It’s Time for India to Stop Being Squeamish About Chinese Investment

Apart from the obvious political and strategic dimensions, Narendra Modi’s visit to China this week is likely to focus on addressing the rising trade deficit between the two countries. The trade deficit with China, currently at nearly US$ 40 billion is the largest that India has with any of its trading partners, accounting for almost a quarter of India’s total trade deficit. The recently announced Foreign Trade Policy 2015-2020 projects that if the current situation persists, then India will have an unsustainable trade deficit of US$ 60 billion with China by 2016-17.

The FTP has laid down an approach to bridge this deficit. This will require focus on increasing market access through removal of non-tariff barriers on particularly agro commodities including bovine meat , oil meals and cake, tobacco, rice fruits and vegetables etc. and seek tariff concessions in specific products of interest to India; seeking market access for Indian IT services and encourage other service sectors like tourism, films and entertainment; attracting Chinese investment to boost India’s manufacturing capacity and finally, operationalizing the five year development programme for economic and trade cooperation that lays down the roadmap for deepening and balancing bilateral economic engagement.

Investment the best option

Of these, increased investment is likely to be a game changer in reducing India’s trade deficit with China. It is evident that Chinese companies are changing their roles from global manufacturers to global investors. For the first time in 2014, China became a net exporter of capital, with outward investment exceeding the inward investment. According to a 2015 report by Ernst and Young, outbound investment flows from China have exceeded US$ 100 billion in 2014, making China the world’s third largest overseas investor. However, so far Chinese investments in India have been very low. Even though investment flows during 2000-01 and 2010-11 were almost negligible, for the first time, during 2011-12 and 2012-13, FDI inflows worth US$ 224 million from China were reported. Although this is way below the potential levels of investment flows from China, it is an indication of the synergies that can be realized between the two countries.

While the FTP envisages that investment will provide the much needed impetus to Indian manufacturing, we argue that direct investments from China in the manufacturing sector may not bring in the expected results. However, investment in infrastructure will help in reducing trade and logistics costs and make Indian exports more competitive.

India’s recent initiative of “Make in India” and China’s shift in emphasis from “Made in China” to “Make for China” may appear as a perfect opportunity for India to attract Chinese investors to India. But, in recent years there has been a structural shift in China’s FDI patterns both in terms of selection of host countries and sectors.

China has shifted its focus from resource-seeking FDI to new sectors which include high technology, such as manufacturing, real estate and infrastructure. Driven by the shift to acquiring advanced technology and brands, Chinese companies are increasing their footprint in developed economies like Europe and America rather than the resource-based economies of Asia, Africa and Latin America. Thus, while India’s Make in India initiative spans a range of sectors that include labour intensive sectors such as textiles, garments and leather to technology and skill-intensive sectors like pharmaceuticals and electronic systems, Chinese outward FDI in manufacturing does not quite match with India’s current demand.

Why infrastructure ?

India’s overall infrastructure ranking of 87th out of 144 countries (World Economic Forum’s Global Competitiveness Report 2014–15) is an indicator of its large infrastructure deficit. The Planning Commission’s approach paper for the Twelfth Five Year Plan period (2012-2017) sets a target of US$1 trillion for investments in infrastructure. There exists much scope for investment opportunities across sectors such as power, ports, railways, roads and telecommunication.

Perhaps the most effective way for China to participate in India’s infrastructure development would be through the development of industrial corridors. Since India has a large hinterland, it is important to develop industrial corridors which connect ports to manufacturing hubs. These corridors are envisaged as industrial townships with efficient road and rail connectiv­ity for freight movement to and from ports and logistics hubs, and reliable power which would provide an environment that is conducive for setting up globally competitive busi­nesses. The government of India has conceptualized some of the industrial corridors which include the Delhi-Mumbai Industrial Corridor (DMIC), the Chennai- Bangalore Industrial Corridor (CBIC) and the Bangalore-Mumbai Economic Corridor (BMEC) among others. Japan has been the most active participant in this economic activity. For example, in DMIC, Japan is currently a main project stakeholder with a 26 percent share and has shown interest in collaborating for CBIC as well. The potential to develop these corridors remains largely untapped and China could be an active participant.

Challenges for India?

Although extensive opportunities exist for Chinese investment in Indian infrastructure, there are challenges. India has two key concerns. First, because of the political mistrust between the two countries, for several years India has resisted foreign investment form China, particularly in core sectors even where national security is not implicated. A concerted effort needs to be made to be more objective, by creating a knowledge base that would reduce the mistrust and create awareness on the benefits of such investments. Second, India faces a challenge to ensure product safety and quality standards of Chinese equipment required for infrastructure development. The challenge lies in strengthening the domestic system that would ensure implementation of standards.

Chinese participation in building India’s much needed infrastructure could not only help India in curtailing its trade deficit but would in the long run help achieve its development goals and a strong and sustainable economic relationship.

Nisha Taneja is Professor at ICRIER, New Delhi and Deepika Wadhwa is Consultant at ICRIER.