More at Stake

Deteriorating economic and political relations with China do not bode well for India

India and China share deep economic ties. There are high trade volumes between the two countries, with a mammoth imbalance in China’s favour. Following a border clash in which several soldiers on both sides were killed, calls have been growing in India for a boycott of everything Chinese. The government first banned the use of 59 Chinese apps followed by the ban on another 47 apps. Goods purchased from China are being delayed at Indian ports, the authorities are planning to impose higher tariffs, and stringent due diligence is being done for Chinese investments. Considering India’s huge dependence on China for technology, industrial equipment and key raw materials, a blanket ban on Chinese imports is not feasible. Moreover, linking political tussles with economic relations is likely to be self-defeating for India.

China’s presence in India

Initially, foreign direct investment (FDI) from China in India was predominantly by state-owned enterprises investing in the infrastructure space. From the early 2000s, Indian demand for Chinese equipment and machinery has been a key driver of bilateral trade. Among the first major Chinese entrants into the infrastructure space was Changsha-based construction giant Sany. Another early entrant in the space was a domestic rival of Sany’s, Guangxi-based Liugong, which is among the world’s largest construction equipment manufacturers. In the past four to five years, Chinese companies started making inroads in highway construction and the railway sector CRRC Corporation and its subsidiaries won rolling stock contracts for the Nagpur metro, Gurugram Rapid Metro, Navi Mumbai metro, Kolkata metro, etc., thus marking a significant presence in the rolling stock segment.

The year 2014 was an inflection point for China. As per policy think tank Brookings India, around one-third of the 800 or so Chinese companies with a presence in India entered the market that year. Close to three-quarters are registered as private companies, while less than 10 per cent are joint ventures (JVs). Around 42 per cent are in the manufacturing sector, while 25 per cent are in infrastructure.

After 2014, the biggest change in the energy sector has been the emergence of renewable energy, which is of major interest for Chinese solar and wind energy companies. Chinese companies have pledged investments of $3 billion in wind and solar energy development in the country. In particular, China’s interest in the solar energy sector in Andhra Pradesh is increasing. That said, it is the smartphone segment that has seen the largest Chinese presence, where five Chinese companies (BBK Electronics-owned brands OnePlus, Vivo, Realme, Oppo and Xiaomi), and South Korea’s Samsung, dominate the Indian market.

Over the past 10 years, however, things have started to change with China’s reputation as a technology superpower growing. Chinese tech giants such as Tencent and the Fosun Group had started investing in fledgling Indian companies. According to data from technology research firm Tracxn, 28 Chinese corporates have invested in Indian start-ups since 2010.

Growing role of AIIB

India has emerged as a top borrower from China-sponsored Asian Infrastructure Investment Bank (AIIB). Almost 28 per cent of the money lent by AIIB in its first two years of operation has gone to projects in India, which is also the only country apart from China to enjoy a permanent seat on the bank’s board of directors.

India needs to spend $1.4 trillion on infrastructure to achieve its target of becoming a $5 trillion economy by 2024-25. Domestic banking institutions are insufficient to meet such high demand for investment, and thus the role of multilateral institutions such as AIIB targeting infrastructure projects assumes great significance. So far, AIIB has approved funding of $3 billion towards 15 infrastructure projects in India. Besides, funding to the tune of another $4.7 billion towards 12 infrastructure projects has been proposed.

India may be the second largest shareholder in the bank, but it is also one of the biggest prospective markets for transport infrastructure development among AIIB’s Asian members. AIIB loans for such projects could arguably pave the way for some major Chinese companies to be involved, giving these firms exposure to India’s promising infrastructure market.

Dependence on China unlikely to reduce

Sectors including solar energy are heavily dependent on China for inputs. At present, about 80 per cent of the solar modules and inverters that are imported are from China. Domestic manufacturing of modules too is dependent on import of components from China. India may look at other countries such as Thailand, Malaysia and Vietnam as alternatives to China but these countries do not have the required scale of manufacturing. Further, they are also dependent on China for several key solar power inputs.

Chinese investors such as the Fosun Group and Tencent have been aggressively infusing cash into a clutch of Indian start-ups and unicorns. As per industry estimates, Chinese investors have put in over $5.5 billion in new-age firms in the past two to three years. The strained relations between the two countries are bound to have an impact on these investments.

India is expected to raise tariffs on several Chinese products and announce further tightening of investment rules. If such restrictions are put in place, then for some time at least bilateral trade and investment volumes are likely to be impacted. However, significant reductions in trade and investment are not expected because the contraction of the Indian economy has reduced the demand for imports.

Steps taken for curbing Chinese ventures in India

China’s FDI in India has grown fivefold since 2014, and from April 2000 to March 2020 its cumulative investment in the country exceeded $2 billion. As per Brookings India, the total current and planned Chinese investment in India is pegged at over $26 billion.

India recently revised its FDI policy with the objective of preventing opportunistic takeovers of firms hit by the lockdown induced by the COVID-19 outbreak. As per the new amendment, firms in neighbouring countries wanting to invest in Indian companies would first need government approval. The decision comes after China’s central bank, the People’s Bank of China, raised its shareholding in HDFC Bank to over 1 per cent.

For road construction, the Ministry of Road Transport and Highways will not grant permissions to JVs that have Chinese partners. A policy will be issued soon banning Chinese companies and relaxing norms for Indian firms to expand their eligibility criteria for participation in highway projects. At present, only a few projects that were undertaken much earlier involve partners from China. The new decision will be implemented for current as well as future tenders. Also, rebidding will be done for projects that have been won by JVs from China. Moreover, in the areas of technology, consultancy and design, the government will not allow foreign JVs with Chinese companies to participate.

The government has also moved to scrap and rework contracts floated by state-owned telecom companies Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited to keep out Chinese equipment suppliers over security concerns. Similarly, the future of the Delhi-Meerut Regional Rapid Transit System is in limbo because China’s Shanghai Tunnel Engineering Company had emerged as the lowest bidder for an underground stretch of the project.

The emphasis on domestic manufacturing is part of the government’s Atmanirbhar Bharat Abhiyan and has gained importance in the wake of changed circumstances at the border. The government is exploring ways to increase local sourcing of both goods and services for infrastructure projects. It has already reserved supply contracts of up to Rs 2 billion for local producers. There is growing concern in the government over overdependence on external supply chains concentrated in a single country for supply of large equipment and machinery for infrastructure projects.

Outlook

According to ICRA, over the past few decades, Indian contractors have built capabilities to execute complex and challenging construction contracts. The majority of the civil works can thus be taken up by Indian entities. The dependence on Chinese players would be to the extent of construction equipment supply or rolling stock for which there are other alternatives available across the globe, though at a higher cost. India had awarded some rolling stock supply contracts to CRRC. It should now explore options from South Korea and Europe. The only way domestic infrastructure projects can reduce their dependence on China is if the government takes some bold steps, including reduction of customs duty on plant and machinery imported from other countries and diversifying the supply chain.

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