IMPLICATIONS OF CHINA'S THIRD PLENUM FOR INDIA

The unusual delay in the Third Plenum of the 20^th Central Committee of the Communist Party of China (CPC) amidst China’s dwindling domestic economic situation led to a lot of expectations about its outcome. Spread across 60 sections, nearly 300 reforms introduced during this Plenary session target Xi Jinping’s economic priorities such as innovation-based growth and balancing central-local fiscal relations, while ignore calls for demand-side reforms, addressing trade imbalances and overcapacity concerns. Although most of these reforms focus on tackling domestic economic headwinds, it is bound to impact China’s external economic relations, including those with India. Despite India’s preparedness for safeguarding its economic interests against Chinese shocks, the bilateral relationship has become more complex in the last few years characterised by a rising trade imbalance and continued border tensions with no immediate resolution on the horizon.

China’s Export-driven Growth: A Concern for India

On the domestic front, China’s economy underperformed with just 4.7 percent year-on-year GDP growth in Q2, well below 5.3 percent growth in Q1. Similarly, the contradiction between improving industrial capacity and weak domestic consumption continues to deepen, as revealed by the quarterly figures released on the first day of the plenum. In the absence of an effective fiscal stimulus to boost domestic demand, exports will continue to remain the primary growth driver for China in the near future despite calls for consumption-driven growth. Thus, in the light of the increased scrutiny of China’s trade practices by Western countries, China might turn to India and Southeast Asian countries to sustain its export-driven model.  

India’s trade deficit with China nearly doubled from USD 44 billion in 2020-21 to USD 85 billion in 2023-24, making China its largest bilateral trade partner. Against this background, the recent Economic Survey drafted by the Chief Economic Advisor recommends for more Foreign Direct Investments (FDI) inflows from China to reduce its import dependency and boost its exports to Western markets. While this suggestion would help India expand manufacturing capacity in high-end products like electric vehicles, batteries or industries where India lacks expertise, it may cause security concerns that had initially prompted restrictions on Chinese investments in 2020.

Furthermore, China’s continued emphasis on supply-side reforms in the reform document is evident from reforms suggested for State-Owned Enterprises (SOEs) that allow them “to grow bigger, with their core functions and core competitiveness enhanced”. Similarly, the private sector is being encouraged to “lead national initiatives to make breakthroughs in major technologies”. Such measures aim to expand China’s manufacturing capacity, particularly in emerging sectors where transfer of core technologies is being restricted by Western countries. As a result, opening up Indian markets to Chinese FDI amidst weak demand and plans for increasing manufacturing base in China might not yield desired results for India, as it may lead to more Chinese imports of raw materials at even cheaper prices, thereby making overcapacity concerns more severe.

Bilateral Trade: Deepening Dependence

Possibly the most significant takeaway from the Third Plenum is China’s emphasis on developing high value-added technologies and integrating them into industrial production in strategic “New Three” sectors; lithium-ion batteries, EVs and photovoltaics. China’s continued subsidy-led industrial policy support for these sectors suggests that India’s import reliance on Chinese high-technology goods is likely to deepen. For instance, India’s Lithium-ion imports from China have grown by more than ten times between 2015 and 2023, which is likely to increase further. Similarly, imports from China of semiconductor manufacturing equipment have grown from around 7 million USD in 2018 to over 421 million USD in 2023 and core component imports for industrial robots, like harmonic reducers, grew from 8 million USD in 2015 to 44 million USD in 2023. With China looking to create new, technologically-driven sources of export-led growth, India’s import dependence will deepen in sectors like semiconductors, renewable energy technologies, aerospace goods and several others, where technology and innovation drive China’s competitive edge.

Moreover, the Third Plenum’s focus on advanced technologies also included “improving systems for enhancing the resilience and security of industrial and supply chains”, which compounds India’s vulnerability to disruptions and risks emanating from China. The Party has increasingly prioritized protecting its competitive advantages by restricting or banning the export of key technologies and goods. China banned the export of technology to produce rare earth magnets in December 2023 and more recently, restricted the exports of certain aviation and aerospace components. As Beijing gets more protective of its technological advantages, leverages its supply chains for geoeconomic gain and India’s import reliance deepens in advanced manufacturing technologies, supply chain restrictions and export bans are likely to suddenly and adversely impact many of India’s manufacturing sectors in the decade ahead.

Another related consequence of the Third Plenum for India’s trade relationship with China concerns rerouting and dumping of goods. The Plenum resolution mentions that China will “support various types of entities in developing logistics facilities overseas”, which hints at a strategy for manoeuvring around the US and EU tariffs on Chinese goods by rerouting goods into South-East Asia from where they are likely to be exported into India and other markets. The strategy to create logistics facilities, most likely in South East Asia, hint at the likelihood that India becomes a market for Beijing to offload excess supply of Chinese goods like EVs, steel and industrial machinery.

External Markets and BRI

The emphasis on high-quality development at the Third Plenum was reflected in all aspects of China’s internal and external economic interests. In the context of China’s Belt and Road Initiative, the Third Plenum highlighted high-quality cooperation to advance “small but beautiful” public welfare projects. This means that BRI projects will feature fewer big-ticket projects and have a smaller footprint, but provide public goods, become geographically spread out within a country and adopt a more sustainable approach. This signals a diversification of China’s BRI presence in regions like South Asia, allowing it more pervasive economic and diplomatic influence to unseat the primacy of established regional powers like India, in their immediate neighbourhood. This will require India’s economic and diplomatic efforts to adopt greater agility and creativity to counter China’s influence.

Additionally, decisions taken at the Third Plenum have done little to encourage foreign investors and businesses, which, coupled with greater regulatory scrutiny of trade and economic activities of foreign businesses, are likely to provide the ‘China plus one’ strategy added impetus. The reshoring of manufacturing facilities to countries like Mexico, Vietnam and India is likely to continue as long as foreign investors and businesses in China are uneasy about their supply chain security and stability.

Continuation in Foreign Outlook

One of the major outcomes of the Third Plenum with respect to China’s foreign policy is the decision with respect to former Foreign Minister Qin Gang. The Communique of the plenum clarified that the Party accepted the “resignation” of Qin Gang from the Central Committee but continued mentioning him as “Comrade”, thereby alleviating speculations regarding his purge. This move also strengthens Wang Yi’s position as the in-charge of China’s foreign relations, indicating overall continuity in its foreign policy. With regards to India-China relations, Recent back-to-back meetings between foreign ministers S. Jaishankar and Wang Yi in Kazakhstan and Laos along with potential Modi-Xi meet later this year at the BRICS summit hint at deliberate efforts towards diffusing political tensions to some extent. However, whether these meetings translate into de-escalation at the border is something that no one is sure about as of now.

However, the reform document offers some hints about China’s military posture in the coming years as it approaches the centenary goal of the PLA in 2027. The major focus of military reforms has been on making systemic corrections to ensure “political loyalty” in the PLA and maintain CPC’s, more importantly Xi’s, absolute control over the military. Further, the focus on “refining the functions of the CMC command center for joint operations” will certainly have implications for the LAC situation. Although the reform document lacks specific measures that the CMC and PLA aim to adopt, it highlights CPC’s priority for “establishing sound coordination mechanism for promoting security in neighbouring regions”. Similarly, the emphasis on creating a “new framework of services and arms” and “new-domain forces with new combat capabilities” suggest that India will have to prepare for more non-traditional security threats originating from China. Lastly, reforms in civil-military relations prioritize the strengthening of national defence mobilisation system in border areas, implying more human presence at the LAC from the Chinese side.

Conclusion

The medium to long term economic policy direction outlined at the Third Plenum presents certain immediate and long-term complexities for India to manoeuvre. From a trade perspective, India’s deficit is likely to extend into advanced manufacturing sectors while New Delhi builds up domestic manufacturing capacities and prepares to mitigate sudden and major externalities resulting from disruptions to Chinese supply chains. These developments may impact India’s overall economic growth as well as export competitiveness of certain manufacturing sectors.

As India mulls the possibility of opening up to FDI from China, the security risks tied to Chinese equipment reemerge along with relatively new concerns about oversupply of cost-competitive Chinese goods. With supply-side reforms continuing to take centre stage and SOEs encouraged to grow bigger and lead breakthroughs in emerging technologies, China’s industrial capacity, if unchecked, could diminish the impact of the self-reliance campaign in Indian manufacturing.                          

Although diffusion of political tensions appears likely in the short term, India is certain to emphasise the outsized influence of the border standoff in any reconciliation efforts. As China gears up to develop hybrid warfare strategies and joint operations capabilities, India’s focus will remain firmly fixed on China’s mobilisation efforts along the border as well as its broader efforts to cultivate influence in South Asia and the Indian Ocean Region.