The entry of the Chinese private sector at a large scale in India since 2014 and the subsequent influx of Chinese capital has changed the nature of China Inc’s engagement with India. What is striking about this change — which raised the stakes of Chinese companies in the Indian market — is that it largely happened without the involvement of Narendra Modi and Xi Jinping governments, and was led by the private sector in both countries.
This new engagement presents both opportunities and challenges for India in pursuing its strategic and commercial goals with regard to China. The Chinese investment and acquisitions in the tech sector hold immense implications for India’s diplomacy, trade strategy, and security.
Until 2014, the net Chinese investment in India was US$1.6 billion, according to official figures. Most of the investment was in the infrastructure space, involving major Chinese players in this sector, predominantly state-owned enterprises.
In the next three years, total investment increased five-fold to at least US$8 billion, according to data from the Ministry of Commerce in Beijing, with a noticeable shift from state-driven to market-driven investment from the Chinese private sector.
It is possible to estimate that the total investment from China exceeds official figures by at least 25 per cent. When announced projects and planned investments are included, the total current and planned investment is three times the current figure, crossing at least US$26 billion. In greenfield investments and capital invested in acquiring or expanding existing facilities in India, Chinese companies have invested at least US$4.4 billion. Chinese companies have also invested in acquiring stakes in Indian companies, mostly in the pharmaceutical and technology sectors, and participated in numerous funding rounds of Indian startups in the tech space. Another US$15 billion approximately is pledged by Chinese companies in investment plans or in bids for major infrastructure projects that are as yet unapproved.
These figures are likely an underestimation as there are several limitations in the exercise of mapping Chinese investments in India. For one, there is no exhaustive list or record of Chinese companies operating in India or their investments with either the Indian or Chinese governments. One reason is the routing of investments through different countries. For instance, a US$504 million (Rs 3500 crore) investment from the Singapore subsidiary of the mobile and telecom firm Xiaomi would not figure in official statistics because of how investments are measured.
A second limitation is the different routes of foreign direct investment (FDI) into India, as a result of which complete FDI statistics are not available with a single government agency. Chinese ministries, on the other hand, may have more accurate country-wise data but tend to be less forthcoming in sharing it. Complicating the picture are investments from funds whose links to Chinese entities are difficult to ascertain. Another limitation is the inability to confirm whether stated investments by Chinese companies have materialised to the fullest extent.
Implications of rising Chinese investment for India
While there are benefits in pursuing investment from China, the challenges need to be considered as well. So far, the focus of capital-hungry Indian startups and a foreign investment-seeking government has understandably been on attracting investment as well as know-how from China in helping them scale up. This has, however, arguably led to inadequate attention on the specific challenges of regulating investments from China.
Chinese companies have escaped the kind of scrutiny in India that their investments have attracted in the West, despite several high-profile investments and acquisitions. Another likely reason is the assumption that investments from the Chinese private sector are entirely different from state-led investments.
But the separation between the Chinese state and private business is blurry. Within China, the Chinese private sector, and particularly tech firms, work closely with the government and the Communist Party in pursuing many of its goals at home. This is especially true of the technology sector, which is widely seen as playing a key role in the party’s enforcement of digital authoritarianism at home, from surveillance to censorship.
In the West, there has been considerable debate on whether a clear distinction should be made between Chinese state-owned enterprises and the private sector. The private sector’s relationship is now under the lens in many Western countries. As of September 2019, the US, Australia, and Japan were among countries that have blocked Huawei, a private sector giant with close state ties, from their 5G plans, while India has not taken a final call, although it has allowed Huawei to participate in initial 5G trials.
For India, the emergence of the Chinese private sector as a key stakeholder presents its own unique opportunities and challenges. The influx of Chinese capital has certainly been beneficial to both countries, and to the broader relationship as well, emerging as a potential factor of stability. For Indian tech companies, the infusion of capital has allowed them to scale up, as well as benefit from the experience and technological know-how of Chinese companies that have achieved a bigger scale and success in their own home market in similar verticals.
The investments and acquisitions by the Chinese private sector in India have largely been driven by market compulsions. Moreover, Chinese companies are unlikely to take any action that adversely impacts either their market share or the hundreds of millions that comprise their user base. At the same time, users of apps need to be made aware of the context and implications of these acquisitions. Safeguarding access to private data that could be potentially sensitive is another challenge that has not received adequate attention.
Neither has the expanding footprint of Chinese stakes in new areas, such as news and entertainment apps. For example, ByteDance has a $25 million investment in Indian news aggregator Dailyhunt. In China, the company plays a key role in ensuring the party’s censorship mandates are followed strictly. Regulators will need to consider the implications of having India’s most valuable startups — in potentially sensitive newly emerging sectors such as fin-tech services — ceding controlling stakes to Chinese firms.
Recommendations for India’s trade and investment strategy
1. Engaging new actors
An immediate challenge is engaging the new actors with stakes in the relationship. India and China have established a wide range of at least 30 dialogue mechanisms, covering engagement between various government ministries. While the Ministry of External Affairs (MEA) in India and the Ministry of Foreign Affairs (MFA) in China are the most important points of contact, a number of new dialogues have been set up in recent years to deal with the growing commercial engagement. These include a Joint Group on Economic Relations, Science and Technology (JEG) that was set up in 1988. It has, however, only met 11 times since.
The JEG has also set up three working groups on Economic and Trade Planning Cooperation (ETPC), Trade Statistical Analysis (TSA) and Service Trade Promotion. In addition, a Strategic Economic Dialogue (SED) was established in 2010; however, only five meetings have been held as of 2018. The SED, led by the vice chairman of the NITI Aayog and the chairman of China’s National Development and Reform Commission (NDRC), has six working groups: on infrastructure, environment, energy, technology, policy coordination and pharmaceuticals.
Despite the impressive list, the outcomes have been modest for several reasons. For one, the JEGs tend to meet infrequently. Secondly, there is no rigorous system of following up on agreements.
2. State-to-province engagement
One obvious gap is in engaging two of the most influential new actors in the commercial relationship: Chinese provinces and the private sector, both of which do not fall into the scope of existing dialogue mechanisms. A decision to set up a state leaders’ forum was announced when Prime Minister Narendra Modi visited China in 2015, but the only meeting of the forum was held during that visit.
Establishing relationships between Indian states and Chinese provinces is another untapped avenue of engagement. Most of the hurdles faced by Chinese investors are at the state level — as we saw in the Wanda and Beiqi Foton investments — where they are often surprised to find that assurances from the Centre do not carry as much weight as they do in their own country. Visits by Indian chief ministers to China, which require MEA facilitation, are infrequent. Giving states more autonomy to pursue their own engagement with Chinese provinces could help address this gap.
3. Outreach to the private sector
There is a lack of a reliable platform to engage the Chinese private sector. Unlike most countries, India does not have a chamber of commerce in Beijing. The only industry body present in China is a Confederation of Indian Industry (CII) branch in Shanghai, which is staffed with only one permanent representative. Its primary concern is dealing with the issues faced by Indian companies in China. Hence, most outreach to the Chinese private sector as well as Indian companies based in China is left to the commercial wing of the Indian embassy in Beijing, besides consulates in Shanghai and Guangzhou. The wing, which is staffed by only three officials, lacks the resources to facilitate both potential Chinese investors in India or Indian companies based in China.
To fill this void, the Department for Promotion of Industry and Internal Trade (DPIIIT) has set up a dedicated China desk in Delhi to handle issues faced by Chinese investors, such as queries over regulation and investment.
4. Rethinking trade strategy
The absence of a coherent strategy in engaging China on trade and investment has led to a piecemeal approach where different actors pursue different interests. If New Delhi wants to better leverage its market in pursuing its goals with China, both on the investment and market access fronts, this will need to change.
Chinese investment also has the potential to rebalance an extremely lopsided trading relationship, which has been driven by Indian dependence on Chinese goods in various sectors. In addition to their stakes in Indian companies, India has also emerged among the key overseas markets for several Chinese companies with hundreds of millions of dollars in revenues at stake. Whether this can be better leveraged by India’s trade strategy, which has so far failed to balance the trading relationship or secure market access for Indian firms in China, needs to be explored.
5. A transparent and effective regulatory regime
Regulation should certainly not single out Chinese investment, which would be self-defeating as well as derail what has undoubtedly been a welcome trend for the relationship. Neither should alarmism on the security concerns dictate policy or overstate the security risks. At the same time, this flush of investment from China has only served to underline the need for a transparent, credible and predictable regulatory framework — aimed at all overseas investment — that strikes a better balance between creating a friendly, open and predictable investment environment on one hand, and safeguarding longer-term considerations of security and privacy on the other.
Doing so would better harness the benefits of greater Chinese investment into India, which have already given some of China’s biggest and most influential companies a long-term stake in the success of India’s economy a welcome shift. After all, the billion-dollar-plus portfolios acquired by companies such as Alibaba and Tencent are not only long-term bets on the Indian economy, but also the biggest bets that have been placed yet on the future of India’s relations with China.
Ananth Krishnan was a Visiting Fellow at Brookings India until 2019. Views are personal.
This article is an edited excerpt from the author’s new Brookings India research study ‘Following the Money: China Inc’s Growing Stake in India-China Relations. Read the full paper here.