Thaw in India-China ties to help trade, movement of people but caution on FDI likely to stay
Summary
Despite easing tensions, the aftermath of the 2020 Galwan clash lingers, with ongoing restrictions on Chinese trade and investment. India may reconsider FDI from China, while focusing on local production and exploring joint ventures to reduce reliance on Chinese imports.New Delhi: Despite the recent easing of tension between New Delhi and Beijing, the ghost of the 2020 Galwan clash is likely to hover for a while, as the implications of the border disengagement between the two countries is likely to unravel only slowly.
Some measures taken by India against Chinese businesses may be scaled back, but other restrictions such as import of finished goods and caution on foreign direct investments (FDI) from the eastern neighbour are likely to stay, according to persons privy to discussions in the government.
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One of the persons quoted above said import of equipment and machinery from China for India’s manufacturing sector will remain smooth.
“Quicker processing of visas for technicians from China is expected; already, streamlining of business visas to technicians from China employed by our factories availing of production linked incentives is underway," this person said, requesting to not be named.
However, the person added that FDI into India will continue to be evaluated on a case-by-case basis, as per Press Note-3, which requires all investments from countries that share a land border with India to be cleared by the Centre.
At the same time, a senior commerce ministry official said on condition of not being named, “There is a possibility that the flow of FDI from China, which has been stalled for an extended period, may see improvement. The resolution of border issues between the two nations is also likely to ease trade barriers, benefiting both the economies."
Queries emailed on Wednesday to the ministries of commerce, finance and to the Prime Minister’s Office seeking comment remained unanswered at the time of publishing.
After the violent clashes between the troops of the two countries at Galwan valley in 2020, India imposed several restrictions on Chinese businesses. This included banning several popular Chinese apps, mounting a hawk eye on Chinese FDI inflows, and introducing stricter customs checks and inspections on imports from the eastern neighbour, among other measures.
Mellowing scenario
Prime Minister Narendra Modi’s and Chinese President Xi Jinping’s first bilateral talks since 2019 on Wednesday on the sidelines of the BRICS Summit in Russia, which comes after a deal to disengage at the ‘line of actual control’, raises optimism within the government and among experts as the two economies are seen to be closely interlinked by trade.
Some key economists in the government have argued in favour of having an open mind about FDI from China. The 2023-24 Economic Survey prepared by chief economic advisor in the finance ministry V. Anantha Nageswaran and his team had proposed that FDI from China may be looked at in a more favourable light.
NITI Aayog member Arvind Virmani, too, had told Mint in an interview published on 5 August that India should explore setting up factories in joint ventures (JVs) with companies from countries that export heavily to India, in order to start manufacturing such products locally and cut down on their imports.
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The commerce ministry official quoted earlier also said that India may consider rejoining the Regional Comprehensive Economic Partnership (RCEP), if relations improve between the two countries. India had withdrawn from the RCEP in 2019, primarily due to concerns over China's growing influence in the agreement.
“The government is on a wait and watch mode," the first person quoted earlier said.
Ankush Wadhera, partner and managing director for India at Boston Consulting Group, said that the world and India are both focused on creating a China-plus-one strategy in electronics, but the same cannot happen without China’s own support.
“Most product reference designs are made keeping China’s components ecosystem in mind," said Wadhera. “While India also wants to make components locally, product designing in India may not take off until the designs become compatible with China’s component ecosystem to begin with, subsequently leading to import substitution of those components."
Peeyush Vaish, partner and leader for tech, media and telecom at Deloitte India, said that while there would be no immediate impact on India’s electronics industry, in the long run, “better relations can even open up China as an export destination for select sectors".
The post-Galwan scenario
After the Galwan Valley clash in June 2020, India imposed several trade and economic restrictions on China. One of the key measures was the banning of over 200 Chinese apps on security and privacy concerns. In the first wave, 59 popular apps like TikTok, WeChat, and UC Browser were blocked, and later bans included games such as PUBG Mobile.
FDI policy was tightened, requiring government approval for investments from countries sharing a land border, primarily targeted at China. This move was aimed at preventing opportunistic takeovers of Indian companies by Chinese investors during the economic downturn due to pandemic.
Also, imports from China faced increased scrutiny, with stricter customs checks and inspections, leading to delays at ports. India began promoting domestic alternatives to Chinese goods, especially in key sectors like electronics, telecommunications, and pharmaceuticals.
Several contracts awarded to Chinese companies were cancelled or reviewed, particularly in the railway and road sectors, as India sought to reduce its reliance on Chinese firms for strategic projects.
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Earlier, in May 2020, the Indian government had launched the Aatmanirbhar Bharat (Self-Reliant India) initiative to boost local production.
While widespread tariffs were not imposed, India introduced measures including stricter quality control measures and licensing requirements for certain Chinese products. Several quality control orders (QCOs) were issued by the ministries of textiles, commerce, steel and new and renewable energy to put a check on import of substandard products.
The government has set a target to bring over 2,000 products under the QCO in the coming years. So far, over 440 QCOs covering 1,200 products have been issued.
Despite tensions, India's imports from China steadily increased, while exports largely stagnated since the Galwan clash, explained Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI).
As per commerce ministry data, in FY2020, India exported items worth $16.61 billion to China, which rose slightly to $16.65 billion in FY2024. In contrast, imports from the neighbour jumped significantly, from $65.26 billion to $101.74 billion in the same period, data showed.
“Imports from China, particularly in labour-intensive sectors like textiles, furniture, and toys, often outcompete Indian small firms. With Chinese companies expanding in energy, electronics, and telecom, imports are expected to keep rising. It is China that needs to allow easier entry of Indian goods and not the other way round," said Srivastava.
Rhik Kundu contributed to this story.