Easing Of Present Barriers To Chinese Investment Into India To Figure At Modi-Xi Meet On Sunday

(MENAFN- The Arabian Post) By Nitya Chakraborty

The tariff war declared by the United States President Donald Trump against India by imposing a total duty of 50 per cent on Indian exports to the USA effective August 27 this year, is having its impact on the economic relations between the two powerful economies of Asia , China and India. Generally the two countries are competitors in the global market but the new geo-political situation triggered by Trump has led both the political leaderships to give a fresh look at the prospects of economic collaboration based on the realities on the ground.

Prime Minister Narendra Modi will be meeting the Chinese President Xi Jinping on Sunday, August 31 in Tianjin, China, the venue of the summit of the Shanghai Cooperation Organisation (SCO) summit being hosted by the Chinese President Xi Jinping. Modi will be having bilateral meeting with XI at the sidelines of the summit.

This meeting between the two heads of India and China is being closely monitored by the entire global diplomatic community, especially the U.S. President Donald Trump as the decisions to be taken by them will have impact not only on their bilateral relations but also in shaping the coming trends of the geopolitics including global trade. Many pending issues are there for bilateral discussions, but one important focus will be on ensuring that the present barriers to Chinese investment to India are removed and more Indian imports are allowed in China in the context of the critical situation being faced by some of the Indian sectors which have been affected badly as a result of the imposition of 50 per cent tariff on their products.

In the last ten months since Prime Minister Narendra Modi's bilateral talks with the Chinese President at the BRICS summit in Kazan in October 2024, there has been gradual improvement in the relationship between India and China covering both political and economic areas. While, there is peace in border areas around line of control, a proper mechanism is in place to ensure that Galwan 2020 type clashes do not take place again. In such a mood of confidence building, measures in economic and business areas have started being taken.

China last week agreed to facilitate supply of rare earth magnets and fertilisers to India. More discussions are expected at the official level to identify the sectors where both the countries can step up trade and investment cooperation in the new global trade scenario. The barriers to investment by the Chinese companies into India is the major one as far as China is concerned. On this, discussions have been held at Indian official level but it requires the green signal from Prime Minister Narendra Modi. PM can only agree to it taking into account the overall position of India-China relations. Sunday's meeting can give some indication in that direction.

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China and India established a robust trading partnership in 2023, with bilateral trade reaching a record US$136.2 billion, reflecting a 1.5 percent increase from the previous year. This growth was bolstered by a 6 percent rise in Indian exports to China, emphasizing positive momentum in bilateral ties amid geopolitical tensions. In 2024, China's exports to India reached US$ 120.48 billion marking a year on year growth of 2.4 per cent while imports from India declined by 3 per cent to US$17.997 billion. This means that China is a large trade surplus nation and it is in India's interests to export more goods to China to bridge that trading gap. This will also be helpful to India in meeting the challenge of finding alternative markets after the jolt given by the US tariff to the Indian exports.

Indian companies have increasingly established operations in China across various sectors, including pharmaceuticals and manufacturing, while over 100 Chinese companies are active in India, particularly in infrastructure and electronics. This mutual investment trend highlights the growing interdependence between the two nations. But while China has emerged as the largest trading partner of India due to its massive exports to India, in terms of Chinese investment in India, the record is very

Investment flows between India and China have experienced notable fluctuations in recent years. According to latest data, foreign direct investment (FDI) from China to India reached approximately US$279.46 million in 2021, down from US$534.60 million in 2019 and US$205.19 million in 2020. The peak of Chinese FDI in India occurred in 2015, amounting to US$705.25 million.

This significant decline in FDI inflows is largely attributed to India's revised FDI policy for countries sharing borders, implemented in response to the Sino-Indian border tensions in 2020. However, by mid-2022, the Indian government began to approve individual FDI proposals on a case-by-case basis, with reports indicating that as of June 29, 2022, 80 out of 382 proposals linked to China had received approval.

China's direct investment in India showed signs of recovery in 2023. According to India's Department for Promotion of Industry and Internal Trade (DPIIT), China's equity investment into India reached US$42.05 million, reflecting a 324.4 percent year-on-year increase. Meanwhile, China's Ministry of Commerce reported a net direct investment flow of US$60.37 million into India for the same year, reversing the negative outflow recorded in 2022.

As of end-2023, China's cumulative direct investment stock in India stood at US$3.21 billion, concentrated mainly in sectors where Chinese companies have historically held competitive advantages. Chinese investment in India continues to target electronics, household appliances, power equipment, steel, engineering and e-commerce.

Conversely, Indian investment in China has also seen a downturn, with FDI amounting to US$6.32 million in 2021, a decrease of 47.4 percent year-on-year. By the end of 2021, cumulative Indian investment in China totalled US$943.96 million, according to data from the Chinese Ministry of Commerce.

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Over the years, Indian companies have increasingly set up operations in China, spanning various sectors including pharmaceuticals, manufacturing, IT services, and trade. Many Indian firms in China focus on manufacturing industries, such as pharmaceuticals, auto components, and wind energy. Major Indian corporations like Dr. Reddy's Laboratories, Infosys, TCS, Wipro, and Mahindra & Mahindra have established themselves in China through wholly owned foreign enterprises (WOFE), joint ventures, or representative offices.

Indian businesses are primarily located in major cities such as Shanghai and Beijing, with many also concentrated in important commercial centres like Guangzhou, Shenzhen, and Yiwu, a hub for wholesale markets. These companies aim to serve both the local Chinese market and their global clientele, leveraging China's strategic position in global trade.

These investment trends reflect the complexities and challenges faced by businesses in navigating the evolving economic relationship between India and China, emphasizing the impact of geopolitical tensions on cross-border investments. Meanwhile, the mutual investments between the two nations highlight the growing economic interdependence and complement the substantial trade relationship between India and China.

Right now, the main barrier to increased FDI from China to India is the applicability of Press Note 3 on FDI which makes prior approval mandatory for foreign investment from countries that share land borders with India. It was targeted at China when it was issued in 2020. India has misapprehensions about Chinese entry in some sensitive sectors of Indian economy. Indian government is well within its rights to take such decisions taking into account the need for national security.

Industry sources say that this press note can be reviewed to make the FDI process easier while keeping the option on national security. Commerce Minister Piyush Goyal also indicated at a recent conclave that there was scope for review and it will be done by the government taking the overall relationship in view. It is time now when some of the areas, not vulnerable to national security, can be opened up to the investors from China. But that will have to be done only if China agrees to allow much higher Indian exports to their country. The trade relationship can not be one way traffic.

Dealing with India –China relationship is a long process. The immediate objective should be to focus on some priority areas for expanding economic collaboration as also more people to people contacts. The process began ten months ago but now in a more compelling situation for both countries, there has to be further push to that understanding respecting the strategic autonomy for both. Modi-Xi's Sunday bilateral may set the basis for that. (IPA Service )

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