Home >News >India >Why falling for anti-China mood could hurt trade

The covid-19 pandemic has earned China the ire of quite a few countries. India has not yet complained openly, but the deep-rooted mistrust towards the giant neighbour has been intensifying nonetheless. The focus may be on the military skirmishes in Ladakh, but the trade screws are at work too: India has been tightening investment norms for China.

Just last month, India mandated government approval for foreign direct investment (FDI) from countries with which it shares land borders. The curbs aimed to shield Indian companies from predatory investments, particularly those from China—a big hint that policymakers in New Delhi have become ever more cautious of Beijing’s growing role in the Indian economy.

India’s actions have possibly been made easier by a recent global context. Backlash over covid-19 is just weeks old, but China is not a new trading target: latest data from Global Trade Alert shows it has faced more trade restrictions than any other country since 2019. The pandemic is only making Beijing’s case worse, with Germany and the United Kingdom hesitating to let in tech giant Huawei, and Australia and the United States, among others, calling for inquiries and reparations.

Source: UNCTAD Investment Policy Monitor
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Source: UNCTAD Investment Policy Monitor

Jabin T Jacob, associate professor of international relations at Shiv Nadar University, called India’s step an “opportunistic move". “Since China is being accused of predatory action in other countries and justifiably so, India can do it too without drawing too much attention," he said. “The fear of predatory investments in the wake of covid-19 disruptions has made India more alert, but analysts and diplomats have been sounding alarm over it for a very long time."

India's FDI measure against its neighbours came days after the Chinese central bank raised its stake in HDFC to over 1% in April [https://www.livemint.com/market/stock-market-news/people-s-bank-of-china-buys-1-stake-in-hdfc-11586677655438.html]. But to be sure, China’s investments—even after including Hong Kong—actually contribute a tiny share in India’s total FDI inflow. This holds true even if one goes by China’s numbers, which are higher. Singapore and Japan occupy a far bigger space in FDI into India

Given the small FDI share, some of the paranoia may even be exaggerated due to the growing mistrust towards Beijing. But not all of it: China’s dominating presence in strategic sectors such as telecom and e-commerce have also raised eyebrows. Chinese tech giant Alibaba, for instance, holds a significant stake in Paytm, which produces huge volumes of data. This has led to fears of security of India’s data.

Opaque lending practices also lead to mistrust. Research shows developing countries owe much larger debts to China than was earlier believed [https://voxeu.org/article/china-s-overseas-lending-and-looming-developing-country-debt-crisis]. Critics call this the “Trojan horse" approach—they allege many loans to build infrastructure projects using Chinese contractors in strategically located developing nations are a form of debt-trap diplomacy [https://www.nytimes.com/2018/06/25/world/asia/china-sri-lanka-port.html].

China is accused of extending excessive credit with the intention of extracting economic or political concessions when countries cannot honour their debts. This raises fears that China’s credit to countries such as Pakistan, Sri Lanka and Nepal could be a strategic disadvantage for India.

But such concerns, too, may be a bit overplayed, experts say. Moreover, India must remember that even though its widening trade deficit with China remains an eyesore for policymakers, dependence on Chinese products has only grown year after year. In 2019, Chinese imports alone accounted for 34% of all the foreign value-added in India’s exports, data from the United Nations Conference on Trade and Development (UNCTAD) shows. In 2009, this figure was just 1.8%. Foreign value-added (FVA) refers to the value of imported goods used as inputs in producing intermediate or final goods meant for export.

Over the last decade, India’s dependence on China for inputs for the manufacture of drugs and consumer goods such as mobile phones has shown a marked increase. All this will matter even more in this time of crisis after the coronavirus. A strengthening anti-China sentiment and louder calls for self-reliance could actually go against India’s interests and economic logic.

For instance, to recover from the demand shock, India needs low prices that Chinese goods provide, said Nitin Pai, director of Takshashila Institution. Entrepreneurship and infrastructure development will also benefit from Chinese financing, and the technology, healthcare and farm sectors need the access to Chinese markets right now, he said.

Indeed, India has played it safe by only blocking the automatic route for investments and not tightening the limit itself. Nor has it named China explicitly. This is a clever move and leaves India room for negotiation, said Manoj Pant, director of Indian Institute of Foreign Trade. Any outright FDI curbs could hamper trade overall, he said.

The economic relationship was earlier believed to be a “balm" for geopolitical woes, but now, problems in one aspect only appear to worsen problems in the other, said Jacob. The solution may just be to remember that China is a neighbour India cannot wish away. There is no single policy to tackle the complex and multifaceted relationship. Even as India confronts China militarily, the need of the hour is better economic cooperation.

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