taiwan. The plant will attract Rs 91,000 crore investment and Tata Electronics’ plant will have a capacity of producing 50,000 Wafers per month. One Wafer has 5,000 chips so the total will be around 3 billion chips per annum. The second, in Assam (Morigaon), Tata Semiconductor Assembly and Test Pvt Ltd (Indore) will set up a Rs 27,000 crore semiconductor unit.[ii] Third in Gujarat (Sanand), CG Power (Mumbai) will set up a semiconductor unit in a Joint venture with Renesas Electronics Corp, Japan, and Stars Microelectronics, Thailand. Hidetoshi Shibata, CEO of Renesas said, “India is a critical part of Renesas’ business. We value its innovative landscape and robust potential growth and are committed to accelerating our investment in India”. Minister of Electronics & Information Technology Ashwini Vishnaw quoted that the total estimated investment in three semiconductor units is Rs 1.26 trillion and will create 20,000 advanced technology jobs and about 60000 indirect jobs.[iii]

Building a domestic semiconductor ecosystem would create a conducive environment and make India’s long-cherished dream of becoming a semiconductor hub a reality. It will help India to reduce its reliance on imports from other countries. According to the International Trade Administration (2023), India imported 95% of its semiconductors from countries like China, Taiwan, South Korea, and Singapore.[iv]

Pharmaceutical Industry:

The local production of some key Active Pharmaceutical Ingredients (APIs) increased under the PLI scheme for bulk drugs. According to Viranchi Shah, President of the Indian Drug Manufacture Association (IDMA), due to the PLI scheme, the number of plants to make Para Amino Phenol (used to make Paracetamol) has increased from one to four. During Covid-19, the pharmaceutical industry was highly dependent on the PRC’s components used in the medicines. Data from the Pharmaceutical Exports Promotion Council (Pharmexcil) reveals that in 2022-2023, Indian imports of APIs and intermediates from China grew by 1.74% from the previous year and in 2021-22 it grew by 19.5% from the previous year; although the trade increased but the rate of growth has slowed down sharply.

API manufacturing has slowly shifted from the Western countries to India and the PRC because both countries provide low labor and the low infrastructure, transportation and equipment costs. During the 1990s, China (PRC) and India were among the largest producers of Active Pharmaceutical Ingredients (API) with a total value of $4.4 billion and $2.0 billion, respectively. However, over time, India’s pharmaceutical companies experienced growth, which created a gap in the local supply of API. China, with its cost competitiveness, filled this gap and further captured the Indian API market. For instance, Penicillin G, just like many other APIs that India manufactured, was phased out of production because of subsidy-driven cheaper Chinese products flooding the Indian market. Hence, the Indian manufacturers need to become self-reliant and the journey has already begun as the 35 APIs have started manufacturing locally under the PLI scheme.


In February 2022, India enacted a ban on the import of drones. This decision was made as a follow-up to an earlier decision in August 2023, which prohibited domestic drone manufacturers from using components made in China. This ban effectively closed off the emerging market for Chinese drone manufacturers in India, as China had previously supplied nearly 70% of India’s drone imports. In particular, this ban has impacted Shenzhen DJI Innovation Technology Co. Ltd, the world’s top drone maker from China. These measures have been taken by the Indian government to address the national security risk and to boost the domestic manufacturing of drones. Other reasons that encouraged India to act are as follows, the U.S. Department of Defense (DoD) and the broader U.S. National Security community have blacklisted the use of Chinese drones due to security concerns in Nov 2022. According to the New York Times report, the DJI app for drones was illegally collecting data from user’s phones.[v] Also, the DJI’s drones were used in the Russia-Ukraine war by Russia to retrieve the strategic information of Ukraine, as per the Diplomat. Under the SCALE initiative and PLI scheme, the Ministry of Civil Aviation, India in FY 2020-2021 has allocated Rs120 Crore to the drone industry which is spread over the three financial years. The ministry has introduced a unique feature for the domestic drone manufacturers under this scheme, the government will compensate the loss if the manufacturer fails to meet the value addition threshold i.e., 20% in the subsequent year.

Telecom Industry:

The Indian telecom market is the second-largest in the world with more than 1.2 billion subscribers and it is anticipated to grow at a compound annual growth rate of 9.4% till 2025, the major share in this growth is of the smartphone industry. Under the mega PLI scheme, the Department of Telecommunications, India incentivized this sector with an outlay of Rs12,195 crore in Feb 2021 which will be implemented over 5 years to boost domestic manufacturing, investments and exports. This scheme will support companies that will manufacture the Core Transmission Equipment; 4G/5G, next-generation RAN and wireless equipment, access & CPE; IOT access devices; and other wireless equipment and enterprise equipment (switch & router). According to the government data, the PLI beneficiaries have invested about Rs.2842 Crore with sales of over Rs 40,800 Crore. The Central government is taking other initiatives like a partnership with the US in the area of telecom and technology which will create an opportunity to export as the US and other like-minded countries – Australia, Japan and the United Kingdom have moved away from the Chinese players Hawaii and ZTE for telecom services due to security loopholes. For the same reasons, national security and geopolitical relations with like-minded nations pushed the Central government of India to keep the Chinese vendors (Hawaii and ZTE) away from the 5G rollout.

Way Forward

The above progress in schemes strengthened the need for diversification but there are still complexities with the PRC in cyberspace, electrical machinery and its components, parts of

nuclear reactors, machinery and mechanical appliances and parts of organic chemicals, plastic and plastic articles, fertilizers, agrochemical as these are key sectors for India. India can also partner with other countries, collaborate and exchange ideas, and expertise and trade for mutual growth.

As major economies attempt to de-risk China, India can make the most of this opportunity by attracting global economic investments in varied sectors. The solutions we must look for are how to build self-resilience, increase and enhance the workforce, and set up our economy to succeed over the long run. This shift not only prioritizes minimizing disruptions to the trade but also enhances national security. Diversifying its security and defence partnerships would not only reduce dependency on any single country but also empower India to navigate the complex interplay of regional strategic dynamics effectively.


[i] https://www.wto.org/english/news_e/spno_e/spno32_e.htm




[v] https://www.nytimes.com/2020/07/23/us/politics/dji-drones-security-vulnerability.html

Authored By:
Gurjot Kaur,
Red Lantern Analytica

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