No Retreat: Government Resolute On Chinese Investment Curbs Amid Economic Survey's Push For Change

The centre has no intention of reviewing the restrictions imposed on Chinese investments in India through the foreign direct investment (FDI) route, Commerce and Industry Minister Piyush Goyal said on 30 July.

Goyal’s remarks are particularly noteworthy given the Economic Survey 2023-24's suggestion to reconsider these restrictions.

“Regarding the chief economic adviser’s report, it always gives out new ideas and reflects their thinking… It is not at all binding on the government. And, there is no thinking or rethinking on supporting Chinese investments in the country,” Goyal asserted during a press conference on Tuesday morning (30 July).

In 2020, India introduced Press Note 3 (PN3), which mandated prior government approval for FDI proposals from countries sharing a land border with India, including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar, and Afghanistan.

China Plus One strategy

The pre-budget Economic Survey on 22 July advocated for increasing FDI inflows from China to enhance India’s participation in the global supply chain and boost exports.

As the United States (US) and Europe shift their sourcing away from China, it is more effective to have Chinese companies invest in India and export products directly to these markets, rather than importing from China, adding minimal value, and then re-exporting.

India faces two choices to benefit from the ‘China plus one strategy’ — it can integrate into China’s supply chain or promote FDI from China.

"Among these choices, focusing on FDI from China seems more promising for boosting India's exports to the US, similar to how East Asian economies did in the past. Moreover, choosing FDI as a strategy to benefit from the China plus one approach appears more advantageous than relying on trade. This is because China is India's top import partner, and the trade deficit with China has been growing," it added.

The survey also cited examples of Brazil and Turkey, which have raised barriers to imports of Chinese electric vehicles (EVs) while enacting measures to attract Chinese FDI. It argued that India must find the right balance between importing goods from China and attracting Chinese capital (FDI).

Notably, the industry body Confederation of Indian Industry (CII), in June this year, made a case for reassessing India's trade relationship with China to become a global electronics manufacturing hub.

The CII suggested adopting a non-restrictive approach towards investments, encouraging technology transfers in deficient areas, and easing the movement of skilled labour.

“Review of Press Note 3 with adequate guardrails should be considered in the current context,” the CII said in its report.

Surprisingly, during a post-budget press conference last week, Finance Minister Nirmala Sitharaman remarked that she does not disown the chief economic adviser's (CEA) suggestion to allow more Chinese FDI into the country.

Sitharaman emphasised that while the CEA's office operates at an "arm's length," it does not mean she is disowning the suggestion.

Pragmatic Shift

Indo-China ties, which significantly nosedived following the fierce clash in the Galwan Valley in June 2020, have experienced a palpable shift in policy over the past six months.

The CEA's suggestion in the economic survey represents a major shift in New Delhi's position. However, it will require a delicate balancing act by both sides to find a mutually beneficial path, which is neither easy nor likely.

To start, India may adopt a ‘nuanced approach’ toward Chinese investments by considering FDI proposals in sectors involving high-end technologies like electric vehicles and batteries, as well as various types of modern capital equipment.

Bilateral trade between the two countries can serve as a model in this regard.

Despite India's public stance that ties with China cannot be normal without peace in the border areas, bilateral trade has grown significantly. China has emerged as India's largest trading partner, with $118.4 billion in two-way commerce in 2023-24, surpassing the US.