Will removing curbs on Chinese FDI help India?

How will foreign direct investment from China help the Indian economy?

Shyam Saran: First of all, we have to spell out our own objectives with regard to our economic and industrial development. Which areas, from a security perspective, are sensitive and which are not. Unless we create a roadmap outlining our priorities and where Chinese FDI fits into that scale, it is very difficult to say whether or not we should accept it.

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Santosh Pai: Chinese investments can play a role in both India’s economic and security objectives. On the economic front, we can look at expanding the contribution of the manufacturing sector to the Indian economy, attracting a greater share of supply chains, and boosting exports. On the security front, especially vis-à-vis China, one pressing need is to reduce our dependence on imports from them, as we have a huge trade deficit. We can also look at how to develop leverage against China, given our political ties.

How do we approach China’s investments in sensitive sectors?

Shyam Saran: It is for the national security establishment within the Indian government to determine which sectors are considered very sensitive. For example, it was decided that we should be careful not to invite Chinese investment or participation in projects on our coast, which may be near our naval bases. The digital economy of India is considered a sensitive sector, and if it is dominated by Chinese investment and companies, our security may be compromised due to potential invisible data flows. There could also be kill switches that can be shut off during a period of emergency. Consumer items may not pose the same kind of concerns. Our view in the Ministry of External Affairs, when I was serving there, was that we should not make some of these limitations China-specific. If there is an area of security concern, the basic effort should be to ensure it is not open to foreign investment. Such a policy is better than being country-specific.

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Santosh Pai: Allowing investments in non-sensitive sectors can contribute heavily to reducing the trade deficit. So I would say we need to look at it from different perspectives, but the red lines must always be clear from a national security perspective before evaluating any other priority. So by placing national security at the centre, I think it is possible to evolve these priorities and develop the current restrictions.

In its Economic Survey for 2023-24, the Ministry of Finance suggested that increased FDI inflows from China could help increase India’s participation in global supply chains and push exports. How viable do you think this strategy is?

Shyam Saran: First, we should recognise that it is not such a simple matter to say we want to be part of this supply chain. Supply chains work efficiently in a low-tariff regime. Unless you make your market open to very easy imports of components, these items cross borders several times before a final product is made. Second, we have to determine the components of that supply chain in which we have competitiveness. I think we also have to study the experience of some Chinese FDI, already present in India, which is actually quite successful, such as Xiaomi and Oppo. We should also see if there are any other areas where Chinese FDI could be invited. Off the cuff, Chinese EV manufacturers may have a lot of interest in India. So why not consider that favourably?

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Santosh Pai: While we must take increased tariffs into account, India also has a role to play in non-tariff barriers. We have quality control orders that have been tweaked over the years to either make it easy or difficult to import some components required for assembly or manufacturing activities. But there will always be some factors beyond our control.

What does China gain from investing in India and allowing it to export products to markets such as the U.S. and Europe that are actively moving away from it?

Santosh Pai: Currently, China has excess capacity in almost every industry. So, ideally, Chinese companies would not like to go and invest anywhere outside China. They have a $1.2 trillion trade surplus. But on the other side, because of this, there is immense pressure on Chinese companies to establish supply chains outside the country and reduce this surplus, as it is interfering with their relationship with many major economies. One gain is that China gets to establish a supply chain outside China, which will insulate its companies against China-focused tariffs in the future. The second is having a foothold in a country like India, which has the fastest-growing domestic market among large countries. This translates to a bigger chance of global market share. And something more intangible is what we can call India Premium, because the confluence of economic and geopolitical factors makes India a considerably attractive destination. We have not really tapped it to its full extent so far, as most of the early moments of the global supply chain after the pandemic have been to countries in ASEAN, for example.

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Shyam Saran: For Chinese smartphone manufacturers, the Chinese market itself is completely saturated. Most of the other markets that China has access to are also saturated. So the only country where the smartphone market is likely to keep growing in the future is India. This is why, despite some barriers and political tensions, these companies have decided not only to navigate the difficulties but also to stay in India. Another more problematic aspect is: can India have become a platform for Chinese manufacturing for export to third countries? It is problematic because India as an investment destination is still regarded as a somewhat difficult place to do business in. There is also the infrastructure logistics constraint. Former IMF chief economist Gita Gopinath recently mentioned that perhaps Indians do not realise that news about pollution across north India is also a big disincentive. So if China is looking for a production basis for accessing other markets, then it finds it much more congenial to go to Southeast Asian countries such as Vietnam or even Bangladesh.

Although China has a dominance in the manufacture of components, its share of U.S. smartphone imports has dwindled from 60% in 2016 to about 22% in 2026. Is this a good example of what the Economic Survey was hinting at, which is that we can push our exports to the U.S. and Europe with the help of Chinese investment and replace them in certain ways?

Shyam Saran: When we got Apple here into India, we found that a very large number of components used in making the iPhone or iPad were manufactured in China. Therefore, unless we were able to access those components, it would have been very difficult to actually do this manufacturing. We had to create conditions for the suppliers of those components to set up units in India under a special provision, not as part and parcel of our general investment policy. We had to make concessions with respect to those Chinese companies that set up units in India, specifically for the iPhone industry. We may have thought that Apple’s investment would have a major demonstration effect on other companies that are de-risking from China for geopolitical reasons. But let me say that so far the results have not been up to expectations. I wonder if we are in a position really to offer those kinds of concessions on a broader scale.

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Santosh Pai: China supplies intermediates and components continues to contribute to that supply chain. It is just that the last port or the last destination of imports into the U.S. has changed. So, if you see, China’s exports to ASEAN have increased tremendously in the last five years. It is now the number one destination for Chinese exports. As a value share, I think China still contributes a significant percentage, but for geopolitical reasons, the U.S. does not prefer that final export to happen from China. So it has managed to discharge it into other countries whose dependencies on China have increased as a result.

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