India’s China+1 opportunity: For several years, India’s policymakers and business leaders assumed that the China+1 strategy would work in the country’s favour. The pandemic had exposed the risks of excessive dependence on China, and multinational companies were expected to diversify production. India appeared well placed to receive that investment, with a large domestic market, a sizeable labour force and relatively low wages. The government reinforced the proposition with production-linked incentives, infrastructure investment and a series of trade agreements.
The shift in global manufacturing, however, has been less generous to India than expected. Southeast Asia has captured a major share of the diversification around China. Vietnam, Thailand, Malaysia and Indonesia have strengthened their positions in global supply chains. FDI into Southeast Asia reached a record $225 billion in 2024, up 10% from the previous year. In 2025, Southeast Asia overtook East Asia as the largest recipient of FDI in developing Asia.
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India is hardly being bypassed by global capital. FDI inflows into India rose 44% in 2025 to about $39 billion. Yet the value of announced greenfield projects fell from more than $111 billion in 2024 to about $74 billion in 2025. The distinction is important. Attracting capital is one thing; attracting new factories and building supply chain capacity is another. The China+1 opportunity is therefore less a question of whether investors will come to India than of whether India can offer the conditions under which manufacturing investment becomes viable at scale.
That distinction gets to the heart of India’s China+1 problem. The strategy was never simply about finding a country with cheaper labour than China. Multinational companies were looking for an ecosystem in which factories could be established quickly, components sourced reliably, goods moved at competitive cost and finished products exported with relatively little friction. India has often competed on labour costs when the more important calculation is the cost and reliability of the entire production system.
India’s China+1 strategy: Cheap labour is not enough
India’s labour costs are lower than those of Vietnam, Thailand, Malaysia and the Philippines, according to the comparative data cited in recent analysis. Yet its exports of goods and services were equivalent to 22.3% of GDP in 2025, down from 24% in 2022. Thailand and Malaysia had export-to-GDP ratios of roughly 71% in 2025.
The comparison is not a simple measure of manufacturing competitiveness because export ratios are influenced by the size and structure of an economy. India’s domestic market is far larger than those of most Southeast Asian economies. But the gap does indicate how much more deeply several of those economies are integrated into international trade.
Labour productivity also exposes a weakness. GDP per hour worked in India was about $10.8 in purchasing-power-parity terms in 2025, according to the comparison cited in the recent data. That placed India near the bottom among the economies competing for supply-chain relocation. The problem, therefore, is not simply the price of Indian labour. It is the amount of output that firms can generate from each hour of work.
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Capital productivity points in the same direction. India’s incremental capital-output ratio was 4.61 in 2025, compared with less than four in Malaysia and Vietnam. A higher ICOR means that more investment is required to generate an additional unit of output. For an economy seeking large manufacturing investments, the productivity of capital matters alongside the cost of capital.
These indicators help explain why low wages have not translated automatically into large-scale manufacturing relocation. Investors compare the total cost of producing and exporting from a location. Labour is one component of that calculation.
Southeast Asia has built what India still needs
The advantage of Southeast Asian economies is partly geographical, but it is also the result of years of industrial accumulation. Vietnam has integrated deeply into Asian electronics supply chains. Malaysia has developed substantial semiconductor and electrical and electronics capabilities. Thailand has an established automotive ecosystem. Indonesia combines a large domestic economy with strength in commodities, processing and manufacturing.
That gives these economies something India has struggled to build at sufficient scale: networks of suppliers, component manufacturers, logistics providers, ports and export-oriented producers. UNCTAD’s 2025 ASEAN Investment Report describes the region as a major global supply-chain hub and notes that manufacturing FDI in ASEAN rose sharply, reaching $44 billion.
India has made progress in selected sectors. Electronics is the clearest example, with production and exports expanding rapidly and companies such as Apple and its suppliers increasing their manufacturing presence. But these gains should not be mistaken for evidence that India has already developed the broad manufacturing ecosystem needed to compete across sectors.
There is another complication. China+1 does not necessarily mean China-minus-one. Companies can retain production and supplier relationships in China while adding capacity elsewhere. The emerging model is often a wider Asian production network rather than the replacement of China by a single alternative location.
That is why India’s ability to connect itself to existing Asian production networks matters. Restricting access to Chinese components or intermediate goods can make domestic manufacturing more difficult when those inputs remain embedded in the global supply chain.
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India’s market can become an advantage
India’s large domestic market is a major economic asset. It gives manufacturers a scale that most Southeast Asian economies cannot match. But the same advantage can weaken the incentive to build for export.
A company can establish production in India, sell mainly to Indian consumers and operate at a scale that would not be possible in a smaller domestic market. A manufacturer based in Vietnam, Thailand or Malaysia has a stronger structural incentive to look abroad because domestic demand cannot absorb the same volume of production.
The objective should therefore be to use the domestic market as a base for building globally competitive manufacturing firms rather than as a substitute for export competitiveness. This requires reducing the costs that accumulate between the factory gate and the ship.
The evidence on FDI points to the scale of the task. India’s overall FDI inflows increased sharply in 2025, but announced greenfield investment declined. UNCTAD also found that the decline was concentrated in manufacturing, where announced investment fell from about $65 billion in 2024 to $27 billion in 2025.
This does not mean that foreign investment in Indian manufacturing is collapsing. It means that the increase in overall FDI should not be confused with a comparable expansion of new manufacturing capacity.
India’s merchandise manufacturing has not yet expanded sufficiently to transform the country’s export structure. Services continue to provide a large part of the export cushion. That is a strength, but it does not resolve the employment challenge. Labour-intensive manufacturing remains one of the sectors with the greatest potential to absorb workers moving out of low-productivity agriculture.
China+1 is therefore a test of the broader business environment. Production-linked incentives can improve the economics of particular investments. Better roads, ports and industrial corridors can reduce logistics costs. Trade agreements can widen market access. But none of these measures, by itself, creates the dense network of suppliers, skills and production capabilities that makes an industrial location attractive.
The China+1 opportunity has not disappeared. UNCTAD’s latest data show that investment is continuing to move towards Southeast Asia and other parts of developing Asia, while India remains a significant recipient of global capital. The question is whether India can turn that capital into a deeper manufacturing ecosystem.
Once suppliers, skills and export relationships accumulate in one location, subsequent investors have fewer reasons to move elsewhere. India cannot assume that diversification away from China will automatically translate into factories in India. The opportunity is to make the country competitive enough that global manufacturers choose it even when China+1 is no longer the reason they are looking.