Welcoming Chinese Investments in India with a Balanced Approach
India's relationship with Chinese investments is a delicate one, especially considering the geopolitical tensions post Galvan and the potential risks of "debt trap diplomacy”. Apart from them being a not so friendly neighbour for India, their current trade war with USA, the infamous debt trap diplomacy, their opaque internal politics with the added twist of stories around state sponsored spying on citizens and outsiders, leaves little room for trust and conducive business environment.
However, with China being a major economy, an important trade partner for India and a manufacturer for the world, India cannot afford to ignore it from the Indian business landscape. The fulfilment of India’s 5 trillion economy dream will mean welcoming Chinese investments in the Indian economy.
Let us look at some statistics
⦁ China is India’s top import partner, however their FDI equity inflow is miniscule at 0.37% (2000-2024)’
⦁ China has emerged as the largest trading partner of India with $118.4 billion two-way commerce in 2023-24
⦁ India’s exports to China rose to $16.67 billion in the last fiscal (23-24)
⦁ The trade deficit widened to $85 billion in the last fiscal year from $83.2 billion in 2022-23.
While Chinese investments have fuelled growth in sectors such as technology, manufacturing, and telecommunications, they also pose concerns regarding national security, data privacy, and the risk of debt accumulation for Indian companies.
India must walk a fine line between attracting necessary foreign investment and protecting its strategic interests. A cautious approach is already in place, with the Indian government taking a tough stance and subjecting Chinese investment proposals to strict scrutiny. However, in the recent months there has been a growing discussion about relaxing these policies a bit and letting in Chinese investments, especially in areas that aren’t crucial from a security perspective. This is majorly spearheaded by the electronics industry which relies on China for parts and components.
India recently approved nearly 100 FDI proposals from China. This move is seen as a signal of softening the stand and ensuring a lower trade deficit. I consider this as a measured reaction and a step in the right direction. India majorly depends on China for machinery, cars, electronics, chemicals and textiles. These are high-value imports and essential to propel India’s manufacturing sector. With no viable alternative in sight in the short term, it is prudent that India focuses on reducing the trade deficit by increasing investments by China.
Embracing Chinese investments in a selective manner—focused on non-sensitive sectors, under stringent regulatory frameworks—will allow India to reap the benefits of foreign capital without compromising its security or falling into debt traps. This balanced approach will be crucial as India continues to grow and attract foreign interest. The investment in light manufacturing, automobile, solar panel and battery manufacturing sector should be encouraged to strengthen local manufacturing for value added goods and encouraging knowledge transfer to create more jobs in the country.
Alternatively, India should also focus on diversifying its FDI sources by seeking investments from other regions, such as the European Union, Japan, and the United States, reducing over-reliance on any single country. This diversification can help mitigate risks while fostering healthy competition among investors. Additionally, India could adopt policies that encourage technology transfers, joint ventures, and local manufacturing partnerships to ensure that foreign investments contribute to building domestic capabilities.
By strengthening the regulatory frameworks and diversifying its foreign investment portfolio, India can safeguard its national interests while leveraging global capital for economic growth.
Despite the tighter scrutiny, Chinese companies continue to show interest in areas such as electric vehicles, renewable energy, and healthcare, with investments being considered in non-sensitive sectors like manufacturing and food processing.
⦁ India can focus on allowing industries that bring their USP to India in terms of knowledge and skills. This will help India build its own ecosystem and create skilled manpower.
⦁ Another area where India can leverage Chinese investment is in establishing specialised manufacturing using Chinese raw materials that we are already importing.
⦁ Encouraging Chinese investments in manufacturing machinery that Indian manufacturing industry needs will help us streamline our needs with lower import costs.
Going forward, while it is prudent that India continues to approve Chinese investments on a case-to-case basis, Chinese companies too can explore sectors that align with India's growth objectives and do not pose security risks. These include electric mobility, specialised machinery, green technology and food processing. By focusing on these areas, Chinese investors can avoid potential roadblocks while contributing to India's manufacturing capacity under initiatives like "Make in India”. Post-pandemic, India has seen a surge in foreign investments from several key countries, with a notable increase in sectors like technology, manufacturing, and infrastructure, hence it is a matter of using a balanced approach to ensure Indian manufacturing sector continues to grow while getting access to global investments, knowledge and skills in various sectors.