Like the nationwide lockdown, the lockdown on Chinese investments announced last month must be seen as an emergency measure to buy time to figure out what to do. And like the nationwide lockdown, the blanket restrictions on Chinese investments must be lifted as soon as we have figured out how to manage the risks. Prolonging lockdowns beyond the minimum necessary period extracts undue economic costs, exacerbating pain and suffering, impacting livelihoods and delaying a quick restart of our economic engines.
Even before the pandemic crisis, policy towards Chinese investments had to contend with a dilemma: how do we design fair regulations when Chinese money is desirable in some areas, and undesirable in others.
The main complication is that it is difficult to pinpoint the boundaries between a private Chinese firm and the Communist Party of China. It is prudent to assume that the difference — especially since the Xi Jinping regime — is practically irrelevant, and Chinese companies are or can easily become Beijing’s proxies.
Why Even ‘Hostile’ China is Good For Indian Economy
That would be bad enough, but added to the fact China’s foreign policies are at best insensitive, and at worst hostile, to India’s interests, it is naive to treat China as yet another country, and Chinese companies as being similar to their Western counterparts. The territorial disputes are real and alive. China’s is attitude strident and adversarial. China’s great firewall of censorship is a non-tariff barrier that hurts Indian technology and media companies.
It does not make a lot of sense to see economic relations with China through the prism of free trade. So if its companies are treated differently, then it has only itself to blame.
Yet even under this backdrop, it is in India’s interests to attract Chinese capital in both short-term, high risk investments such as technology startups, and in long-term, low-risk sectors such as physical infrastructure. A prominent Bengaluru-based venture capitalist feels that Chinese investors have learnt how to engage with Indian startups over the past couple of years, and the emerging partership is on the verge of uncovering new synergies. And compared to their Western counterparts, Chinese investors have a better understanding of India’s market conditions, and bring value beyond the money that they invest.
- Even before the pandemic crisis, policy towards Chinese investments had to contend with a dilemma.
- It is difficult to pinpoint the boundaries between a private Chinese firm and the Communist Party of China.
- Yet, it is in India’s interests to attract Chinese capital.
- India can gain from Chinese capital to fund ‘dumb’ infrastructure like highways, bridges and industrial parks.
Win-Win for India and China
The money itself has become more important in the post-pandemic world, as Western investors might retreat to their home markets. Chinese investors, it would appear, are among those who retain their appetites. Before the pandemic, tech startups expected about a third of their funding from Chinese investors. If Western and domestic sources dry up, their reliance on Chinese money will only increase. Choking Chinese investments would thus hurt innovation and entrepreneurship and weaken the prospects of a quick economic recovery.
It is also in India’s interests for Chinese capital to fund ‘dumb’ infrastructure like highways, bridges and industrial parks, as economist Ajit Ranade and I have advocated. Like venture capital, infrastructure investments present a win-win opportunity for the two countries; one with an abundance of capital and the other in a position to offer attractive returns on it.
Indian Government Must Be Smart Enough to Assess Risk
Where we need to be a lot more careful and discriminating is in areas where allowing Beijing control entails systemic or strategic risks. For instance, we should be wary of Chinese investors buying large stakes in our banks, telecom, media, cybersecurity, defence or biotechnology companies. Yet even in such cases, the question is how large is large. The actual risk is of Beijing acquiring control or privileged information, not merely riding along as a financial investor.
For all the heartburn following People’s Bank of China raising its stake in HDFC Bank above 1%, this in itself neither gives Beijing control nor any influence over the bank, much less the banking system. It’s a different story if the shareholding begins to approach 5% and the Chinese investor gets greater influence and information.
It follows then, that our regulators and government agencies must be smart enough to assess risks and put in safeguards to manage them — without closing the doors entirely. In a sign of the times, the government could declare three channels of investment — green, orange and red — with differing levels of safeguards and scrutiny. Such a system will inject greater clarity in minds of investors and entrepreneurs and allow innocent deals to proceed unhindered.
FDI From China Leverages India’s Position
There is more than a grain of truth in Swaminathan Aiyar’s argument that “massive foreign investment is a bigger risk for the foreigner than the investee country. So, let us attract as much Chinese investment as possible, since the main risk will be theirs, not ours.” In fact, it is likely that China will come to depend more on India as its politically-motivated investments under the Belt and Road Initiative come a cropper in the post-pandemic world.
As Aiyar points out, becoming a massive recipient of FDI from China actually creates more leverage for India.
In geoeconomics, New Delhi can use this leverage to secure greater market access for Indian companies.
In geopolitics, Beijing could perhaps be persuaded to be more sensitive to India’s core interests. In the immediate aftermath of the coronavirus pandemic, the world economy will face an unprecedented challenges in getting back on its feet. In the short term, capital will be scarce and no country can afford to turn its back on foreign investors. Now that it has bought itself some respite, the Modi government must quickly lift the lockdown on Chinese investments and proceed to a staggered reopening.
(Nitin Pai is director of the Takshashila Institution, an independent centre for research and education in public policy. He tweets at @acorn. This is an opinion piece. The views expressed are the author’s own. The Quint neither endorses nor is responsible for them.)
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