The NITI Aayog released its inaugural quarterly report, Trade Watch, which evaluates India’s trade and commerce scenario.

NITI Aayog Observations

• India’s Limited Success: The report acknowledges India’s limited success in leveraging the China Plus One strategy, as compared to Vietnam, Thailand, Cambodia, and Malaysia.
  • These countries have emerged as significant beneficiaries due to competitive advantages like cheaper labor, simplified tax structures, lower tariffs, and proactive free trade agreements (FTAs).
  • India has not fully captured the opportunities presented by the global shift away from China-centric supply chains.
  • Multinational companies are de-risking their operations by diversifying to other countries.
• Global Trade Disruptions: US-China trade conflicts, including recent reciprocal trade restrictions, have fragmented global supply chains.
  • Export bans on critical materials and increased tariffs on Chinese goods are reshaping trade dynamics.
• Sectoral Challenges: Indian iron and steel exports have seen a steep decline (33% in Q1 FY25) due to weak domestic demand and oversupply from China.
  • India’s iron and steel industry is particularly vulnerable to the EU’s Carbon Border Adjustment Mechanism (CBAM), which could impose 20–35% tariffs.
• Opportunities in US Trade Policies: Tariffs on Chinese goods (up to 60%) could provide India a competitive edge in global markets.
  • Trade diversification offers opportunities in underrepresented sectors where India’s global share is below 1%.

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About China Plus One Strategy

• It is a strategy adopted by multinational corporations to reduce dependence on China by expanding production or sourcing in other countries.
  • For example: Apple has started manufacturing some of its products in India to reduce dependence on China.
• Key Drivers of China +1:
  • US trade barriers on Chinese imports.
  • Fragmentation of supply chains due to geopolitical tensions.
  • Search for cost-competitive and stable alternatives to China.

Challenges in Reaping Benefits of China+1 Strategy

• Internal Limitations: High labor costs compared to competitors like Vietnam and Cambodia.
  • Complex tax laws and limited FTAs with major trade blocs.
  • Insufficient infrastructure and bureaucratic delays.
• Global Dynamics: Dumping of Chinese products in Indian markets due to surplus production in China and competition from Southeast Asian countries that are better positioned in global trade.
• Environmental Regulations: Compliance with CBAM increases costs for Indian exporters, especially in high-risk sectors like iron, steel, and aluminium.
  • Potential reduction in demand for Indian exports in the EU market.

Indian Government Initiatives to Leverage the Benefits of China +1 Strategy

• Production Linked Incentive (PLI) Scheme: This scheme provides production-linked incentives to boost domestic manufacturing in key sectors like electronics, pharmaceuticals, textiles, and automobiles. The PLI scheme has attracted significant investments from global companies.
• Make in India Initiative: This initiative aims to make India a global manufacturing hub by simplifying regulations, improving infrastructure, and promoting skill development.
• Focus on Electronics Manufacturing: The government has taken several steps to promote electronics manufacturing, including setting up semiconductor manufacturing facilities and providing incentives to attract investment.
• Trade Agreements: India is actively negotiating free trade agreements with various countries to enhance market access and reduce trade barriers.
• Infrastructure Development: The government is investing heavily in infrastructure projects like roads, ports, and railways to improve connectivity and reduce logistics costs.
• Skill Development: The government is focusing on skill development programs to create a skilled workforce to meet the demands of the manufacturing sector.

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Way Forward

• Enhance Manufacturing Capabilities:
  • Focus on high-tech industries and sectors with significant global demand.
  • Promote domestic production through incentives and infrastructure development.
• Simplify Policies:
  • Reform tax laws to make India more competitive for foreign investors.
  • Accelerate the signing of FTAs to access new markets.
• Mitigate Risks:
  • Implement measures to prevent the dumping of Chinese goods.
  • Support industries exposed to carbon regulations by subsidizing compliance costs or negotiating trade terms.
• Leverage Trade Opportunities:
  • Expand exports to markets affected by US-China trade restrictions.
  • Target underrepresented sectors in global trade for diversification.