When looking at the foreign investment trends in India over the last two decades, the country has received a cumulative US $456.91 billion in FDI, with over 72 percent of it coming from just five countries, Mauritius, Singapore, Japan, the Netherlands and the US—of which China is not one. The proportion of China’s foreign direct investments (FDI) in India during the same period constituted a mere US $2.34 billion or 0.51 percent of the total inflows. However, regardless of this, there is no denying that over the last few years, Chinese investments have shot up considerably to the extent of being pervasive across various sectors, such as infrastructure, automobiles, consumer goods, fintech, travel, transport, e-commerce, etc. Post-2014, investments from China both in the form of private equity, as well as greenfield investments, has assumed great proportions in the Indian market.
While the influx of FDI from China into the startup space is large, its impact is also significant. There has been a 12x growth of Chinese investments in Indian startups from 2016 to 2019. This trend is not surprising as large Chinese players have been steadily investing and filling the gap in the tech-startup space in India, which holds strategic market importance—where investors who have large financial capacities are few. According to Jane Li, a China Tech Reporter at the Quartz, Alibaba and Tencent have been aggressively snapping up stakes in Indian startups in the last five years—and many of the firms they’ve helped fund have crossed the US $1 billion threshold to become unicorns. A report titled “Chinese Investments in India” by Gateway House estimates that the total value of Chinese investments in Indian startups between 2015 to 2020 is approximately US $4 billion. In fact, as of March 2020, 18 out of 30 Indian unicorns are heavily backed by Chinese investments. The recurring Chinese investing firms have been highlighted in the following table.
While the influx of FDI from China into the startup space is large, its impact is also significant. There has been a 12x growth of Chinese investments in Indian startups from 2016 to 2019
Recurring Chinese Investors in the Indian Startup Space
Source: Author’s own (data from various open sources)
What could be the economic rationale behind these investments? First, with the high competition and saturation in the Chinese domestic market, India is viewed as one of the last emerging markets with untapped potential. In fact, the modalities of the Indian markets are extremely similar to that of the Chinese markets, which has led the investors to believe that there is ample scope to succeed in the former if the scale economies are harnessed properly. Moreover, it has been observed that Indian markets suffer from lack of capital due to which alternate investment sources are readily welcome in the system. Third, there is an immense amount of potential in terms of creativity and ideas that are offered by the technological prowess of Indian engineering institutes and the specialised skills of India’s young demographic. This makes it easier for Chinese investors to gamble on mid-low tier companies and convert them into high-stake cash cows. And finally, these investments in India give China a competitive edge against the US through deep-tech penetration into the Indian demography.
Against this background, in April 2020, the Indian government banned FDI under the ‘automatic’ route from countries sharing land borders with India. This move was preceded by the People’s Bank of China raising its stake in India’s largest mortgage lender Housing Development Finance Corporation (HDFC) Limited, from 0.8 percent to 1.01 percent through open-market purchases—which concerned New Delhi regarding China’s ‘hostile’ takeovers of Indian companies that could be financially stressed because of the pandemic. In fact, Indo-China relations, in particular, remained strained after the Galwan valley military clash in June 2020, prompting the permanent banning of 59 Chinese apps in India, citing security reasons.
There is no doubt that while some amount of restriction for security and nationalistic reasons is necessary at this time, but it is also important to look into the implications that such protections have for the startup industry in India, which is largely funded by investors from China. This becomes even more important at a time when capital infusion is extremely necessary for the startups given the prevailing dip in India’s consumption demand apart from the other pandemic-induced economic issues that are here to stay for some time. Quite notably, after almost a nine-month freeze, the Indian government had started clearing the Chinese FDI proposals in early 2021—for the ‘smaller cases’, while the larger proposals are to be dealt with later after a careful analysis of the situation. These cases are guided by allowing Chinese investments in critical sectors in India or in industries where local companies don’t have adequate capacities.
After almost a nine-month freeze, the Indian government had started clearing the Chinese FDI proposals in early 2021—for the ‘smaller cases’, while the larger proposals are to be dealt with later after a careful analysis of the situation. These cases are guided by allowing Chinese investments in critical sectors in India or in industries where local companies don’t have adequate capacities.
During a discussion on India’s Trade Policy at WTO in January 2021, China has expressed ‘deep concerns’ over the Indian restrictions on foreign investments last year. While Chinese investors may also grow hostile towards the Indian startup ecosystem as their own apps have been forced out, their gap may well be filled by alternate investments from other countries (mature markets such as US, UK, and Japan) and developing its own investor culture. For a truly successful Digital India or Make in India, India must be able to attract substantial capital to finance domestic startups through a set of policy reforms such as incentivising venture capitalists through tax concessions on such investments, etc. Finally, to ensure economic progress, national security needs must also be comprehensively reconciled with financial needs of the nation over time.
(The author acknowledges Arnav Bose at WB NUJS Kolkata for his research inputs on this article.)
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Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...
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