Harsh V. Pant
Kalpit Mankikar
India has approved investment proposals from certain Chinese electronics manufacturing companies, suggesting a shift in its economic stance towards China. After military tensions and economic restrictions post-Galwan, India had limited Chinese investments. However, with concerns over economic losses and job creation, the government is now scrutinizing and allowing select investments, especially those that involve technology transfer and local manufacturing capabilities. The move highlights the need to balance economic growth and national security in India’s dealings with China.
Recalibration of India’s Economic Stance
GoI’s nod to investment proposals from certain Chinese companies in electronics manufacturing is being seen in some quarters as a recalibration of India’s stance on economic engagement with China. The development is important, since following the economic crisis in the aftermath of the pandemic led to calls to limit Beijing’s economic influence.
The alarm was sparked off after China’s central bank increased its stake in an Indian financial institution in April 2020, which led to suspicions that it was indulging in opportunistic takeover of corporate assets. Subsequent military tensions along the border in June 2020 led to a clampdown on Chinese-capital inflows. China’s attempts to change the status quo along the LoAC and subsequent build-up of PLA troops led to a hardening of India’s stance of economic engagement.
Trade and Investment Dynamics
India’s post-Galwan position was also shaped by the larger geopolitical debate taking place globally on economic cooperation with China. The US took the lead in this by first delineating sensitive sectors. Washington then banned Chinese participation completely, or granted approval only after an intensive examination – the Biden administration’s ‘small yard, tall fence’ approach.
In the shadow of Beijing’s military coercion, India tied engagement with China to the resolution of the border standoff. This resulted in India shutting its doors to Chinese capital in its entirety, with investment to India accounting for 0.43% ($2.45 bn) of total FDI received between April 2020 and December 2021.
Thus, India built a ‘Great Wall’ to keep the Chinese out. But despite that, trade flourished, with imports from China crossing over $100 bn in 2023-24, and Beijing overtaking the US to become India’s largest trading partner after a gap of nearly two years. In this context, Economic Survey 2023-24 argued for the right balance between trade with China and Chinese investment, pitching for Chinese companies to set shop in India to manufacture for exports. While GoI distanced itself from the survey’s recommendations, there seems to be a recalibration underway in New Delhi on how best to exploit Chinese capital. The devil, as usual, is in the details.
Policy Continuity and Future Directions
Some investment proposals where an Indian corporate has tied up with a Chinese partner, and the latter holds a minority stake, or to Taiwanese companies listed in Hong Kong, or firms from Taipei having investment from Hong Kong, have been approved. The government committee scrutinising the ventures has set conditionalities on value-addition. The proposals will have to bring in capital and technology that is important to developing local manufacturing capability in advanced components. Another reported rider is that Chinese citizens are debarred from holding important positions in JV companies, or in the foreign company cleared to operate in India.
Is this a recalibration of India’s approach on engagement with China? No policy can exist in isolation, and GoI’s stance on an issue must respond to evolving ground realities: India Inc had been arguing that New Delhi’s obdurate stand on Chinese capital had led to local manufacturers coughing up losses to the tune of $15 bn and the loss of 1 lakh jobs in the last four years.
Some challenges on the FDI front have been evident for some time with American FDI flow into India dropping from $6 bn in 2022-23 to $4.99 bn in 2023-24. In fact, net FDI flows into India dropped to $26.5 bn in 2023-24 from $42 bn in 2022-23. GoI is also cognisant of the pressures of unemployment and its impact on social stability.
In a reduced parliamentary space and an invigorated Opposition bench, Modi 3.0 has its priority clear by working on improving the employment situation by stimulating job creation. There is a degree of continuity, too, in the policy response. Even after the Galwan crisis, New Delhi did not move to cut off economic ties with China. It resisted those voices who were calling for a complete dismantling of trade ties.
For India, the most important priority is to sustain its domestic development agenda, and ignoring Chinese economic heft is not really an option. But what is certainly needed is the setting up of a new economic compact between Asia’s two most important economies, so that India continues to leverage the Chinese economy for its own internal consolidation, even as it keeps a close eye on its implications for national security and strategic policy.
Harsh V Pant is Professor at King’s College London and Vice President for Studies and Foreign Policy at Observer Research Foundation (ORF), India.
Kalpit Mankikar is fellow, China studies, Observer Research Foundation (ORF), New Delhi
This article was first published in The Economic Times as ‘Could New Delhi’s recalibrated policy on Chinese capital hurt India? The devil is in the details’ on 22 August 2024.
Disclaimer: All views expressed in the article belong solely to the author and not necessarily to the organisation.
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Acknowledgment: This article was posted by Manushka Sharma, a research intern at IMPRI and pursuing her B.A Honours in Chinese from Jawaharlal Nehru University, Delhi.
