From rival to reluctant partner: India’s evolving stance on Chinese investment

India’s bid to become a leader in the factory sector has hit a hurdle: To become a credible alternative to China for global companies, it must first forge closer ties with its longtime rival.

Relations between the world’s two most populous countries have been tense since the US forced the country to conduct military exercises with the United States in 2014. Border clashes in 2020The flow of capital, technology and talent has slowed despite growing demand for electric vehicles, semiconductors and artificial intelligence. The Modi government’s tight scrutiny of all Chinese investment during this period effectively turned down billions of dollars in investment from companies like BYD, Great Wall Motor and created new layers of red tape for Indian firms with Chinese stakeholders.

But now, New Delhi is considering easing some of these restrictions as companies struggle to ramp up manufacturing despite a number of subsidies offered by the government to boost local production.

Also read: With or without Chinese companies, that is the question

“There is this realisation that you cannot be part of any major supply chain, especially in high technology products and certain sectors like solar cells, EVs, where it is not possible for you to do anything without being part of the Chinese supply chain,” said Sushant Singh, a lecturer at Yale University who has also been a researcher for a public policy think tank in India.

Acknowledging the need

Even businesses that have supported a ban on Chinese imports acknowledge the need for vital inputs from the North.

Naveen Jindal, head of Jindal Steel & Power, one of the country’s largest steel companies and a federal MP, has supported tariffs on Chinese steel but also stressed the need for a pragmatic approach to trade.

“Many steel companies import equipment and technology from China,” Mr. Jindal said. “China is the world’s largest steel producer and they are very good in some areas, but not in every area.”

Now, after four years of restrictions on Chinese investment and visas, Prime Minister Narendra Modi’s government is seeking to move closer to its Asian rival and breathe new life into its “Make in India” ambitions.

“The government is considering easing investment rules introduced in 2020 for countries with which India shares a land border as we need more investments,” an official aware of government discussions told Reuters.

New Delhi now plans to add a provision under which investments by companies with Chinese shareholding up to 10% will no longer require government approval. The move could help global companies with supply chain partnerships with Chinese firms to invest more easily in India.

The government also plans to set up a post-investment monitoring framework driven by crime and fraud investigation agencies and the banking regulator to address security concerns.

The move would boost Chinese investment, which analysts say is crucial for India to join global supply chains in high-technology sectors such as solar cells, EVs and battery manufacturing. The proposed relaxations are still being pushed by Mr Modi’s office, with various kinks between government ministries to be ironed out, a second official with direct knowledge of the matter said.

Following lobbying from industry, India has already eased the visa issuance process for Chinese nationals and is expediting visa approvals for Chinese engineers for sectors that receive federal subsidies to manufacture locally.

Another government official said the government may have approved about 2,000 short-term visas for Chinese professionals, with most of the applications coming between November last year and July this year.

“There is rationalisation in the visa process. It has not been implemented on the ground yet, but there has been a change in mindset,” said Pankaj Mohindroo, head of the Cellular and Electronics Association of India.

External Affairs Minister S. Jaishankar said this week that the country has “not closed the door to trade with China” but the issue is in which sectors and on what terms Beijing allows trade, though he did not elaborate.

The prime minister’s office, finance, trade and foreign ministries did not respond to emailed requests for comment.

Mandatory

In a bid to woo Apple, following a 2020 standoff with China, the Indian government gave fast-track approval to joint ventures between the US giant’s Chinese suppliers and Indian firms.

The move has led the phone maker to shift 14% of its global iPhone assembly to India in fiscal year 2023/24. In the same year, India’s mobile exports grew 42% to a record $15.6 billion.

However, despite this shift, there are doubts whether India’s factories are large enough to match the investment or achieve productivity comparable to their Chinese counterparts.

Chief Economic Adviser V. Anantha Nageswaran said it is inevitable that India will have to connect with China’s supply chains.

“Whether we do it solely by relying on imports or partly through Chinese investment is a choice for India to make,” Mr. Nageswaran said in July.

A sharp decline in foreign investment in India has also prompted a reconsideration of trade barriers.

Away from politics, despite targeted sanctions, Indian demand for Chinese goods remains strong.

Goods imports have risen 56% since the 2020 border clashes while India’s trade deficit with China has nearly doubled to $85 billion. China remains the biggest source of goods for India and was the biggest supplier of industrial products last year.

“We would be better off if some Chinese investment and technology flowed into our country without compromising national security concerns,” Mr. Mohindroo said.