India and China

Chinese FDI in India: Will it augment the bilateral relations?

04 Oct, 2014    ·   4679

Dr Bhartendu Kumar Singh on the nature of Chinese FDI and its potential to improve the peace process

Economic relations have propelled Sino – Indian ties in recent times and have also facilitated the management of political conflict and rivalry. In this context, the announcement by President Xi Jinping during his New Delhi’s visit that China would invest $ 20 billion in next five years has added another dimension to the bilateral commitment of taking economic relations to a new height.

Will the Chinese investments help the bilateral peace process? Has there been a gap in Chinese declarations and actual investments elsewhere in the world?

China’s Investments elsewhere
There is no ubiquity about economic relations being in sync with political relations. Contemporary international relations have variable trends. On the one hand, China’s economic relations with Taiwan have led to a ‘compatible political relations’; that with Japan has not had any collateral impact on political relations. In fact, Sino – Japanese political relations are at worst. Many Southeast Asian countries that followed the Japanese lead and poured FDI into China did not get political dividends.

China’s own FDI policy in African countries has come in for criticism wherein it has been dubbed as ‘neo-colonial or extractive’ economy interested in minerals and oil. China has done little to use its FDI in the up gradation of local infrastructure and economy. Chinese attempts in past to purchase critical assets in US under the garb of FDI were thwarted by Congress in the name of economic security.

Chinese Investments in India
Past Chinese investments into India have suffered on two counts. First, China never placed FDI as part of its overall political economic strategy towards India. In the last decade, China has invested less than $ 400 million into India and is 31st among all investing countries. China found other South Asian countries more attractive since they yielded political dividends through good relations and strategic outreach or for that matter African countries where there has been a lucrative market to exploit. Second, the logic of economic nationalism and security prevented India from laying down a red carpet for Chinese investments and were subjected to various regulatory mechanisms.

The Chinese in turn, have turned themselves as a manufacturing backyard supplying cheap retail products into India and adding to Sino – Indian trade deficit and rivalry.

While these factors remain insitu, the proposed Chinese FDI is also questionable for many reasons. First, the declared amount would be invested over a period of five years; so the actual investment is quite spread out and inconsequential to meet India’s FDI demand. Second, there has always been a gap in Chinese declarations and actual investments elsewhere in the world and the trend is likely to continue here also.

While China has the capacity to pump in more than it has declared, much also depends upon the political camaraderie and a bad swing in relations could affect the actual FDI flow. In fact, it could also be argued that the Chinese FDI declaration was actually a one upmanship game to match the Japanese FDI declaration during Prime Minister Modi’s visit to Tokyo. Third, China may not be a willing partner into critical technology since it would like to perpetuate India’s dependence in such areas for foreseeable future and could even have a sabotage policy through short term capital inflows and withdrawal strategy.  

Will the Chinese FDI augment Sino-Indian Peace Process?
The miniscule and debatable Chinese FDI could, nevertheless, augment Sino – Indian peace process. First, it could contribute, albeit marginally, to reduction of trade deficit of a staggering $ 37 billion. India does have many Greenfield projects in which China can invest and reap rich dividends. Second, it will open up many areas (like railways) for functional cooperation. As the Chinese recognition of Sikkim as part of India proves, economic interaction does moderate political stand sometimes. In this context, the agreement between the two countries on ‘the five – year economic and trade development plan’ is an important step.

Third, when the Chinese come with their money and showcase China-made industrial parks or bullet trains or invest in other non-rival areas, there will be positive things to talk about China, irrespective of localised irritants like Chinese incursions across LAC. Fourth, FDI enjoys certain benefits over trade patterns since it is a long term game where the liberty to withdraw or alter the trade pattern at will is not available. Both China and India would take concrete steps to make this FDI assuring and sustainable on ground. Political overtures is, therefore, the sin qua non for successful implementation of Chinese FDI. Fifth, since China also happens to be India’s neighbour, its investments across the Himalayas would induce a ‘new sense of regionalism’ and promote openness between the two sides.

The immediate challenge, therefore, before the policy makers in India is to work on the positive factors and implement the road map for facilitating Chinese investments. Imagine a bullet train running from Chennai to Benguluru produced by Chinese technology and funds! The goodwill created from such ventures would only perpetuate the ‘relative but uncertain peace’ between China and India.   

Note: Views are personal.