In April, the Indian government had modified the rules to let FDI, Foreign Direct Investment, from neighboring countries only with its preceding consent, even in sectors where ‘automatic’ clearances were conceded (1).
The move had hit China-based investors hard since they had emerged as a major source of flows in recent years, especially in the digital and technology space.
Consequently, even transfer of one share needed the Centre’s clearance. While the government changed the rules after the coronavirus outbreak, officials gave no consent amid the tension mounted at the Ladakh border. And it resulted in a pile of investments totaling above 12 thousand crore INR.
Their objective was to check on Chinese companies’ opportunistic takeover with sources citing a clampdown in several nations across the globe.
Total China-based Capital Inflow
According to Statista, the FDI inflow from China to Indian startups from the financial year 2013 to 2019 was about 2 billion USD (2).
Tencent and Alibaba are two of the most prominent Chinese investors in India. They have stakes in Indian unicorns such as Zomato, Paytm, Bigbasket, Flipkart, Hike, MX Player, BYJU’s, and others.
It is also worth highlighting that after the FDI rules revision, the Alibaba Group decided to rethink their investment in the country after the Indian government amended the FDI rules for countries that share a land border with India (3).
Read Als: Alibaba Pauses New Investments in Indian Ecosystem
Ant Group and Alibaba Capital Partners have invested more than two billion USD in India since 2015. They have backed prominent Indian startups such as Zomato, Snapdeal, Paytm, Xpressbees, Bigbasket, and others.
Easing the FDI Norms
The revision in the FDI rules came in the backdrop of anti-China sentiments in India. Consequently, there are more than 120 pending proposals worth 12 thousand crore INR awaiting clearances since April 2020. It includes European or American companies with marginal investments from Hong Kong or Chinese entities or individuals.
According to the sources, most of the proposed investments are for brownfield projects, meaning existing Indian companies.
Sources further added that some Chinese firms have also applied for registration for bidding Indian government contracts and sent those proposals to the home ministry. Notably, there are no restrictions on China-based entities for bidding in projects funded by multilateral institutions (4).
After amending the FDI policy in April, the government set up a screening panel to check all Chinese foreign investment proposals. The panel was supposed to approve only ‘non-controversial’ proposals.
According to the reports, the home secretary is heading the panel with the DPIIT, Department of Promotion of Industry, and Internal Trade secretary as a member.
Reports also surfaced in November 2020 that the Indian government is considering up to 26% FDI from countries with which it shares a land border, including China (5). It is also interesting to note that the same panel members had suggested the government to ease the rules.
And according to the latest reports, the Indian government has started clearing FDI, Foreign Direct Investment proposals from China on a ‘case-by-case’ basis. It is putting an end to the freeze on such clearances, which lasted more than nine months.
According to the TOI report, even though they have been limited to smaller cases so far, they have started the approvals in the last few weeks. (6).
The sources have also clearly indicated that the large proposals would be taken up later after careful consideration of the situation. The government is also setting up a coordination committee of officers from the home ministry, external affairs ministry, commerce, industry ministry, and Niti Aayog to look at the issues and smoothen the process.
A source explained that the committee is not like the Foreign Investment Promotion Board, which looked at all the cases. The concerned ministry would look at all FDI proposals from neighboring countries and will decide on them.
Other sectors such as telecom and insurance also follow a similar system where officials are still reviewing proposals before they are accepted or rejected. In the case of automatic processes, companies have no obligation to seek prior permission from the government.
Chinese FDI Set to Flow In Again
The Centre has recently decided to clear as many as 45 investment proposals from China-based institutes, and individuals as the border tensions with China seem to be ebbing. Officials in the finance and commerce ministries, while confirming the development, told TNIE that these FDI proposals include a high-profile once stuck because of the tension between the two countries. It includes Great Wall Motors’ proposal, a Chinese auto giant, to manufacture electric vehicles in India (7).
Other notable proposals include the one by SAIC Motor Corp and projects in the electronics and power industries. SAIC had started selling cars in India in 2019 under its British brand MG Motor and has already invested more than 400 million USD in India. And now it wants to bring in more investment to bolster its production capacity. It is also worth highlighting that Great Wall also plans to invest one billion USD in the country over the next few years.
According to a commerce ministry official, there are about 45 proposals in the pipeline waiting for approvals. The aggregate value of these proposals is about twenty thousand crore INR. The talks have resumed, and tension has eased; hence these deals are likely to get approvals.
The official further clarified that it is not only Chinese firms but also several proposals by Hong Kong and Singapore-based firms that were also stuck in the process. It also includes a large bunch of private equity investors looking to invest in Indian startups.
Another official added that there are about a dozen startup deals that are stuck because of security clearance. It would bring a big relief for startups once it is done, looking for liquidity post-COVID-19 era (8).
China: India’s Top Trading Partner Amid Sour Relations
China has reclaimed its spot as India’s top trade partner in 2020 as its reliance on imported machines outweighed its efforts to curb commerce with China after a bloody border conflict.
Last year, the two-way trade between the longstanding economic and strategic rivals stood at 77.7 billion USD, according to the provisional data from the Indian commerce ministry.
Even though the numbers are lower than the previous year’s 85.5 billion USD in total, it was enough to make China the largest commercial partner of India. It has displaced the US, with whom the bilateral trade came in at 75.9 billion USD amid the muted goods demand because of the pandemic.
Even though the Indian government has banned hundreds of Chinese applications, slowed down investment approvals from the neighbor, and called for self-reliance after a deadly clash along the India-China border, the country continues to rely heavily on Chinese heavy machinery, home appliances, and telecom equipment. Consequently, China’s bilateral trade gap was at almost 40 billion USD in 2020, making it the country’s largest.
Notably, these relations are already weighing on the country’s ambitions to increase its manufacturing capabilities.
Further, the country has also been slow to issue visas to Chinese engineers to help Taiwanese firms set up factories under its PLI, Production Linked Incentive scheme to promote local manufacturing (9).
Read Also: PLI Scheme: The Make in India Solution?
According to Amitendu Palit, an economist specializing in international trade and investment at the National University of Singapore (10), India’s efforts to cut its reliance on China still have a very long way to go. He added that the PLI scheme would take at least four to five years to create new capacities in specific sectors. He believes that till then, India’s reliance on China would continue.
Indian Trade Negotiations 2021
As the Chinese military is pulling back from its aggressive position in Ladakh, Som Prakash, the Indian minister of commerce (11), stated that FDI from all members of the WTO, including China, is permitted. It is now time for both nations to settle down and deal with the pressing matter of trade.
India has got off to a serious start with great negotiation in the new year and has made agreements to secure trade deals with Europe and the UK. India is also seeking greater trade concessions from ASEAN, Korea, and Japan. At present, India is in discussion with different countries for over 30 trade agreements of various types, including China. However, there are several challenges.
India and China share a common border, even though most of it is in difficult terrain. Moreover, China also supports Pakistan and not India’s claim to territories, the primary reason why India refuses to acknowledge China’s belt and road initiative. Part of the China Pakistan Economic Corridor, CPEC passes through disputed lands (12). And according to India, officially recognizing China’s BRI is equal to recognizing Pakistan as a legitimate claimant to these territories.
However, the reality is that the lands have been disputed for more than 70 years. The debilitating saga winners are the respective militaries who are observing an increase in their annual budget. It is a significant drain not only for budget but also on lost potential business and trades (13).
The Asia-Pacific Free Trade Agreement
India and China have an agreement as part of the 1975 APTA Asia-Pacific Trade Agreement. It is a preferential trade arrangement, formerly known as the Bangkok Agreement. That was an initiative of the UNESCAP, United Nations Economic and Social Commission for Asia and the Pacific. And a preferential trade agreement between developing countries. APTA signatories include China, India, Bangladesh, Lao, South Korea, and Sri Lanka.
In late 2005, the first session of the Ministerial Council of the Bangkok Agreement in Beijing, China, representatives of the member nations endorsed a revised APTA text and the conduct tariff cut talks in 2006 (14).
There are reports that the fourth round of negotiations is currently underway. It involves tariff concessions on trade in services, goods, investment, trade facilitation, and other non-tariff measures. However, to date, there has been no further development.
Besides the APTA, India, and China also have discussed a free trade agreement with the Asian Development Bank in 2006.
At that time, the ADB, Asian Development Bank had stated that open regionalism and trade cooperation between the two largest developing nations across the globe, the PRC, People’s Republic of China, and India, can nourish outward-oriented development and intra-regional trade based on comparative advantage and available factor endowments.
The statement further added that considering the recent wave of global sub-regional and bilateral trade corporations, the opportunity cost of not moving forward with greater trade integration between China and India could be increasing (15).
Notably, that statement came 15 years ago, and the world has indeed lost the opportunity costs.
Since there, the world has made several attempts to involve India and China in some free trade semblance. The most recent was with the RCEP. Regional Comprehensive Economic Partnership free trade deal. However, India pulled out of it in 2019 (16).
The Sino-Indian Relationship
Together with the coronavirus pandemic and its health and economic consequences, the border crisis has already affected Indian perception towards China. The Indian ambassador to China noted that there had been considerable damage to India’s trust in China while also accelerating existing concerns about China, some of which have existed since the 1950s.
The Indian home minister has linked China both to the health and border crises affecting the country. Furthermore, the Indian government has also called the Chinese ‘action and behavior’ a clear violation of the bilateral agreement and protocols between the two nations over two decades since 1993.
Hence, the border crisis has weakened the hands of those in Indian policy-making panels that spoke for more engagement with China or the idea that economic ties would help alleviate political strains, ultimately leading to policy consequences (17).
Several market experts and former government officials have acknowledged that these restrictions would hurt India. However, it is still a worthwhile step since it would reduce the country’s exposure and overdependence on China.
Since the standoff, India has taken several measures, directly and indirectly, targeting China. There has been a mix of Chinese reactions, objections, persuasions, warnings, legal action, and retaliation suggestions.
One or two steps India took in isolation wouldn’t have mattered to the Chinese government since India is far more dependent on Chinese imports than the other way around. However, collectively, all the steps India has taken so far have an impact.
Moreover, in certain sectors such as telecommunications and technology, these restrictions have implications for China-based companies’ valuation and access to a significant and growing Indian market.
China also seems to be worried about the impact and perceptions of Indian steps on the global market. It has also raised questions about the link between Indian actions and others such as the US and Australia (18).
The Present Scenario
The need of the hour for the Indian economy, which is still reeling under the twin shocks of the COVID-19 resultant lockdown and crippled growth, is to refuel the consumer demand via generating adequate employment.
India can only possibly do it through a capital infusion in the private sector. Currently, the finance of the Indian government is stressed, and bank lending is muted. In this scenario, the selective prohibition of foreign capital is not desirable. It could be one of the obvious reasons why India is easing its FDI rules and allowing investments from Chinese entities and individuals.
Additionally, the most tricky part about India’s restriction was that it amounts to a blanket ban. It did not make any exemptions for any Chinese investors. While the Department of Promotion of Industry and Internal Trade press note issue did say that the Indian government would make the call on investment decision, there is no confidence because of the previous record.
Consequently, there would be fewer potential buyers, which would further depress Indian firms’ value that requires immediate capital infusion coupled with unnecessary red tape creation.
It is a fact that China’s state capitalism with its various hidden subsidies for state-owned firms doesn’t create an ideal condition for Indian corporates to compete with. Despite this, the major threat for Indian firms is not from Chinese investment but from their exports.
Regardless of the FDI curbs, the Indian market continued to overflow with China goods from plastics to electronics. Even the Indian pharmaceutical industry continues to depend heavily on chemicals supplied by Chinese firms.
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It was evident in the 92 billion USD trade between the two nations in 2019 when India ran a 56 billion USD trade deficit (19).
For India, attracting investment is a good way to bridge the gap, and it is also an excellent time to achieve so. The Chinese capital, currently facing global hostility, is also looking for a huge market such as India.
Moreover, considering Chinese firms’ reach across the global market, Chinese investors would still find ways to invest in India through different routes while purchasing equity stakes in the Indian stock market.
It means that it is time for India to play its game smartly.
Lastly, if India continues with its restrictive policy, it would likely prompt China to seek redress from WTO, World Trade Organization. There are also high chances that China may seek retaliatory measures, leading to a trade war.
And keeping in mind India’s current economic development and evolving economic dynamics because of the coronavirus pandemic, we can hardly afford it (20).
Even though some approvals have come through, the recent hostility at the India-China border, which resulted in India banning several Chinese mobile applications, including popular ones like Tik Tok, meant that the Indian government is unlikely to go towards businesses as usual with restrictions.
While the government has made it clear with its recent steps that there can be no compromise on national security, the recent step of limited opening up also suggests that the government is also aware of the requirement to ensure that there is no adverse impact on investments at a time when all of us are making efforts to revive growth and create jobs.
The Indian prime minister Narendra Modi has set ambitious plans for the country to use the current crisis and emerge as a vital player in global manufacturing and supply chains post the pandemic.
Such a vision needs huge capital and forward-looking ideas, and the government is well aware that sticking to the last vesting of protectionism will not help them achieve their goals.