India’s China+1 lessons lie within its own States

Why in news?

A study of 50 investor interviews shows China+1 firms choose specific States like Tamil Nadu and Karnataka, not ‘India’.

UPSC Relevance

Prelims – China+1 strategy  

GS1 – Factors responsible for the location of industries in India. 

GS3 – Indian Economy – industrial policy and its effects on industrial growth, investment models. 

What is the China+1 strategy?

China+1 is a business strategy in which global companies keep their operations in China but add at least one more country for production and sourcing. The aim is to reduce over-dependence on a single country, not to fully exit China.

Why did it emerge?

• Rising costs in China – Wages and land costs in coastal China have risen sharply over the last two decades, so low-margin assembly has become less profitable there.
• US-China trade war (2018 onwards) – Tariffs on Chinese goods pushed firms to look for alternate production bases to keep access to the US market.
• COVID-19 shocks – Lockdowns in Chinese factory hubs disrupted global supply chains and exposed the risk of a single-source model.
• Geopolitical risk – Tensions over Taiwan, export controls on chips and critical minerals, and sanctions have made companies price in political risk.
• ‘Friend-shoring’ and ‘near-shoring’ – Western governments now encourage sourcing from trusted partners (friend-shoring) or nearby countries (near-shoring, like Mexico for the US).

Who has gained?

Vietnam has been the biggest early winner, followed by Mexico, Malaysia, Thailand, Indonesia and Poland. India has gained mainly in electronics assembly, especially mobile phones, with Apple’s suppliers like Foxconn and Tata Electronics expanding here.

India’s China+1 experience so far 

• States, not India, attract investment – Global firms do not choose India as one block. They choose a State, and with it the land, power, approvals, workers and suppliers it offers.
• Policy continuity matters – Investors said commitments must be honoured regardless of political change. Ecosystems took four to five decades to build and cannot be created by a single industrial park or subsidy.
• Thin backward linkages – India mostly assembles. Electronics exports touched about $48 billion in 2025-26 but imports were about $116 billion. One executive described exports as assembled products with only around 20% Indian inputs.
• Concentration risk – Growth is largely in southern and western India, not in populous States like Bihar, Chhattisgarh and Jharkhand.
• Two State models highlighted in the article

Two Big Questions : 

1. Why India could not industrialise like East Asia (Vietnam, South Korea, Taiwan)?

India’s manufacturing share in GDP has stayed around 15-17% for decades, while East Asian economies used factories to move millions of workers out of farming. Some key reasons are:

• Different growth path – India moved from agriculture directly to services (IT, finance, telecom). East Asia followed the classic path of agriculture to labour-intensive manufacturing to high-tech industry.
• Early investment in people – South Korea and Taiwan achieved near-universal basic education and strong vocational training before their industrial take-off. India focused more on higher education, leaving a large workforce with low formal skills. Female labour force participation also remains low.
• Land acquisition hurdles – Fragmented land holdings, unclear titles and lengthy acquisition under the LARR Act, 2013 make large factory sites hard to assemble. Vietnam offers ready-built industrial zones.
• Rigid labour regulation and the ‘missing middle’ – Older labour laws discouraged firms from growing beyond small size. India has many tiny firms and few large ones, while East Asia built large exporting factories. The four Labour Codes, aim to correct this, but implementation depends on States.
• High cost of doing business – Logistics costs are estimated at around 8-9% of GDP. Industrial power tariffs are higher because industry cross-subsidises agricultural and household consumers.
• Trade policy – India has raised tariffs on several inputs, causing an inverted duty structure and costly components. It stayed out of RCEP (2019). Vietnam, in contrast, signed deep trade deals like the EU-Vietnam FTA, giving firms cheaper market access.
• Policy unpredictability – Retrospective taxation (Vodafone case, 2012; withdrawn in 2021), frequent duty changes and contract enforcement delays have hurt investor confidence.
• Distance from Chinese supply chains – Vietnam shares a land border with China, so components move quickly across. Press Note 3 (2020) restricted investment from land-border countries, slowing entry of Chinese component makers, though it was eased in March 2026.
• Weak ‘developmental state’ discipline – South Korea gave cheap credit to firms but tied it to strict export targets (chaebols). India’s licence raj protected firms without demanding performance.

2. Why investment is uneven across Indian States?

• Historical industrial base – Investment follows existing clusters (agglomeration economies). Suppliers, trained workers and service providers are already present around Chennai, Pune, Bengaluru and Ahmedabad.
• Coastal location and ports – Export-oriented units prefer coastal States like Gujarat, Maharashtra and Tamil Nadu, which reduce shipping time and logistics cost.
• Skilled workforce – Southern States invested early in engineering colleges, ITIs and polytechnics. Tamil Nadu also has a large share of India’s women factory workers, supported by safe hostels and transport.
• Governance and administrative capacity – Professional investment promotion bodies (Guidance Tamil Nadu, SIPCOT, KIADB in Karnataka), faster approvals and better contract enforcement attract investors.
• Ready land and utilities – Leading States maintain land banks and plug-and-play industrial parks with reliable power and water.
• Urbanisation – Investors and managers prefer locations with good housing, schools, hospitals and airports, which large southern and western cities provide.
• Perception of law and order and political stability – Investors avoid regions seen as having governance or security risks, even when labour is cheap.
• Self-reinforcing cycle – Investment brings revenue, which funds infrastructure, which brings more investment. Lagging States lack fiscal space to break into this cycle.

Steps taken so far

• Make in India (2014) – Aimed to raise manufacturing’s share and create jobs.
• PLI Schemes – Incentives across 14 sectors with an outlay of about ₹1.97 lakh crore. The PLI for large-scale electronics ended on March 31, 2026, and a successor was approved on July 15, 2026.
• India Semiconductor Mission – Support for chip fabs and assembly-testing units in Gujarat, Assam and other States.
• Infrastructure and logistics – PM GatiShakti National Master Plan (2021), National Logistics Policy (2022), Dedicated Freight Corridors and the National Industrial Corridor Programme.
• Ease of doing business – Business Reform Action Plan ranking of States, National Single Window System, Jan Vishwas Act (2023) decriminalising minor offences, and the four Labour Codes.
• Trade agreements – India-UAE CEPA, India-Australia ECTA, India-EFTA TEPA and India-UK CETA.

Way Forward

1. To attract more industrial investment into India

• Build ecosystems, not just assembly lines – Shift incentives from final assembly to components, tooling and design so that domestic value addition rises beyond the current 20% level.
• Rationalise tariffs – Lower duties on inputs and correct the inverted duty structure so Indian products stay competitive.
• Policy stability – Avoid retrospective changes and give long-term certainty on taxes, duties and incentives.
• Calibrated openness – Allow selected component makers from neighbouring countries under strict security screening to speed up technology transfer.
• Reduce input costs – Reform power distribution, end cross-subsidy burden on industry and cut logistics costs through multimodal connectivity.
• Skill and include women – Link skilling to placement, expand apprenticeships, and provide hostels, crèches and safe transport to raise women’s factory participation.
• Improve data – DPIIT should track FDI by the location of the actual plant, not the head office, to guide policy correctly.

2. To spread investment across more States

• Learn from within – Document what Tamil Nadu and Karnataka did on land, skills, approvals and supplier development, and share it through peer learning between States instead of looking only at Vietnam or Mexico.
• State-specific clusters – Match industries to local strengths, such as metals and downstream products in Odisha and Jharkhand, food processing and textiles in Bihar, and electronics in western Uttar Pradesh.
• Connect the hinterland to ports – Fast-track freight corridors, inland waterways and multimodal parks so landlocked States get the cost advantage coastal States enjoy.
• Plug-and-play parks – Develop ready industrial parks with land, power, water and worker housing in lagging States, preferably near existing towns.
• Smart incentives – Give higher central incentives for units in backward districts, but avoid a subsidy race to the bottom between States.
• Cooperative and competitive federalism – Use bodies like NITI Aayog and the BRAP ranking to reward reforms, while the Centre supports infrastructure gaps through targeted grants.
• Urban development – Invest in tier-2 and tier-3 cities so that managers and skilled workers are willing to relocate.

India’s China+1 opportunity will be fully used only when the factories that have come up near Chennai and Bengaluru start coming up near Patna, Ranchi and Raipur too. National schemes can attract investors, but it is State-level delivery that makes them stay.

Mains Practice Question

Q. “Global firms adopting the China+1 strategy do not choose India, they choose a State.” In this context, discuss why investment in Indian manufacturing remains concentrated in a few States, and suggest measures to spread industrialisation more evenly across the country. (15 Marks, 250 words)

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