Opinion
Don’t let China’s dragon breath scorch our factories
Summary
- As Chinese exports threaten production elsewhere and face Western barriers, India should invite foreign direct investment (FDI) from China as part of its plus-one strategy—as the Economic Survey suggests—but only with due safeguards and a strategic plan for technology transfer in place.
The Chinese word ‘ma’ can mean mother, horse, hemp or scold, depending on how it is said. Tone and nuance are equally vital when it comes to welcoming foreign direct investment (FDI) from China. This is what the Economic Survey has to say: “India faces two choices to benefit from a China plus one strategy: it can integrate into China’s supply chain or promote FDI from China."
Of these, “focusing on FDI from China seems more promising…" This needs to be qualified on multiple counts. China is not just another economy. It is a neighbour with which India has fought a war and whose hostile intent occasionally finds articulation as skirmishes with Indian soldiers along the Line of Actual Control and diplomatic pressure on other neighbours to disadvantage India.
Another relevant aspect is that China has been identified by the US as its strategic rival, whose rise is seen to threaten the stability of the world over which the US presides.
Also read: ’FDI from China can help India increase value addition, exports’
A third point is that China is the world’s great big factory and its second-largest economy, thanks essentially to an industrial policy that funnels subsidies to the tune of 1.8% of GDP into sectors of industry that the Chinese Communist Party has earmarked for global dominance.
Hostility must be fended off with our own strength and deft diplomacy to leverage the fact that India is the only country in the Indo-Pacific with the heft to counterbalance China. It also means that allowing Chinese entry into sensitive sectors, such as telecom networks, could compromise national security.
China’s strategic rivalry with the US exposes Chinese output in some categories—whether exported directly from China or via third countries—to potential American or Western sanctions. This could even apply to shipments with large Chinese inputs. Thus, it would be best for India to avoid letting investment from China into advanced sectors.
Also read: How to sneak billions of dollars out of China
Beijing’s industrial policy results in cost-crushing scale economies, subsidized competitive efficiency and giant overcapacity in relation to local demand, and this poses the threat of replacing local production with cheap imports from China in much of the world.
Since Beijing’s opaque subsidies make Chinese production costs hard to estimate, it isn’t always easy to identify its export game as ‘dumping,’ which is a violation of trade rules, but it clearly squeezes investment in factories elsewhere.
China’s policy has lessons for developing countries, though. Access to its large and fast-growing domestic market, for example, was used by Beijing to ‘persuade’ foreign companies to transfer technology in strategic sectors. This led academics to coin the term ‘forced technology transfer.’
Also read: India’s FDI decline seems easier to explain than reverse
While we should unconditionally welcome investment proposals from China in sectors like consumer goods and light machinery, we could insist on joint ventures (JVs) with local partners in fields where Indian players lack know-how. This would replicate the tech diffusion seen in the auto sector, thanks to JVs with Japanese and Korean carmakers.
Within sub-sectors that overlap with sectors that involve strategic capabilities, FDI could be strictly regulated in terms of ownership caps, management control and monitoring of local value addition. Broadly, India should welcome FDI from China, as the Economic Survey says, but only armed with sufficient policy safeguards and regulatory oversight.
In short, we must use a whip alongside the training manual. This may or may not be a ‘game of thrones,’ but there is no such thing as a friendly dragon.
