India’s economic relationship with China has undergone rapid transformation in recent decades, reflecting broader shifts in global geopolitics and economic strategies. Bilateral trade grew significantly in the early 2000s, driven by sanguinity about economic complementarities. However, tensions emerged as India’s trade deficit with China ballooned. Further, simmering border tensions culminated in the 2020 Galwan clash, causing a shift in perceptions of Chinese firms and a tightening of scrutiny. The relationship has, thus, transitioned from one of optimism and growth to one characterized by increased caution and strategic calculations.
Rajesh Kumar Singh, a senior Indian official, recently indicated this scrutiny could ease if border peace persists, signaling potential for cautiously improved ties. Nevertheless, national security anxieties, unequal market access in China for Indian goods, trade deficit, and other issues continue overshadowing the complex economic relationship. The evolving dynamics between the two countries have led to a re-evaluation of the benefits and risks associated with economic ties, with India adopting a strategic approach towards its engagement with China. As both countries navigate these challenges, the future trajectory of their economic ties will depend on their ability to address mutual concerns, manage geopolitical tensions, and pursue cooperation where possible. This report aims to analyze the intricate dynamics shaping this economic collaboration and assess India’s scrutiny of Chinese firms.
Assessing India-China Economic Relations Post-Galwan
The economic interplay between India and China has undergone notable transformations, mirroring broader geopolitical shifts and regional considerations. At the turn of the century, there was optimism about the economic potential between the two nations. However, challenges emerged as India increasingly relied on Chinese goods, leading to a significant trade imbalance. The mounting trade deficit prompted Indian policymakers to seek diversification in trade and enhance exports to China. Yet, barriers such as non-tariff measures and regulatory complexities impeded India’s access to the Chinese market, despite the global competitiveness of Indian pharmaceuticals and IT services. However, the deterioration of Sino-Indian political relations, exacerbated by border clashes in Ladakh and the COVID-19 pandemic, had ripple effects on economic ties. The Galwan Clash of June 2020 marked a critical escalation in tensions, disrupting decades of relative peace along the disputed border. The clash had far-reaching implications, extending beyond the realm of geopolitics into the economic and regulatory spheres.
At the heart of India’s scrutiny were multifaceted concerns, chiefly revolving around national security, economic integrity, and political sensitivities. The Galwan clash served as a stark reminder of the volatile nature of the border situation, prompting heightened vigilance against potential security threats posed by Chinese firms. Allegations of data privacy risks and purported links to the Chinese military cast a shadow of suspicion over these companies, prompting calls for stringent scrutiny to safeguard India’s sovereignty and territorial integrity.
Consequently, economic ties with China began to be viewed through a strategic lens, prompting measures to scrutinize Chinese activities in sectors deemed sensitive for national security, such as technology and telecommunications.
Economically, India had long grappled with concerns over unfair trade practices and predatory pricing by Chinese firms, which were perceived to be undercutting domestic industries. The Galwan clash further fueled resentment towards Chinese businesses, intensifying calls for regulatory measures to protect India’s economic interests and foster a level playing field for local players. Moreover, the clash stirred nationalist sentiments and public outrage across India, exerting immense political pressure on the government to take a tougher stance on Chinese firms operating within its borders. Efforts were initiated to bolster domestic manufacturing under initiatives like ‘Aatmanirbhar Bharat’ and ‘Make in India’, aiming to reduce reliance on China and diversify trade partners. This geopolitical uncertainty prompted businesses to reassess trade relationships and supply chains, potentially leading to delays or cancellations of agreements that were in place. Foreign Direct Investment (FDI) flows between the two countries were impacted as investors sought to mitigate geopolitical risks, influencing market sentiment and stock market fluctuations. This was followed by a decline in Chinese FDI in India, particularly after FY 2019–20.
In response to the clash, India adopted a series of measures aimed at tightening the regulatory noose around Chinese firms. These included increased regulatory requirements, more frequent inspections, and stricter FDI approvals, particularly targeting investments from China. Additionally, India introduced stringent data localization policies, mandating that sensitive personal data must be stored within the country’s borders to mitigate the risks associated with foreign firms accessing and potentially misusing Indian users’ data. The Indian government’s ban on 59 Chinese mobile applications in 2020, including popular platforms like TikTok and WeChat, disrupted planned investments, highlighting the interconnectedness of geopolitical tensions and economic dynamics.
The impact on Chinese firms operating in India was palpable. They faced delays and complications in their operations- additional financial burdens, escalating operational costs and uncertainty about future investments as a result of heightened scrutiny and regulatory hurdles.[1] Furthermore, negative publicity and reputational damage stemming from the heightened scrutiny tarnished their image in the Indian market, exacerbating their challenges in maintaining a positive brand perception. For instance, in recent years, instances of Chinese companies withdrawing or cancelling significant investments in India, such as BYD, China’s largest EV maker’s cancellation of a $ 1 billion investment in electric vehicles and batteries, reflect the growing scrutiny and challenges faced by Chinese investors in India.
Conversely, India’s aggressive stance towards Chinese firms carried its own set of risks and repercussions. While aimed at addressing legitimate concerns, such as national security and economic interests, it risked deterring genuine Chinese investment beneficial for India’s growth and development. Moreover, the heightened tensions with China strained diplomatic relations, escalating the bilateral conflict and threatening regional stability. Overall, while the precise magnitude of Chinese FDI in India remains uncertain, recent trends suggest a decline in investment activity, influenced by regulatory changes and geopolitical tensions post Galwan. In response to these challenges, India has been refining its stance on bilateral economic relations, actively formulating a plan for concerted economic diplomacy. This strategy aims to reframe the relationship, broaden India’s interests into manageable sectors, and secure advantages that safeguard its strategic interests vis-à-vis China.
Beyond Scrutiny: A Wider Canvas of Challenges
New Delhi’s heightened scrutiny of Chinese firms since 2020 reflects a complex blend of concerns encompassing security, economic competition, strategic interests, and domestic politics. This scrutiny continues to be a pivotal factor shaping economic ties between India and China, serving as a check on China’s unhinged regional ambitions.
According to a recent report by Reuters, Xiaomi, a prominent Chinese consumer electronics manufacturer, has engaged with the Government of India regarding concerns raised by its smartphone component suppliers. Xiaomi’s President in India highlighted that “suppliers are hesitant to establish operations in India,” citing challenges faced by companies, especially those of Chinese origin. The concerns expressed by Xiaomi point to several key issues faced by Chinese companies:
- National Security Anxieties: Ongoing border tensions between India and China have fueled apprehensions about data security and potential espionage, particularly in sectors where Chinese firms operate.
- Economic Competition: India’s “Make in India” initiative, aimed at bolstering domestic manufacturing, poses a competitive challenge to established Chinese players in the Indian market.
- Unequal Playing Field: Accusations of unfair trade practices and perceived preferential treatment for domestic companies.
However, beyond these challenges, Chinese companies like Xiaomi and Vivo have encountered legal hurdles in India. Xiaomi faced legal issues, including asset freezing exceeding $676 million in 2022 over alleged violations of Indian laws.[2] Despite legal battles, Xiaomi’s appeal against this decision was rejected. Similarly, Vivo faced scrutiny for illegally remitting money and violating visa regulations by sending executives to sensitive regions like Jammu and Kashmir without proper permits prompting investigations by Indian authorities. China perceives these regulatory actions as discriminatory and has urged India to ensure a fair and transparent business environment for Chinese enterprises, as highlighted by Xiaomi’s recent communication.
Despite regulatory challenges and tensions, India’s approval of 80 Chinese FDI projects in 2022 and investments by Chinese entities like Tencent’s $100 million investment in Indian online grocery platform Blinkit and Xiaomi’s establishment of a new research and development centre in Hyderabad suggest that India does not inherently oppose Chinese investment. However, as policy narrative suggests India closely scrutinizes transactions for compliance. The case of Paytm, a leading Indian fintech company, further exemplifies this stance. Despite regulatory warnings, Paytm disregarded compliance issues, potentially facing bans on its payment services. Paytm’s major Chinese investor, Ant Financial, reduced its stake in 2023. India has now formed a panel to investigate Chinese investments in Paytm, signaling the importance of regulatory adherence.
Thus, India’s scrutiny of Chinese firms underscores the imperative of adhering to regulatory standards in the Indian market. Chinese companies and investors must navigate these standards diligently to foster successful operations and partnerships in India.
Assessing the Future Trajectory of India’s Approach to Economic Ties with China
Despite the persisting challenges, both nations acknowledge the significant benefits derived from cooperation. China remains a pivotal trading partner for India, providing essential goods and affordable technology to Indian consumers. There now seems to be a shift in India’s stance. Senior Indian official Rajesh Kumar Singh, the Secretary at the Department for Promotion of Industry and Internal Trade at the Annual World Economic Forum meeting in Davos, Switzerland in January 2024 stated that the scrutiny could ease if the border situation remains peaceful. Singh’s suggestion of a potential relaxation in scrutiny on Chinese investments, contingent upon border stability, offers a glimmer of hope for the resumption of normal economic activities between the two countries. However, the absence of a specific timeframe for such relaxation underscores the cautious and delicate approach adopted by Indian policymakers, balancing security concerns with economic imperatives.
It is pertinent to note that there are increasing diplomatic efforts that persist between the two nations, seeking avenues to de-escalate tensions and foster a conducive environment for business operations. India’s potential adoption of a nuanced approach in scrutinizing Chinese firms, based on criteria such as data security practices and technology transfer commitments, reflects a strategic shift transitioning from initial optimism to pragmatic realism regarding Chinese investments and technologies.[3]
As analysts and policymakers observe, there is a growing wariness of over-dependence on China, especially in critical sectors like technology and infrastructure. New Delhi’s approach to de-risking from China involves a combination of indigenization and diversification (or friend-shoring[4]) strategies. This strategy encompasses measures such as imposing extra scrutiny on Chinese investments, restricting Chinese companies’ participation in critical infrastructure projects, and promoting domestic manufacturing. Furthermore, the perception within the Indian private sector mirrors this shift in the national mood. While certain sectors, such as telecom and power, may prefer access to Chinese suppliers for increased options and cost competitiveness, they acknowledge the geopolitical realities and risks associated with Chinese investments and technologies. The Indian private sector, much like its counterparts in other countries, recognizes that there is a growing understanding that decisions involving Chinese investments or partnerships can carry reputational and operational risks as seen in the case of China’s “debt-trap diplomacy” as a result of its Belt and Road Initiative. Additionally, as regulatory scrutiny increased post Galwan, Indian tech startups that had been receiving significant funding from China started evaluating the importance of aligning with India’s strategic objectives. Furthermore, public sentiment and domestic political considerations also significantly influence India’s economic decisions concerning China.
In examining India’s economic ties with China, it is evident that the country stands apart from others like Australia, where heavy reliance on Chinese trade significantly influences policy decisions. India’s comparatively lower trade volume with China underscores its limited leverage in negotiations, prompting a nuanced approach to economic engagement. In turn, Beijing’s response to India’s scrutiny and restrictions reflects its acknowledgment of the lack of significant economic leverage vis-à-vis India. While complete decoupling may not be feasible, India’s approach to de-risking from China involves diversifying supply chains and reducing dependencies without severing ties entirely. Moreover, to mitigate vulnerabilities and achieve self-reliance, India requires a tactical approach to reduce reliance on Chinese imports, particularly in strategic sectors. This entails not a return to import substitution policies but rather a nuanced strategy that identifies and addresses dependencies on China. Therefore, while India’s efforts to scrutinize Chinese firms are crucial, addressing the trade deficit demands a comprehensive strategy. Timely interventions, such as the recent proposal by NITI Aayog[5] to study bridging the trade deficit, are essential to safeguard India’s economic and national interests.[6]
While Chinese investments, like Tencent’s in Flipkart and Ola, have fueled innovation and job creation in India’s tech sector, anxieties about data security and national security cast long shadows. Collaboration with companies like Huawei and ZTE in telecommunications infrastructure showcases potential, but requires careful navigation. Furthermore, Chinese brands like Xiaomi have captured the Indian market with competitive pricing and innovative products, emphasizing the importance of adaptability. Furthermore, recent actions taken by the Indian government, such as prohibiting over 100 Chinese-operated websites implicated in investment-related scams targeting Indian citizens, underscore the growing recognition of security threats posed by Chinese entities. The proactive stance reveals India’s reliance on stringent measures to mitigate security risks. Furthermore, with the upcoming Indian General Assembly Elections, political considerations are likely to weigh heavily in shaping the government’s stance on investment policies. Thus, the balance between economic interests and security imperatives will remain central to India’s strategic calculus, shaping its trajectory in the complex landscape of Indo-China relations. In conclusion, while indications of a potential thaw in economic relations between India and China exist, driven by pragmatic considerations and diplomatic efforts, any policy changes are likely to be gradual and contingent upon evolving geopolitical dynamics.
Expected Policies of India on Scrutiny of Chinese Investment: A 2024 Outlook
The economic relationship between India and China, once brimming with potential, now navigates a complex labyrinth shaped by geopolitical rivalry and strategic considerations. It is worth noting that India’s current stance on Chinese investment resembles a complex maze, shrouded in ambiguity and fraught with potential pitfalls. Heightened scrutiny reigns supreme, particularly in sensitive sectors like technology, infrastructure, and data. Therefore, on one hand, emerging policy developments indicate a tightening regulatory environment for investors. Enhanced measures concerning data privacy and cybersecurity are anticipated, presenting additional obstacles. Moreover, stricter regulations in sensitive sectors such as telecom, defense, and critical infrastructure are expected, elevating approval standards.
On the other hand, recent policy developments in India suggest a potential openness to certain forms of Chinese investment, particularly in non-sensitive sectors. One notable instance occurred in 2023 when the Indian government approved Chinese investment in specific projects aligning with India’s strategic goals. This included the greenlighting of a manufacturing plant for electric vehicle components and a pharmaceutical facility, indicating a willingness to welcome investment in sectors like electric mobility and healthcare. Additionally, government officials have emphasized attracting foreign investment in non-sensitive sectors such as agriculture, food processing, and textiles. This focus underscores a potential shift towards encouraging collaborations and FDI approval in areas deemed less critical from a security standpoint. However, it is important to note that these developments do not signify an unrestricted openness to Chinese investment. Each project undergoes scrutiny based on various factors, and geopolitical tensions or border disputes can influence policy decisions, leading to sudden changes or delays. Even within potentially less-critical sectors, specific technologies or data involved may raise concerns and trigger stricter scrutiny.
Therefore, while recent policy moves indicate a degree of openness, relying solely on them for investment decisions carries risks. Thorough due diligence, expert advice, and continuous monitoring of policy updates are essential for navigating the complex India-China investment landscape. Thus, in the foreseeable future of 2024, India’s policy trajectory appears steady, with no significant shifts expected. The focus remains on meticulous scrutiny of investment proposals, evaluated on a case-by-case basis through internal deliberations. Conditional approvals may become more prevalent, often requiring technology transfers or joint ventures, while comprehensive national security reviews are likely for every Chinese investment application. Anticipating the mid-term period of 2025-2026, insights gleaned from interactions with policymakers and analysts suggest that there could be room for adjustments. These potential changes would hinge upon economic needs, the evolving geopolitical landscape, and the results of internal deliberations.
While India may require foreign investment to sustain economic growth, the balancing act between openness and security remains unclear. In navigating this intricate policy landscape, vigilance is paramount. Continuous monitoring of evolving policies and staying informed about geopolitical developments is essential. Additionally, diversifying investment portfolios beyond India can help mitigate risks associated with heightened scrutiny. However, it is crucial to acknowledge that the labyrinth of policies is ever-shifting, and unforeseen events can swiftly alter its course.
Looking ahead, the trajectory of this relationship hinges on several key factors:
- Peace at the border: Continued peace could lead to relaxed scrutiny and improved business conditions, facilitating collaboration.
- Policy changes: Adjustments to import tariffs, manufacturing incentives, and visa regulations could significantly impact the landscape for Chinese firms.
- Global dynamics: The evolving US-China rivalry and global supply chain shifts could further influence India’s stance, potentially impacting Chinese investments.
India, thus, must address security concerns while fostering an environment conducive to foreign investment and technological progress in a globalised world. Chinese firms, on the other hand, must adapt to the new realities, demonstrating transparency and commitment to fair trade practices.
Conclusion
In conclusion, the economic ties between India and China stand at a critical juncture, presenting both opportunities and strategic challenges. While occasional statements express a willingness to engage with Chinese capital, India’s actual policy stance remains cautious. The current and anticipated policies surrounding scrutiny on Chinese investment reflect a delicate balance between national security, economic imperatives, and geopolitical considerations. While there are indications of potential relaxation for certain non-sensitive Chinese investments, the specifics remain uncertain.
India’s efforts to address trade imbalances and reduce dependence on China are juxtaposed with the recognition of the benefits of interdependence and collaboration. The current situation is akin to a complex puzzle requiring careful navigation rather than a dead end. Open communication, policy adjustments, and addressing underlying concerns are crucial for fostering a more predictable and mutually beneficial relationship. Thus, gradual moves like allowing benign investments under monitoring may occur before substantial easing. Time, diplomacy, and strategic actions will shape the narrative of this intricate economic dance between the two Asian giants. Whether this unfolds as a journey of fruitful collaboration or a collision course remains to be seen.
[1] Lieberherr, B. (2024, January). India’s Limited Room for Maneuver: How New Delhi Addresses Its Strategic and Critical Vulnerabilities vis-à-vis China and Russia after the Galwan Clash and Russia’s Full-Scale Invasion of Ukraine. CSS Studies. Retrieved from https://doi.org/10.3929/ethz-b-000655348
[2] India court rejects Xiaomi’s challenge to $676 million asset freeze
[3] Commentary Podcast by Tanvi Madan, Senior Fellow, Brookings: Accessed at: A big-picture look at the India-China relationship
[4] In trade terms between countries, “friendshoring” could refer to a situation where one country favours trade agreements or partnerships with friendly nations over others. This could involve giving preferential treatment in terms of tariffs, quotas, or other trade barriers to goods and services from allied countries. This approach to trade can be driven by various factors, including political alliances, historical relationships, shared economic interests, or strategic objectives.
[6] The initiative to conduct a comprehensive study, involving ten reputable institutions, aims to dissect trade dependency trends, analyse supply chains, and formulate strategic policies to narrow the trade deficit with China.
