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‘Temporary funding pause from China’s VCs will not disrupt investments to Indian startups’

The deep entrenchment of China’s supply chain in India’s manufacturing and services industry is a bigger matter of concern than investments.

india china trade relations, china investment, FDI, exports, imports, FDI inflow
In the short to medium term, India should develop alternate supply sources to reduce its dependence on China.
  • By Ravinder Vashist

The onset of coronavirus pandemic has brought many disruptions to the investment world. Up until a year ago, India was one of the fastest-growing economies with rising GDP and interest from foreign investors. According to the World Investment Report 2020 by the UNCTAD, India was the 9th largest recipient of FDI in 2019, with $51 billion dollars of inflows throughout the year, an increase from the $42 billion of FDI received in 2018. The dynamic startup ecosystem of the country also attracted many foreign investors, with major PE/VC investors wanting to become a part of India’s growth story. China has also been an active investor in India during the past few years and has participated in a few marquee investments. However, the recent anti-China sentiment has raised a question, how does it affect India’s VC industry?

Anti-China Sentiment and India’s VC industry

Several countries across the world are looking askance at Chinese model with lines getting blurred between what is a state-controlled or private sector owned. Security concerns have been raised globally against technology companies like Huawei. There has been an undercurrent of geopolitical tension between China and India with China opposing India’s security concerns at international forums like the United Nations. It is in this backdrop that India amended its FDI policy in April 2020 to curb opportunistic takeovers/ acquisitions of Indian companies due to COVID-19 pandemic. This was essentially done to avoid any takeover attempts by China. China called the amendment discriminatory resulting in dampening the investment sentiment. The situation has got aggravated by the violent clash between Indian and Chinese troops along the Line of Actual Control (LAC) in Ladakh. The incident made anti-China sentiment engulf the entire country. Soon after, the government put a ban on a number of Chinese apps owing to national security concerns.

In such a volatile and charged up atmosphere it is unlikely that Chinese investors will look to invest, and neither will Indian companies seek investments from China till resumption of normalcy. China has been one of the active investors in India’s startup ecosystem lately. According to Gateway House Report Feb 2020, Chinese investors have pumped in an estimated $4 billion into Indian tech startups, and have invested in 18 out of 30 unicorns that have emerged out of India. Paytm, Ola, Byju’s, Swiggy, Zomato, BigBasket and Udaan are some of the biggest startups that are backed by investors like Fosun, Tencent, Xiaomi and Alibaba.

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It would thus seem that China has been a significant contributor to India’s investment landscape. However, to put things in perspective, China’s total FDI investment ranges from $6.2 billion – $8 billion between 2014 and 2019 which is 4.2 per cent – 5.4 per cent of around $148 billion, the total PE/VC India has attracted during the same time. Thus, the data clearly indicates that a temporary pause in investments from China will not meaningfully disrupt the availability of capital to Indian companies. Moreover, the majority of the investments by China have come after these companies had attracted multiple rounds of capital, had established a product-market fit and in quite a few places assumed the leadership position in their categories. Thus, it is safe to assume that these companies would have attracted capital from alternate sources.

However, it is the deep entrenchment of China’s supply chain in India’s manufacturing and services industry which is a bigger matter of concern. For example, India’s pharmaceutical industry is hugely dependent on the supply of raw materials from China. Despite being the world’s third-largest drug producer by volume, India imports 70 per cent of its raw materials from China. Similarly, India’s smartphone industry is dominated by Chinese brands. Data from market research firm IDC shows that four of the five top smartphone brands in India are Chinese. The same data revealed that nearly 76 per cent of the 32.5 million smartphones shipped to India in the first quarter of 2020 belonged to Chinese smartphone brands.

Reducing dependence on China

In the short to medium term, India should develop alternate supply sources to reduce its dependence on China whereas, in the medium to long term, India must capitalize on the opportunities that the current crisis has presented. The country should present itself as a viable alternative to capture a larger pie of global commerce. The Government of India has already announced its economic reset initiative ‘Atmanirbhar Bharat’ to make Indian economy self-reliant and also manufacture for the world. Collectively, with adequate infrastructure and policy support, Indian industries and its entrepreneurs have the wherewithal to successfully defend its interests and create a self-sustainable network to reduce the country’s dependency on China although in phases.

Ravinder Vashist is the Co-founder of Roots Ventures. Views expressed are the author’s own.

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