If India is to be more vigilant with Chinese investors, it must carve out no-go areas; without such rules, it will be impossible to ever clear Chinese investments in the startup world, which requires quick decisions on funding.
Given the furore over the People’s Bank of China (PBC) buying a 1% stake in HDFC Bank, it is just as well that the government announced a policy “for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”. A 1% stake in HDFC Bank via the FPI route wouldn’t give PBC any leverage, but FPI rules allow for this to rise to 10%. Combined with the possibility of other Chinese entities buying, this could give the Chinese government some serious leverage. Indeed, with even more Indian assets likely to be auctioned off after the pandemic, the Centre would be wary of Chinese entities—especially given their government/military link—picking up too many assets for a song. A recent Brookings India report (brook.gs/2RMFlBl) notes how Chinese firms are investing in all manner of areas from mobile phones and construction equipment to real estate and automobiles, and increasingly, in startups. Over 800 Chinese firms operate in India right now.
A direct confrontation with China is tough, but the press note on the changes was quite blunt when it said “an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route”. In other words, Chinese investment is welcome, but Indian government must approve each one through an FIPB process.
How long India can sustain this stance remains to be seen, especially if, as is always possible, the major powers decide not to punish China for its role in the pandemic, and the possibility that the virus was man-made. Right now, the US seems to be readying to be tough, but it is unclear how this will play out. India has allowed Huawei to conduct its 5G trials despite US opposition to the Chinese player. But, in the past too, India back-pedalled after, at one time, hinting that the firm’s activities were linked to Chinese intelligence work. And, when Indian suppliers protested the import of Chinese power equipment funded by very liberal suppliers’ credit several years ago, the government chose to ignore this. Dongfang Electric, one of China’s big power companies, Brookings reports, has signed deals for installing 28,000 MW worth of power generators and plans to build its first production facility in India, with a $2 bn investment plan over five years.
Whether India can stick to its current position will probably also be influenced by China’s ability to stir trouble at the border. And, what if China offers concessions like greater market access for Indian firms, or some of its big mobile phone makers offer to move more production to India, or if Indian firms lobby the government for liberal treatment of low-cost Chinese firms with generous suppliers’ credit?
It is difficult to get a fix on Chinese investment in India, since a lot could be coming via Singapore, or through funds where a certain beneficial interest could be Chinese; Sebi is supposed to be probing this. India’s official data show that just 1.5-2% of FDI has come in from China and Hong Kong—$800 mn of the total $45 bn of fresh equity flows in FY19, and $6.5 bn of the $456 bn that has come in since April 2000. A recent paper by Gateway House (bit.ly/2ywFwK1) estimates China has invested $4 bn in Indian tech startups, resulting in18 of India’s top 30 unicorns having Chinese funding. In addition, Chinese smartphone manufacturers already have a two-thirds share of India’s mobile phone market. In 2018, Gateway House says, around half of the total app downloads on—iOS and Google—in India were apps with Chinese investments, such as SHAREit, TikTok, and UC Browser.
The Brookings paper, quoting the Chinese commerce ministry, puts the number at $6.4 bn in 2014-2017 (this includes Fosun’s $1.1 bn to buy Gland Pharma), and says this is an underestimate. The big investments that come to mind are Alibaba’s $860 mn in Paytm, and $500 mn in Snapdeal, along with SoftBank and Foxconn; Tencent’s $400 mn in Ola, $700 mn in Flipkart, $175 mn in Hike Messenger, and $145 mn in Practo.
While Gateway House quotes a study that shows Chinese apps ask for 45% more permissions—access to contacts, cameras, microphones, etc—than those requested by the top 50 global apps, this is hardly relevant since none of these firms are based out of India. The real issue is whether Chinese investors are insisting the firms share the data gathered with them; perhaps, that is something the authorities need to examine.
If India is to be more vigilant with Chinese investors, it must carve out no-go areas; without such rules, it will be impossible to ever clear Chinese investments in the startup world, which requires quick decisions on funding. Future Chinese investment, for instance, can be kept out of the fintech space because it interacts with India’s banking system, out of biotech, defence (including drones), telecom (networks, not equipment), and such select areas, but may be allowed in the taxi business, in retail, food delivery, entertainment, etc.
More than that, since China is one of the few countries that have the money to invest right now, if India’s startups aren’t to be starved of funds, as Mohandas Pai and Siddarth Pai have argued in this newspaper, the government will have to ensure Indian investors get a level playing field versus global ones in terms of tax treatment, and other such facilities (bit.ly/3eaCpYB). Indeed, till the operating environment in India gets less hostile, more startups will be incorporated in countries like Singapore; then, India can’t even hope to keep a check on Chinese investing in these firms.
At a macro level, if India wants to keep Chinese investment at non-threatening levels, it needs sweeping reforms. Apart from the obvious reforms to make India more competitive, and fixing the government’s anti-industry bias (bit.ly/2Kl3M4I), policymaking has to become a lot more coherent. You can’t, for instance, hope to attract Indian fintech players while, at the same time, abolishing MDR commissions these companies live off. If price controls continue to hobble domestic pharmaceutical firms, they will have nowhere to turn to but to low-cost Chinese API, and if you keep squeezing telecom players, or don’t allow electricity boards and power producers to get paid adequately, they, too, will turn to low-cost Chinese suppliers. The only way to keep Chinese firms from developing a chokehold here is to allow local firms, as well as those from the US, Europe, and Japan to do well; India’s current policies, it so happens, are tailor-made for mainly Chinese firms to do well.