The Chinese economy’s extended tumble is undoubtedly being watched from India with glee and opportunism. Ever since India became the world’s fifth-largest economy a year ago, there has been a lot of talk about its potential to replace China as the world’s manufacturing hub. Realistically, the development gap between the two countries imposes serious limits on New Delhi’s ability to take advantage of Beijing’s dwindling fortunes. What is likely, however, is that India will adjust the way it does business so as to attract enough investments over the next several years to reduce some of the world’s dependency on the Chinese industrial complex. How this unfolds will have a major bearing on U.S. national security and foreign policy in the coming decades.
The Biden administration is trying to curb U.S. investment in China. In some respects, this process was already underway; for example, U.S. venture capital investment in China has declined significantly since 2021. But Washington wants to go further, specifically to prevent Beijing from using American money to advance its military capabilities. So, on Aug. 9, the White House issued an executive order restricting investment in China in three strategic sectors: semiconductors and microelectronics, quantum information technologies, and artificial intelligence.
In the short term, at least, the U.S. and Chinese economies are too interconnected for Washington to push this strategy very far. The sluggish Chinese economy is already hurting American corporations with major commercial interests there. In recognition of the economies’ interdependence, the Treasury Department said it would exempt “publicly traded instruments and intracompany transfers from U.S. parents to subsidiaries.” The U.S. well understands that China’s enormous market share, acquired over decades, will not be easily reversed. After all, it was Washington’s strategy dating back to the Cold War that played a key role in China’s rise.
Over the longer term, countering China requires a reduction in the world’s dependency on Chinese industry. This, in turn, requires other players to step up and offer serious competition to China. India is a logical contender, given not only its size and development but also its own hostile relations with China.
Unlike China, where the state dominates the private sector and can mobilize resources more quickly (even if the efforts eventually flounder, as they are currently), in the Western economic model investors must see a worthwhile return in order to invest. But just because China is looking unattractive does not make India the belle of the ball. It is up to India to take the steps to attract American investors. The process is underway, but it still needs time.
There is also a framing problem with the public debate on this issue. Generally, observers do not pay attention to a development until it is near maturation or has become a full-blown condition. Some have rightly pointed out the factors that could block India’s path to becoming the next China, but they too are seeing the issue from the perspective of a desired end state. Evaluating India’s growth potential requires examining it as a process – one that will have flaws similar to the struggles that China experienced during its rise.
Obviously, India is not going to replace China anytime soon. The People’s Republic will remain a major producer of manufactured goods for a long time to come. But the Indians have great potential to reduce some of the dominance that the Chinese currently enjoy. The Indian government will have to overcome a number of bureaucratic obstacles to enact the reforms necessary to attract investment. Working in its favor is the fact that China’s economic decline has investors spooked, and many are looking for alternative destinations for their cash.
Acceleration of this shift depends on the progress the Indian political elite can make in reducing the risks that have thus far limited firms’ willingness to do business in the country. In particular, New Delhi will need to ensure that the rules of the game do not excessively advantage Indian companies; foreign firms will expect a level playing field. To what extent India over the coming years becomes a competitor to China is to a great degree a function of Indian political stability. Prime Minister Narendra Modi’s ruling Bharatiya Janata Party has the parliamentary majority to push through the necessary reforms, but it will have to work with state governments that it does not rule.
More important, the BJP will need to balance its geoeconomic imperative with the right-wing Hindu nationalist ideology that fuels its electoral base. For investors considering diversification away from China, reports of communal violence, such as the recent flare-ups in Manipur in the northeast and the areas around the national capital, are reason for pause. Investors are likely to think they are better off weathering the economic storm in China and managing the risks of U.S.-China tensions than trying to wade into the uncertainty of India.
These are not just challenges for India. They also represent hurdles for U.S. strategy, and Washington will need to work with New Delhi toward mitigation. The key is that the United States should not expect anything as grand as India becoming a substitute for China. The American approach will have to be gradual – if it’s not already.