India should be pragmatic about huge Chinese investments | Mint

India should be pragmatic about huge Chinese investments

BYD cancelled plans to invest $1 billion in partnership with the Megha Engineering and Infrastructure to make EVs in India after it was clear that regulatory approvals would not be forthcoming (Photo: Reuters)
BYD cancelled plans to invest $1 billion in partnership with the Megha Engineering and Infrastructure to make EVs in India after it was clear that regulatory approvals would not be forthcoming (Photo: Reuters)

Summary

  • BYD Motors's $1 billion investment bid is the latest casualty of the economic cold war with China. Can India afford to continue turning down Chinese money and expertise?

Officially, India would love to do business with China. Minister of state for information technology Rajeev Chandrasekhar told the Financial Times in an interview last week, “We are open to doing business with any company anywhere as long as they are investing and conducting their business lawfully and are in compliance with the Indian laws." He added, for good measure, that India was “open to all investments, including Chinese".

That these statements were meant for consumption overseas is evident if one looks at the ground reality. China’s BYD Motors has become the latest casualty of India’s undeclared economic cold war with China. The company has called off its plans to invest $1 billion in partnership with the Hyderabad-based Megha Engineering and Infrastructure to manufacture electric vehicles in India, after it was clear that regulatory approvals would not be forthcoming.

BYD’s proposal ran afoul of a 2020 amendment to India’s foreign direct investment policy that made government approval mandatory for any investment originating from a country with which India shares a land border. Although India shares a land border with seven countries – Pakistan, Afghanistan, Nepal, Bhutan, China, Myanmar and Bangladesh – given the economic vicissitudes gripping six of them, the policy was clearly aimed at China.

That policy was the direct outcome of violent clashes between Chinese and Indian military forces along the border in Ladakh’s Galwan Valley and Pangong Tso Lake that year. The clashes, which India said were unprovoked and unjustified, led to heightened tensions between the two countries. India banned hundreds of Chinese apps, cracked down on Chinese businesses operating in India, and amended the investment rules to prevent the easy entry of Chinese investments into India.

Chinese businesses quickly felt the effects of these actions. Smartphone makers Oppo, Vivo and Xiaomi, which dominate the Indian smartphone market, faced tax raids and their Chinese CEOs were forced to work remotely from China as visas were not renewed. The expat headcount in these companies has dropped to between a third and a fourth of pre-2020 levels. China’s Great Wall Motors, which had planned to buy GM’s shuttered Talegaon plant to start manufacturing in India, exited after waiting two years for approvals to materialise. The Tatas called off a proposed 500 crore joint venture with Shanghai Highly Group – the world’s largest compressor manufacturer – to make inverter compressors in India. Many other projects have been put on hold because the Chinese engineers needed to set them up aren’t getting visas.

But the question is, who is this really hurting? Yes, China and Chinese companies have suffered to some extent. India’s trade with China declined – albeit marginally – in the first half of 2023 after more than two years of record growth. Bilateral trade hit $66.02 billion in the first six months of 2023, according to data from China’s General Administration of Customs (GAC). India’s imports from China fell by less than 1% from the same period last year to $56.53 billion, while exports fell by 0.6% to $9.49 billion. India’s trade deficit with China, at $47.04 billion, is the largest it runs with any country, including its biggest trade partner, the US. In fact, China’s share of India’s non-oil imports is over 25%, making it all but impossible for India’s economy to decouple from China, however much policymakers may want it to.

There is also the question of whether India can afford the luxury of turning down billions of dollars of direct investment just because it doesn’t like the colour of that money. The government has been proudly pointing out that UNCTAD’s 2023 World Investment Report places India third in the list of top FDI destinations, with inflows of $49.355 billion in 2022 putting it behind only the US and UK. However, it must be noted that the gross FDI figure is much less than the over $64 billion logged in 2020. The net FDI (less outflows) was only $34.812 billion in 2022, with a bulk of this skewed in favour of equities and software and services.

On the other hand, BYD – which overtook Tesla as the world’s largest maker of electric vehicles in Q2 2022 and since increased the market-share gap to over 5% – was planning to bring in advanced EV and battery technology to India, transfer technology to its Indian partner, and create thousands of jobs here – not to mention the tax it would pay the government. India’s shift to EVs is a key part of its net-zero goals. At the moment, the country lags in EV and battery manufacturing and technology. BYD is among the world’s top two in both fields.

India thus needs to shed its paranoia regarding Chinese investments. It allows Chinese phone makers to operate in India, sources more than three-quarters of its pharma bulk inputs from there, and even allows Chinese vehicles to ply on Indian roads. BYD itself has a joint venture for making electric buses. ZTE deployed BSNL’s existing 3G network and is in talks to set up an Indian joint venture. Building overall trade with China is as much a strategic as an economic necessity. No two countries with significant trade relations have ever risked damaging that by going to war.

Of course, India needs to narrow the trade deficit with China. But that can be achieved better by “Indianising" a portion of current imports by allowing JVs and local manufacturing. Of course, India is not alone in viewing Chinese firms, especially those with links to state entities, with suspicion. The US, Australia, New Zealand, Vietnam, Bahrain, Taiwan and 10 of 26 EU states have banned 5G equipment from Huawei and ZTE while the US, Australia, Britain and others have removed Chinese security cameras and equipment from government sites, citing security risks.

India, however, needs to adopt a balanced and pragmatic approach, given its needs . Proper safeguards will ensure that our strategic interests are preserved, and proposals that bring in money, create jobs and ensure genuine technology transfer will only help, not harm, India’s long-term interests.

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