Roll out a red carpet for Chinese investment—but cautiously

The government’s ambition is to reach FDI worth $100 billion every year. This will still represent less than 3% of gross domestic product (GDP) and not even one-tenth of the industrial and economic investment that is needed to take GDP growth to a higher orbit. A bulk of the investment will continue to be funded by domestic savings.

FDI is important not just for the dollars flowing in, but also because it brings know-how, cutting-edge technology and management best practices, even as it helps India plug into global value chains. 

Also read: Don’t let China’s dragon breath scorch our factories

It also helps improve India’s human capital, thanks to an osmotic effect, increasing productivity as well as competitiveness. Before the recent decline of FDI, it was on an upward path. The average annual inflow for the past five years is still around $70 billion. 

This needs to rise to $100 billion. An economy that promises high growth and a large domestic market can surely do so, but it has to roll out the red carpet for FDI from all over the world.

Globally, one of the biggest FDI sources is China, which last year alone poured $148 billion into other economies, the world’s third highest, at a time when global aggregate FDI flows were falling. China today represents a sizeable part of the world’s savings and investible surplus, of which nothing comes to India. 

Even before the Galwan clash, India had issued its Press Note 3, restricting FDI from China. Countries without land borders with India have automatic entry, but Chinese investments are scrutinized case-by-case by the home ministry for national security risks. 

Since April 2020, when this rule came into effect, the government has received 526 proposals from Chinese investors, totalling $11.6 billion worth of FDI. Of these, 201 were rejected and 200 are still pending. 

Meanwhile, some of that intended equity investment has entered disguised as long-term debt, while the rest has gone away. Of the cumulative FDI received since 2000, India approved only $2.5 billion from China, less than 1% of the total.

In contrast, trade flows between India and China have grown healthily. At the turn of the millennium, bilateral trade was nearly balanced, with total trade being less than $4 billion. But that grew to $120 billion by 2023-24. 

Also read: Mint Quick Edit | Chinese investment could suit India

China has been India’s largest trading partner (not counting flows through Hong Kong or Taiwan) in the past 10 years, except for a year or two when the US or UAE edged ahead. The growth of bilateral trade has had a spectacular compound annual rate of 17% in dollar terms, much faster than the GDP growth rate of either economy. 

In 2001, India was ranked destination No. 19 for exports out of China. In the next decade or so, it jumped to sixth rank, illustrating the size of India’s domestic market and its importance to Chinese exporters. Of course, the trade growth is quite skewed, with a large deficit that is adverse to India. 

Despite sustained efforts, including trade remedies like anti-dumping duties, Chinese imports continue to grow. But India enjoys a large surplus with the US, which balances other deficits. India’s current account deficit is below 1% of GDP.

The deficit with China can be partly offset by capital inflows to India. Even if 1% of China’s vast foreign exchange reserves are deployed in India’s infrastructure, it will substantially wipe out the trade deficit. Investments in sectors such as infrastructure, automotive, renewable energy and electric vehicles (EVs) cannot be seen as threats to national security. 

The Economic Survey recommends that India become more receptive to Chinese FDI because it will boost our presence in global value chains, manufacturing competitiveness and exports. There are industries where China has assumed global leadership and there is no way to cut ourselves off from those supplies. 

Chinese imports are important as inputs for crucial industries in India such as pharmaceuticals, specialty chemicals, electronics assembly, telecom equipment, solar energy and EVs. India is proud of the success of domestic iPhone assembly, but that requires at least three critical Apple vendors with a Chinese connection. 

Two of them have recently been bought out by the Tata Group. A possible roadmap for future Chinese investments into India could use the template of MG Motors, a Chinese automaker which sold 38% of its shares to JSW, an Indian business group.

India must pursue a compartmentalized approach in its ties with China, with trade, investment, cultural and scientific exchange in one compartment and border issues and geopolitics in another. 

Also read: ’FDI from China can help India increase value addition, exports’

Even though China unilaterally changed the status quo on the border, it is possible to combine realpolitik with trade relations. We can learn from the US approach of a “high fence, small yard."

India cannot ignore China’s $7 trillion consumer market as a tremendous export opportunity. And there are many areas where Chinese dollar flows will not jeopardize national security. There could be bilateral investment deals that bypass the dollar currency risk as well. 

This calls for a hardheaded, open-eyed and nuanced strategy, which uses not just a military or security lens, but also economic and sociocultural considerations. Three billion people who are neighbours on this planet cannot be cut off from each other for too long.