It is not business as usual for Chinese companies who seek to invest or operate in India due to border tensions between India and China since April 2020. India has intensified the screening of foreign direct investment proposals from neighbouring countries that share a land border with it. China is the most important country in this regard with cumulative FDI inflows of $2.4 billion till March 2022. Out of 382 FDI proposals received from Chinese firms for screening, India has approved only 80 as on June 29 this year, according to the Department for Promotion of Industry and Internal Trade in a reply to a Right to Information application, without indicating the quantum of proposed investments or how many were rejected.

No doubt, this scrutiny has upset the big-ticket investment plans of Chinese companies like automaker Great Wall Motors, which has abandoned its $1 billion manufacturing project that entailed taking over General Motor’s plant in Talegaon in Pune. GM managed to sell its other factory at Halol in Gujarat to MG Motor India, a unit of China’s SAIC Motor, in 2017 well before the border standoff. Another auto company, Changan Automobiles, closed its India office early last year after its investment proposals ran into obstacles. Chinese firms have participated in India’s growth story since 2015 with investments in industrial parks, real estate development, steel, renewable energy, telecom and funding Indian tech startups.

Disturbing issues

Besides the screening, there is also a realization that China’s investments in the country is much more than is indicated in DPIIT’s database; that with opaque beneficial structures, several companies are investing through offshore financial centres and shell companies than directly from mainland China. China’s FDI in India reached as much as $16.6 billion till 2020 according to American Enterprise Institute’s China global investment tracker that registers individual transactions of $100 million plus which is 7-times higher than India’s official estimates. An example of Chinese FDI entering through third countries is by a leading smartphone manufacturer Xiaomi which does not figure in AEI’s investment tracker.

These non-transparent beneficial structures have prompted investigating agencies like the Enforcement Directorate to launch raids on Chinese smartphone manufacturers like Xiaomi, Vivo and Huawei. Xiaomi has had Rs 55.5 billion seized by the ED for making such
payments to three foreign-based entities as royalty payments since 2015 although it has allegedly not availed of any services from them. Vivo, which together with its sister concerns accounts for 40 percent of smartphone shipments to India, has also faced the ED heat for remitting 50 percent of its revenue over a five-year period to its parent company to avoid taxes. Huawei is also under the Income Tax department’s scanner over alleged tax evasion.

However, this punitive mood against Chinese firms is not reflected in a diminishing dependence on Chinese goods on the trade front or telecom technology. The dragon remains one of our largest trade partners with two-way trade rising to $115 billion in 2021-22. The bilateral trade numbers hardly indicate any discernible downtrend. China remains the largest source of our imports with a share of 15.4 percent while only 5 percent of our exports are headed to the mainland. The trade balance is heavily tilted against India, with a ballooning trade deficit of $72.9 billion. India’s dependence appears more akin to a Third World country that exports raw materials while importing manufactured goods from the dragon.

Trade imbalance

Even with respect to mobile telephony, India’s dependence on China is still substantial. The lure of a booming domestic market -- 1.2 billion phone subscribers, of which 98 percent are mobiles -- has attracted the Chinese (and other global manufacturers like Samsung) to assemble phones here in a big way. They have responded to government initiatives like phased manufacturing programmes, Make in India, production-linked incentives to step up local assembly and value addition. Domestic production of mobile phones has increased substantially since 2015-16. The bad news is that it is largely based on imported parts and components from the mainland, contributing to the massive imbalance in bilateral trade.

The only way to reduce this dependence on China is to course correct in directing state-funded R&D to develop indigenous capability in mobile phones technology according to Prof Sunil Mani of the Centre for Development Studies, Thiruvananthapuram. Reviving the public laboratory C DOT is imperative to focus on latest developments in mobile communications technology. He adds that a “consortium approach should be adopted in order to link the laboratory with domestic manufacturing firms so that the fruits of R&D can immediately be transferred”. Without such a boost to domestic R&D, there is no likelihood of technological decoupling. The upshot is that India’s dependence on China remains intact despite the prevalent mood to impose severe costs by scrutinizing the dragon’s investment plans and on-going ED raids. 

(The writer is an economics and business commentator based in New Delhi. His views are personal. He may be contacted at nchandramohan@rediffmail.com)