As geopolitical tensions expose the risks of over-dependence on one ‘factory of the world’, global firms are diversifying. The ‘China+1’ mantra is propelling capital towards alternatives. India looks primed to gain — on paper.
The pitch is seductive: the planet's most populous country, with a young workforce and huge market, ready to wrest manufacturing from a slowing China beset by anaemic demand, deflation and a weak housing market. Yet interviews by National University of Singapore’s East Asian Institute with 50 executives, officials and experts across India, America and Singapore and official data paint a more cautious picture. The shift from China to India is no stampede, but a slow shuffle shaped by India’s enduring obstacles as much as by its opportunities.
China+1 is not about decoupling; global supply chains remain entwined with China. For most multinationals, India is a complement, not a substitute. Apple expands in India but retains its vast Chinese operations. Firms cling to China for high-end manufacturing, R&D and its domestic market, while spreading lower-end production elsewhere for resilience.
India has notched gains. Gross foreign direct investment hit $81bn in 2024-25, up 14% year-on-year. Production-linked incentive schemes have lured factories from electronics to pills. Pharma alone generated sales of 2.66trn rupees ($28.1bn) in three years under PLI, with exports of 1.7trn rupees and local value-added hitting 83.7% by March 2025. In Tamil Nadu, Foxconn and Apple's suppliers are clustering and growing, aided by swift, single-window approvals. When India's bureaucracy works, it works fast. America's tariffs — now hitting Indian goods alongside Chinese — have sharpened the urgency for India to build self-reliant supply chains.
But harsh realities persist. India trails China not on headline costs but on reliability and supplier depth. Official logistics costs are around 8% of GDP. Bosses say the lived experience — delays, clunky multimodal links, and unpredictability — is costlier. Power tariffs roughly match China's on paper, but disruptions force firms to run costly diesel backups. Trucking 1,500km takes eight days, an aeon for just-in-time chains. Above all, India lacks China's dense web of parts-makers.
Policy adds drag. India trumpets an ‘open for business’ sign, but red tape snarls execution. Doing business in India remains difficult is a frequent complaint. Quality-control orders and tariffs, meant to nurture local makers, inflate input costs.
China ties pose a deeper bind. India runs a $100bn yearly trade deficit, dependent on Chinese machinery, rare earths, special alloys, active pharmaceutical ingredients and precision components with no realistic near-term substitutes. Moreover, bilateral trust is strained.
The implementation of Press Note 3, a 2020 rule needing approval for investments from neighbours, was tightened after the Galwan clash. Chinese FDI into India cratered from $229mn in 2018-19 to $42mn in 2023. Critics call it self-defeating: shunning Chinese factories and know-how while importing their finished goods; forgoing jobs and technology transfer while the trade deficit expands. Press Note 3 was amended in March to attract more investments from China; China’s response will provide one measure of how much damage has already been done.
Politics poisons trust. The two governments' rivalry trumps business pragmatism — for now.
The contradiction highlights the complexity. While the two countries are locked in strategic competition, many businesses attempt to navigate the landscape pragmatically. The sharp decline in Chinese investment into India post-2020 is a clear indicator of which prevails.
The irony stings. Before 2020, Chinese firms had begun building manufacturing ecosystems in India; Xiaomi, Oppo, and Vivo were developing component supply chains, bringing capital, technology, and quality standards. A reported ongoing review of Press Note 3, potentially allowing low-stake investments automatic approval, is a welcome step if implemented thoughtfully.
To convert global interest into substantial manufacturing depth, India needs a pragmatic and ambitious policy recalibration.
First, wield protectionism more selectively. Shield infant industries at home, but let exporters get world-price inputs. Tariffs that shield local producers for the home market should not make export-oriented firms uncompetitive by raising input costs. A mixed approach — protection for sectors, building scale domestically, openness for exporters competing globally — acknowledges both needs.
Second, ring-fence genuinely sensitive sectors from Chinese investment while allowing carefully structured investment in non-sensitive areas. Establish India’s terms of engagement and safeguard requirements clearly. Blanket restrictions have curtailed capital and technology inflows without reducing import dependence. Security-sensitive sectors like defence warrant strict screening; non-sensitive sectors such as batteries, components, and consumer goods could operate under transparent rules.
Third, play the long game. China+1 is a long-term opportunity offering important gains in employment and technology transfer. But progress is slowed by mistrust and policy uncertainty. India cannot replace China in the short or even medium term. Aim for ‘managed interdependence’: diversify for resilience while maintaining sufficient integration with Chinese supply chains to remain globally competitive. That means a multi-decade strategy of building alternatives through investment in frontier sectors, partnerships with advanced economies, and targeted R&D.
Finally, leverage India’s unique advantages. India's ace is its vast domestic market of 1.4 billion consumers. Unlike Vietnam or Mexico, India allows firms to pursue an ‘India-for-India’ strategy, justifying manufacturing investments on domestic market considerations. This reduces pressure for absolute cost competitiveness and allows companies to accept somewhat higher costs in exchange for market access and long-term growth potential.
The world is indeed looking for a Plus One. If India wants to be that choice, it needs to address its structural constraints with clarity and confidence and on its own terms. The opportunity is immense — but it must be earned, investment by investment, policy by policy, over the years.
P.S. Srinivas is a Visiting Research Professor at the East Asian Institute, National University of Singapore, and formerly worked at the World Bank, the Asian Development Bank, and the New Development Bank. This article draws on his recent study, “India, China and China+1 Strategies of Global Firms”, co-authored with Frank Pieke and Alfred Schipke of EAI. Anisha Sircar is a writer and researcher