Several Chinese venture capital funds had just filed their applications to invest in Indian industry and startups. The Narendra Modi government had made clearance for foreign direct investment (FDI) flowing from China and bordering nations into India mandatory since April. Chinese firms have invested up to $8 billion and created 200,000 jobs in India, according to official Chinese figures. And in the trade sphere, the two economies are even more deeply intertwined.
So, some firms were busy hiring Indian lawyers to help them comply with the latest rules. Then the unprecedented border crisis on 15 June seemingly brought business to a grinding halt.
20 Indian soldiers, including a commanding officer, lost their lives that night in Galwan Valley in Ladakh in the worst Sino-Indian territorial clash in nearly half a century. The Chinese casualties were undisclosed. India says the violence was a direct result of a “premeditated" and “planned" action from the Chinese side that reflected an intent to change the status quo on the Line of Actual Control (LAC). The People’s Liberation Army (PLA) incorrectly claims China has “always" had sovereignty over Galwan Valley and accuses India of violating the LAC. External affairs minister S. Jaishankar told his Chinese counterpart Wang Yi to expect a “serious impact" on bilateral relations. Outside official circles, the forecast is bleaker. “It can take five to ten years for Sino-Indian ties to recover," estimates Srikanth Kondapalli, professor of Chinese studies at the Jawaharlal Nehru University (JNU) in Delhi. “The damage is substantial.’’
Taking precautions for a “worst-case scenario", a section of China’s official media advised Chinese companies in India as trade organizations and Twitterati called for a boycott of thousands of Chinese products. “If possible,’’ stated the government-backed Global Times in Beijing, “they should start thinking about diversifying their investments and seeking potential alternative markets.’’ China says there are over 1,000 Chinese companies in India, but most expatriates recently returned home to escape the pandemic.
China’s investment footprint has grown faster than FDI from any other source, including about $4 billion invested by Chinese tech funds in dozens of Indian startups and over half the country’s unicorns. Four of the top five smartphone brands sold in India are Chinese. On Thursday, a OnePlus smartphone model reportedly sold off within minutes after launch.
Investment in the Indian automobile sector hit a total of $876 million by last year. China’s largest SUV maker Great Wall Motor had just signed a memorandum of understanding with the Maharashtra government for a phased $1-billion investment to make cars in Talegaon near Pune. Further investments by the company in India, subject to receiving future FDI clearances, may be delayed until the business climate and consumer sentiment for Chinese products revives.
Both governments have kept a door open to ease tensions. “The official statements are designed to keep the diplomatic channels going,’’ points out professor Alka Acharya at JNU. Former China envoy Nirupama Rao cautioned in The Hindu, however, that Indian and Chinese businesses across the border “can expect the going to be tougher than before".
The political and investment dynamics between Asia’s two largest rivals are delicately interlinked. According to findings of the Pew Research Center in the US last year, 61% Indians—more than people from any other nation in the poll —said China’s growing economy was a “bad thing" for them; 54% viewed Chinese investment with suspicion.
Bilateral trade might drop by 20% this year, analyst Qian Feng at Tsinghua University in Beijing was quoted saying in Global Times. India has already been discussing ways to increase tariffs on Chinese products and become “self-reliant," especially on active pharmaceutical ingredients which are mostly made in China. India’s trade imbalance with China ($58 billion in 2018) has kept on expanding as the trade volume increased to just under $100 billion.
From January to November last year, India’s trade deficit with China was over $51 billion, according to data posted by the Indian embassy in Beijing. India exported about $16 billion worth of products comprising mainly raw materials and commodities and imported $68 billion of finished goods.
“Much depends on whether the current situation is quickly de-escalated or not,’’ said Amitendu Palit, research lead in trade and economics at the Institute of South Asian Studies, National University of Singapore. “India is expected to raise tariffs on several Chinese products and announce further tightening of investment rules. For some time at least, if such restrictions come in, then bilateral trade and investment volumes are expected to reduce."
That said, Palit does not expect very significant reductions in trade and investment because the contraction in the Indian economy has reduced demand for imports.
Reports are coming in of Chinese companies and bids losing the odd government infrastructure contract in 4G equipment for BSNL and MTNL or monorail rakes in Mumbai.
China’s Huawei, the world’s second-largest smartphone maker which is blacklisted in the US and banned from 5G plans in Australia for national security reasons, could be excluded from India’s 5G network roll-out as well. This would spark a new dispute with China which retaliated against Australia, for example, with tariff barriers on barley and beef.
“Tit-for-tat retaliation might result in China imposing new quality restrictions for Indian exports, particularly agriculture and seafood exports,’’ said Palit. “While there might not be specific restrictions on Indian companies in China, there might be tighter scrutiny of business and student visas for Indians travelling to China.’’
Finding a new equilibrium
There is no large-scale alternative yet —and no official restriction or retaliation—to replace Chinese investment to make India a manufacturing powerhouse with world-class transport corridors. “On the one hand, India expects more Chinese capital to come in and help grow its economy, but on the other hand it does not want to see more reliance on the Chinese economy,’’ strategist Zhao Gancheng in Shanghai argued in Global Times, warning that investors may withdraw funds if ties worsened.
As HT reported, six Chinese companies are working on infrastructure projects in Mumbai alone. “Boycott protests have a short-term impact,’’ said JNU’s Acharya. “China’s presence in investments made and contracts awarded can’t be replaced in the short to medium term and such restrictions will also impact Indians at the entrepreneurial level especially the small traders. Indiscriminate attacks on all things Chinese would actually harm the prospects of the vast pool of unskilled workers who have obtained employment in factories producing goods with Chinese investment."
Even hard-nosed Indian and Chinese CEOs still recall that border tensions hampered business as usual around a decade ago when visa delays and denials were routine. For several reasons, India and China are bracing for a resurgence of strategic distrust that will pose difficulties in ties at every level.
“Business sentiment is bad now, but Chinese companies familiar with doing business in India in the last two to three years know that these sentiments eventually subside,’’ said Santosh Pai, partner and head of the China desk at Link Legal India Law Services. “It could take six months or more for firms to readjust to a new business equilibrium."
Pai suggests a likely scenario in which only firms that are “seriously interested" in a long-term presence in the Indian economy will come from China. This would mean sectors such as B2B businesses like capital equipment manufacturing and intermediate products for consumer goods. Chinese firms will also be more inclined in future to develop Indian partnerships and joint ventures, he predicts.
That ‘60s show
Some strategists suggest a comeback of the 1960s school of thought on India.
“As in the 1950s, India is again being viewed as a growing, ambitious and nationalistic power with whom China will have to have a day of reckoning,’’ said strategist Mohan Malik, author of China And India: Great Power Rivals. In the book, Malik discusses a broad divide among Chinese policymakers who want to “nip the India challenge in the bud before it becomes a serious threat and those want to come to terms with a rising India and partner with it".
Chinese objections to India’s border road construction have increased notably against a 255km road from Leh to Karakoram Pass and the construction of dozens of border roads that can speed-up Indian military movement to the LAC. Malik said that India’s infrastructure upgradation is being compared in Beijing to the “forward policy" that Chinese propaganda blamed as a trigger for the Sino-Indian war of 1962.
Both sides still don’t agree on the length of the border or maps clarifying the Line of Actual Control, which has emboldened sections of the PLA to argue in favour of teaching India a “lesson". But until the last decade, Beijing appeared reluctant to risk an actual conflict. The hundreds of PLA transgressions every year, and occasional fist fights on remote outposts, were getting provocative but predictable. The PLA would eventually shift from face-off to peace talk, build infrastructure on disputed sites and discuss confidence building mechanisms.
China’s emerging attitude change toward India, from assertive to aggressive, suggests a boldness to take risks that can turn bilateral differences into dangerous disputes. “Efforts made for normalisation since 1976 have come to nought," Rao tweeted after the clash.
India and China are rising on a collision course, whether on Xi’s Belt and Road Initiative in Pakistan, or the reorganization of Jammu and Kashmir and Ladakh into Union territories or Indo-Pacific sea-lanes. Most Chinese media reports after the Galwan Valley disaster have complained of two things: Indian border roads construction and plans to contain China in the Indo-Pacific Quadrilateral grouping of the US, Australia and Japan.
“Certainly, the Quad has begun to get on China’s nerves,’’ said Acharya. “It’s seen as very directly anti-China.’’ She notes that despite attempts to improve relations through informal summits between the two top leaders and various border management mechanisms, the neighbours have failed to find a strategic convergence and meaningful partnership.
Malik reckons that Beijing sees an ambitious India as a “spoiler power" backed by the US, Japan and others, that seeks to sabotage Xi’s China Dream and overturn the regional balance of power. “Apparently, the PLA is convinced that a limited war with India would send a resounding message to those who are again courting and counting on India as a balancer or counterweight to China,’’ he said.
Former Indian ambassadors and strategists are urging India to extensively scale up its role in the Indo-Pacific to counterbalance Chinese bullying. “I think India’s moving closer to the US is expected by the Chinese and it’s a self-fulfilling prophecy,’’ said Yun Sun, director of the China Program at the Stimson Centre in Washington D.C. But “by the end of day," she added, “the Chinese don’t believe India will form an alliance with the US."
Foreign ministries on both sides have indicated they want to prevent an escalation of the crisis without backing down on their strategic stance. The process of disengagement on the border and repairs to the relationship will be tense and prolonged. “In living memory, India’s youth had not seen death on the Sino-Indian border,’’ said Kondapalli. “This memory will remain etched in their minds for a long time." He notes that China’s foreign minister Wang Yi has set impossible “preconditions" for disengagement in his statement asking India “to hold the violators accountable".
While hardening the rhetoric on India, China will also be keen to contain any domestic consequences of border clashes and censor news about it. As a Chinese scholar once suggested to me some years ago in Beijing: “Can a Chinese parent ever support war and risk losing an only child?’’
Reshma Patil is the author of Strangers Across The Border: Indian Encounters In Boomtown China, based on her years as a former China Correspondent