The Government’s Economic Survey 2023-24 dropped a political clanger by making a case that getting Foreign Direct Investment (FDI) from China could help India improve its participation in global supply chains through exports.
The strategy document notes that many companies have adopted a ‘China plus one’ strategy to cut down reliance on Beijing for advanced electronic items and components. While India may not be an immediate “beneficiary” of this approach to diversify manufacturing away from China, the Indian government’s Production-Linked Incentive scheme, taxation holidays, and subsidies have played a major role in attracting companies to invest in India.
The Economic Survey reasons that an India, which seeks to burrow into international value chains, will have to emulate successful strategies of East Asian tiger economies like facilitating foreign investment. It notes that while South Korea and Vietnam have been gained from U.S. diverting manufacturing from China, these nations also received enormous FDI from Beijing. Thus, the survey observes that the ‘factory of the world’ cannot be ignored even as the world pursues a ‘China plus one’ strategy. There is a thinking that inviting Chinese investment will help India boost exports, turning India’s approach towards China on its head.
The Government has been swift to scotch any speculation that there is an easing of Chinese capital inflows. Union Commerce and Industries Minister Piyush Goyal stated categorically that there was no rethinking currently to support Chinese investments in the country, and put the matter in perspective that it was usual for the Government’s Economic Survey to offer novel solutions to challenges. But it is fair that this has kickstarted a debate on Chinese capital inflows in India.
Rewind to 2020 when India and rest of the world was under lockdown due to the pandemic and the economic outlook looked bleak, Delhi shuttered down against Beijing’s opportunistic takeover of Indian companies by amending its Foreign Direct Investment (FDI) policy. Under Press Note 3, the Government mandated that a corporate located in nations sharing land border with India could invest here only after securing approval. India was no exception; the U.S. too sought to evaluate the role of Chinese capital. America delineated sectors where China posed a security risk, and then resorted to completely banning Chinese investment therein or putting it to the most rigourous scrutiny before granting approval. This was known as the ‘small yard, high fence’ approach, for instance the U.S. government (and India) banned Chinese 5G, citing the national security argument. The clashes between the Indian and Chinese armies along the border in 2020, which led to soldiers on both sides being martyred, led to a deterioration in relations that led to hardening positions in the economic sphere.
Some economists have argued that compared to the U.S. stance, India’s approach has been the complete opposite that is treating all Chinese capital with apprehension. Despite trade booming between China and India, Chinese investment accounted for barely 0.37% of the total FDI inflow between April 2000 and March 2024.
Structural factors between China and India have also posed constraints to the latter, for instance, Beijing’s dominance in the processing of rare and critical minerals hobbles Delhi’s push for renewable energy and meeting its green goals. Thus, absolutism impulses in economic policy of keeping all Chinese capital out hurts Bharat’s growth story too, grumbles India Inc. There is nascent pragmatism emerging on China in the economic sphere in India and across the world. Italian Premier Giorgia Meloni recently travelled to Beijing to reset economic ties following the decision to pull out of Xi Jinping’s signature Belt and Road Initiative (BRI). Rome and Beijing is keen to expand cooperation in the field of electric vehicles production and renewable energy. Meloni stated that China’s investment in Italy is a third of Italy’s capital outflow to China, and that she was keen to narrow the gap. In India, it is reflected in the Commerce Ministry working with the Home and External Affairs ministries working together to arrive at a framework for reducing the time taken to process visas for Chinese professionals who may have to visit India, for example, to meet contractual commitments on maintenance of industrial machinery. The vice-chair of NITI Aayog, the Government’s chief public policy think-tank, has pitched in for clarity on guidelines to clear investment from China, citing that reviewing each proposal is slow and time-consuming.
The debate on Chinese FDI thus needs a whole of government approach that has been necessitated as the Economic Survey has suggested that tackling unemployment is one of the main priorities. In the pursuit of reducing inequality and generating jobs, the Economic Survey says that the State should relinquish its regulatory powers to foster a better business climate, hence a nuanced discussion on Chinese capital is need of the hour.
This commentary originally appeared in the Economic Times.
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Professor Harsh V. Pant is Vice President – Studies and Foreign Policy at Observer Research Foundation, New Delhi. He is a Professor of International Relations ...
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Kalpit A Mankikar is a Fellow with Strategic Studies programme and is based out of ORFs Delhi centre. His research focusses on China specifically looking ...
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