India rethinking its FDI Policy Stance with China

India rethinking its FDI Policy Stance with China:

To avoid opportunistic takeovers of local companies during the epidemic, the Indian government amended its foreign direct investment (FDI) policy toward its neighbors, including China, in April 2020. The Consolidated FDI Policy, 2020, which went into force on October 15, last year, reaffirmed this.

As a result, foreign investment from India's neighbors would be authorized only with the permission of the federal government, even in industries where "automatic" permits were previously allowed. Any changes in the ownership of shares, no matter how little, would need to be approved by the federal government.

Increased scrutiny and consequent delaying of Chinese investment bids, on the other hand, coincided with border conflicts between India and China. In addition, India has banned over 100 Chinese applications, including ByteDance's famous video-sharing app TikTok, Tencent Holdings' WeChat, Alibaba's UC Browser, and Tencent's popular videogame PUBG, on security grounds.

India's position on Chinese investment restrictions

Now that geopolitical tensions appear to be easing, rumors suggest that the government may clear Chinese FDI applications after a nine-month moratorium. After Fresh Delhi approved three new FDI bids from Hong Kong-based businesses in January 2021, speculation was widespread.

Soon after, news sources cited authorities denying that India's attitude had changed significantly. “The government of India has put in place a robust FDI policy,” according to official officials reported by news outlets. According to the revised policy, “proposals from countries sharing borders with India must undergo a security review, and approval would be granted only after a comprehensive investigation.” The Home Ministry will make the ultimate decision on security assessments, according to the same sources. “These bids were by Citizen watches, Nippon paints, and Netplay,” the sources said of the proposals cleared in January. Two of the three are Japanese, and one is a non-resident alien.”

In March, new guidelines were introduced.

According to the most recent sources as of March 3, the Indian government would examine Chinese investment bids carefully while following to three-pronged standard operating rules. Security clearances will be required for all Chinese investment applications. The following are the new guidelines:

• Large Chinese FDI in key sectors: Any large-scale investment from China might be approved in a vital industry if local firms are undercapitalized.
• Firms with headquarters in countries other than China that aim to invest in India: Proposals from companies with headquarters in countries other than China that seek to invest in India may be considered for approval.
• Modest investments by Chinese investors: Proposals involving small investments by Chinese investors may be examined for approval as well.

It's unclear how the rules will be enforced until the administration issues an official statement. Good development with regard to pending Chinese FDI bids is also possible.

Experts believe that any loosening of restrictions may be part of a wider deal between New Delhi and Beijing to de-escalate border tensions and try to mend aspects of the relationship.

Meanwhile, there is no news on whether the restriction on Chinese mobile applications would be lifted. According to research by the analytics firm AppsFlyer, Chinese applications' market share in India (as measured by the proportion of installs) would decline to 29% in 2020 from 39% in 2019.

In the future New Delhi is expected to continue to approach Chinese firms and investments in India with care, citing security and sovereignty as justifications - similar to Beijing's own internet and technology policies. Because the borders between state-owned companies (SOEs) and private firms in China are blurred, Chinese FDI attracts attention. With Chinese corporations and Chinese-invested firms obtaining controlling shares in Indian companies, this focus becomes increasingly more important, particularly in the technology sector, where definitions of security and strategic consequences are quickly developing.

China has expressed concerns to the World Trade Organization (WTO) in early January about the negative impact of New Delhi's FDI curbs. This was raised during India's WTO trade policy review, during which the US and EU highlighted India's trade obstacles, notably high and volatile import tariffs.

Reading between the lines reveals that the official tone shifts on the subject of easing inspection.

Several Chinese outbound investment plans have remained in limbo since the FDI limits were imposed in 2020.

Since April 2020, India has received over 120 Chinese foreign direct investment (FDI) bids totaling INR 120 billion (US$ 1.63 billion), according to official statistics. Brownfield developments account for the majority of these investments. All of these inbound applications have been transferred to the government approval process under the new FDI policy, but no approvals have been issued as of yet due to the ongoing border crisis. As a result, the expectations of Chinese firms in India and Indian companies in need of Chinese investment have been harmed. As a result, the expectations of Chinese firms in India and Indian companies in need of Chinese investment have been harmed.

Initial encouraging reports suggested that Chinese investors interested in Indian markets may expect a number of concessions. The following are some of them:

• Some Chinese greenfield investment projects may be approved if they are not sensitive to national security.
• Brownfield projects that do not pose a threat to national security may be cleared following the first round of greenfield investment approval.
• Investments in “non-sensitive” industries such as heavy machinery, car components, services, and technology, which have no security implications, may revert to the automatic path for countries with whom India has land borders.

A new bureaucratic clearance procedure has been implemented.

The federal government has established a coordination group made up of officials from important ministries including as Home Affairs, External Affairs, Commerce and Industry, and Niti Aayog, the government's policy think tank, to help smooth the process. The FDI bids from all surrounding countries will be scrutinized by this inter-ministerial coordination group, but they will eventually be vetted by the appropriate ministry, which will have the last word.

 

Chinese money is pouring into India.

Though India and China have had political connections since 1950, bilateral commercial contacts began in the mid-1980s and have accelerated since the early 2000s. India got US$2.43 billion in FDI from China between April 2000 and September 2020. Despite a short setback in the relationship, China remained India's most important economic partner in 2020, with bilateral trade totaling US$77.7 billion.

In the first decade (2000-10) of the partnership, the India-China bilateral trade relationship was unbalanced and transactional, with Indian purchases of Chinese machinery and equipment accounting for more than half of all Indian imports from China.

Since then, Chinese firms have made significant investments in India's growth and industrial capacity, with the goal of establishing a long-term presence. They've taken a multipronged strategy, tapping into hyperlocal start-ups (similar to the Chinese environment a decade ago), purchasing local enterprises, and creating joint venture plans with Indian corporations to offer them unparalleled access to the Indian market across industries.

Composition of Chinese investments in India by sector

Despite the hoopla, China's FDI inflows to India were just US$2.43 billion (0.51 percent) of overall inflows. The majority of this FDI inflow from China (US$1.81 billion) occurred between April 2014 and March 2019, according to the Ministry of Commerce and Industry, with the automobile (US$876.73 million), electrical equipment (US$152.5 million), and services sectors (US$127 million) receiving the largest share.

Chinese FDI was also heavily invested in India's pharmaceutical industry. According to The China Global Investment Tracker, the Shanghai-based pharmaceuticals company Fosun Pharma bought a 74% interest in Gland Pharma, a Hyderabad-based pharmaceutical manufacturing and R&D firm, for US$1.08 billion in 2017.

From 2016 forward, private Chinese funding began to pour into India's IT sector. Several Chinese technology companies and venture capital firms, led by Alibaba (Paytm, BigBasket, and Zomato) and Tencent (Ola, Flipkart, and BYJU's), have taken minority or majority shares in Indian unicorn start-ups. Leading Chinese smartphone manufacturers OPPO, VIVO, Xiaomi, and Huawei have all obtained 100 percent FDI for contract manufacturing of electronic devices in India, according to Invest India statistics, and have built up factories in the states of Uttar Pradesh, Andhra Pradesh, and Tamil Nadu.

SAIC, a Chinese automaker that performs research and development, produces, and distributes passenger and commercial cars, has a presence in India. Its India activities include the acquisition of a former General Motors firm with an annual manufacturing capacity of 80,000 units. MG Motors, a subsidiary of SAIC Motors UK, has also registered in India. In 2020, BYD Auto Co. successfully introduced electric buses. Changan, which was previously scheduled to begin operations in 2022-23, and Great Wall Motors are two more Chinese automakers with plans awaiting clearance (GWM).

Former National Security Advisory Board Chairman Shyam Saran was quoted in the media as saying of the blocked proposals and possible easing of tensions between India and China, "If [the GM-GWM deal] is going to be cleared, that seems to suggest that part of the overall deal between the two sides may also begin untangling the commercial and economic issue."

India, for its side, is aggressively promoting more foreign investment in target industries such as electronics and car manufacture in order to meet the country's huge market demands, reduce import dependency, generate employment, and advance up the value chain, among other things.