By Peter Martin
Among Delhi policy circles, the dominant response to Xi Jinping’s recent India visit was one of disappointment. Dissatisfaction at Chinese military provocations along the Indian border was certainly understandable. Disappointment at the 20 billion dollars of investment that Xi announced, however, seems harder to justify.
True, the figure is substantially less than many had expected. In the run up to the visit, Indian media speculated that Xi might announce a figure of 100 or even 200 billion US dollars. These expectations were stoked by the speculative and apparently ill-informed comments of China’s Consul General in Mumbai, Liu Youfa, that China would invest as much as 100 billion dollars. Dissatisfaction at the actual number was certainly acute. The Times of India’s headline writers complained that the figure was “much less than Japan’s offer of $35 billion.” More effusively, The Business Standard led with, “China dashes $100-bn hope.” Firstpost went simply with “Gypped by Xi.”
In the race to criticize the figure, however, few paused to put it in context. In truth, the 100 and 200-billion figures were never credible. India’s total stock of FDI currently stands at USD 227 billion. As Anil K Gupta and Haiyan Wang put it recently on the Financial Times’ Beyond BRICS blog, “It is an extreme overstretch to imagine that the next five years can see Chinese FDI into India equaling half of this amount.” Japan’s pledge to invest 35 billion dollars over the same five-year period will build on a much larger investment stock of USD 17.1 billion over the past 14 years.
Twenty billion dollars of Chinese investment over five years will in fact mark a massive expansion of the country’s investments in India. According to Government of India data, the total stock of China’s investment in the country currently stands at approximately USD 500 million. It has invested less in India over the past 14 years than Poland, Malaysia or Canada. The USD 500 million figure is also dwarfed by China’s investments in other countries. China invested more than USD 100 billion overseas last year alone. Its cumulative investments in Myanmar total USD 14.2 billion.The real question, surely, is why Chinese investment in India has lagged so far behind.
Political mistrust is certainly a large part of the answer. After the 1962 border war, commercial ties between the two countries were virtually suspended. Things picked up slowly from the late 1970s and picked up after Rajiv Gandhi’s 1988 visit to China; they accelerated further after Atal Bihari Vajpayee’s 2003 trip. Buoyed by Chinese demand for Indian iron ore and Indian demand for Chinese nuclear reactors, electronic appliances, machinery and chemicals, China had become India’s number one trading partner by 2008. Chinese investment in India, however, remained weak.
More than half a century after the conclusion of the border war, mistrust remains strong. Across numerous sectors, Chinese companies are objects of suspicion. Huawei’s role in telecoms infrastructure is under government investigation as a national security threat. Shanghai Zhenhua Heavy Industries Company was excluded from being part of a consortium for Mumbai Port on national security grounds. The Indian Air Force recently instructed employees not to use handsets manufactured by Xiaomi on the same basis. Investigations into Chinese companies in the US and Europeare widely reported in India and exacerbate suspicions of Chinese firms among Indian regulators. So too does the belligerent behavior of the PLA on India’s borders. Chinese behavior – whether military or commercial – is seen through the prism of the threat posed by China to India’s security.
The trust deficit also adds compounds many of the practical difficulties faced by Chinese companies in India, not least the ability of Chinese nationals to obtain visas. Chinese business people routinely find it difficult to obtain the multiple-entry or employment visas issued to other countries’ nationals. Media reports suggest that plans to sign a visa pact between the two countries during Xi’s recent visit were scrapped as the result of continuing tensions over the border dispute.
Trust aside, Chinese companies have been slow catching onto the opportunities of the India market. Part of this is also political. China’s overseas investments in emerging markets (especially those made by state-owned companies) have tended focus on areas that the Chinese government has mandated as strategic priorities. These include the acquisition of natural resources in Africa or shoring up relationships with neighboring states such as Myanmar. A net energy importer, India hasn’t ranked high on the list of China’s geo-economic priorities.
There is also a broader problem of perception. For a long time,India was simply not been taken seriously as a market by many Chinese firms. Rather than an emerging economic powerhouse, India was seen as an economic backwaterwhose problems were compounded by its chaotic democracy. This is starting to change, slowly. Many Chinese companies – especially in the automobile and consumer electronics industries – are starting to accord much more weight to the market. The Chinese government too, encouraged by India’s role in the BRICS and the G20, increasingly recognizes the India market’s importance.Even so, there is a long way to go. As a Chinese academic recently explained at a track-two dialogue in Delhi: “we are committed to expanding our economic relationship with India in areas where India has an advantage such as fruits, vegetables, and [after a long pause] ICT” -hardly an endorsement of India as an emerging economic powerhouse.
India too has been slow selling China the dream of the India market. The national government has done little in the way of investment promotion in China. Many state governments have led delegations to China, but these often end up being little more than glorified sight-seeing trips. Gujarat is, of course, the most notable exception and it will be interesting to see whether Narendra Modi will be able to court Chinese companies with the same effectiveness and vigor as prime minister that he demonstrated as Chief Minister of Gujarat.
What about the growing number of Chinese companies already in India? Aside from the barriers mentioned above, Chinese business practices have proved obstacles to expansion.Most Chinese firms are latecomers to the Indian market. They lack the decades of India experience built up by Western and Japanese multinationals, together with the knowledge of regulatory, business and cultural practices that go with it. Partly as a result of this, the Chinese business community in India lacks the support networks and resources enjoyed by Western and Japanese firms. US and European firms enjoy not only the support of their embassies’ commercial services in India, but also access to well-established, private chambers of commerce and business councils. Companies from Japan and Taiwan can also look to well-resourced trade facilitation agencies such as Japan’s JETRO or the Taiwan Trade Commission. Chinese companies must rely on the more meagre resources of the Chinese Embassy’s Commercial Section.
Chinese firms have also been slower than Western companies to harness Indian talent in overcoming their shortcomings. Most firms have Chinese nationals at the helm of their India operations and remain beholden to their China headquarters for many vital aspects of business decision-making. This impedes the ability of Chinese companies to spot and pursue opportunities in India and makes it more difficult to win trust with skeptical Indian regulators.
There is also a more fundamental problem. In infrastructure development, the area most analysts identify as having the greatest potential in India-China economic relations, the most conspicuous expression of China’s economic success bumps up against one of India’s most conspicuous shortcomings. Famously effective at initiating and delivering infrastructure projects at home, China is increasingly looking to initiate projects overseas. India – starved as it is of infrastructure investment – should be a natural target market.Attempting to implement infrastructure projects in India, however, is a painful process and projects quickly become bogged down in a quagmire of regulatory approvals and land acquisition processes. As such, the sector where China is best-placed to deliver investment is arguably the area where India is worst-placed to absorb it.
We should all hope that the Chinese and Indian governments are able to make good on the USD 20 billion pledge.Increased investment will not only create jobs and encourage the transfer of technology and skills to India. It will also go a long way towards strengthening the overall state of Indo-Chinese relations. Investments, much more than trade, create ties that bind between countries by creating powerful groups on each side with strong vested interests in stable bilateral ties. As such, they create forces which can go some way to counterbalancing more volatile and often less positive political and military trends. India’s relationship with China has historically lacked these counterbalances. The bilateral relationship has been bounced up and down by the situation on the border with little in the way of political, economic, business or cultural counterweights to offsetdeteriorations. This situation will need to change if Indo-China relations are to mature, stabilize and improve. Improving the state of the investment relationship would be a good place to start.
(The writer is a Visiting Fellow at Observer Research Foundation, Delhi)
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