By Amitendu Palit
The latest Economic Survey of the ministry of finance suggests: “As the US and Europe shift their immediate sourcing away from China, it is more effective to have Chinese companies invest in India and then export the products to these markets rather than importing from China, adding minimal value, and then re-exporting them.”
The suggestion has stirred storms in teacups and generated debate about whether the government intends to invite more Chinese investments into India and the implications of such a move.
On April 17, 2020, soon after the outbreak of the Covid-19 pandemic, India amended its inward foreign direct investment (FDI) policy by expanding the scope of restrictions applicable on investments from countries it has land borders with. The FDI policy in vogue, till then, was announced on August 28, 2017. Paragraph 3.1.1 of the FDI policy, while describing the scope of non-resident entities and individuals for investing in India, outlined the restrictions for investors from Bangladesh and Pakistan. The press note 3 of the ministry of commerce and industry, issued on April 17, 2020, expanded the restrictions to include investors from all countries that share “land border with India”. This brought China into the scope of restrictions. The ostensible reason mentioned by the press note for the amendment was to stop “opportunistic takeovers/ acquisitions” of Indian companies during the Covid-19 pandemic. The Consolidated FDI Policy that became effective from October 15, 2020, has retained the restrictions.
No country having land borders with India, except China, has the economic muscle for taking over Indian companies. The restriction, therefore, was clearly meant for achieving a specific goal: stopping potential takeover by Chinese investors of some Indian companies forced into economic distress during Covid-19. While this was the explicit goal, a broader implicit objective was preventing greater control of Chinese investors over domestic business and corporate assets. The inclination was undoubtedly motivated by security concerns arising from unprecedented hostilities with China on the border along with fears over China’s coercive economic tendencies arising from its command over vital supply chains, critical materials, and industrial inputs.
Notwithstanding these concerns, India never banned Chinese investments outright. Investments from China remained eligible for entering India under the government route. This requires investments taking prior permissions from the Government and operating according to the conditions specified in their approvals. However, unlike investments from almost all other countries, Chinese investments are not eligible for entering India through the automatic route, i.e. without taking prior permission.
Given this background, it is difficult to figure out what exactly has the Economic Survey suggested that has led to the fresh angst and concern on Chinese investments. The Survey has not asked for a rethink on the existing FDI policy and the restrictions it imposes on investments from countries that have land borders with India. It has also not suggested that India should openly solicit investments from China. It has simply proposed an economically effective option for India for taking advantage of the economic impacts caused by the shifts in global geopolitics.
The US and the European Union’s (EU) plans to discourage imports from China by increasing tariffs, and amplifying a China+1 strategy by diversifying sourcing, have led to a significant reconfiguration in global capital flows. Chinese investments are moving to countries from where exporting to the US and the EU are free and easy. Mexico is an important beneficiary of the relocation, as are Morocco, Vietnam, Indonesia, Poland, and Hungary. These emerging market economies are spearheading a new phase of re-globalisation. They are drawing significant Chinese investments, thereby digging deeper into Chinese supply chains.
The current re-globalisation is witnessing emerging market economies competing for attracting “tariff-jumping” FDI. High US and EU tariffs on Chinese electric vehicles (EVs) are encouraging several economies to create enabling conditions for attracting Chinese investments and creating local EV manufacturing capacities. Hungary, while being a part of the EU, and going by the latter’s decision to impose countervailing duties on Chinese EVs, has attracted significant Chinese investments in making EVs locally.
The point is simple. Chinese investments are seeking new destinations for relocating. The relocation of investments is shifting supply chains. Several emerging market economies are able to take effective advantage of the shift for increasing local production capacities and exports.
The suggestion of the Economic Survey doesn’t involve India making a drastic change in its existing policies for snatching a share of the mobile Chinese capital. Indeed, India has already begun drawing the interest of Chinese investors in spite of not changing policies. The collaboration between JSW and MG Motor India for making EVs is a relevant example. The joint venture, where JSW and Indian investors hold a majority stake and are partnering with Chinese auto major SAIC’s MG Motor brand in India, will enhance domestic supplies of EVs in India. More such investments are necessary given the rather low share of EVs in the Indian auto market.
The Economic Survey simply advises taking a pragmatic view of the developments around the world and capitalising on opportunities arising from them. Indeed, India’s bilateral trade with China doesn’t display any tendency of declining. Riding on the back of more than $100 billion imports, China pipped the US to become India’s largest trade partner in FY23-24.
If high imports from China, year after year, can be lived with without any fuss, then what is the issue with investments from China? Aren’t investments a better economic choice if they save some of the costs incurred on imports by making them locally? Brought in through the government route with project-specific operating conditions, the investments, in many areas, can cut import costs, increase local capacities, and generate exports. Doesn’t this mean good economics in the long-term?
The author is Senior Research Fellow & Research Lead (trade & economics) at ISAS-NUS and Associate ISPI, Italy
Views are personal