The elephant’s relations with the dragon have been tense to say the least in the last few months. Prime Minister Narendra Modi exchanged greetings with Taiwan’s President Lai Ching-te in June, drawing sharp protests from the Chinese.  

A month before that an Indian naval fleet held exercises in the South China Sea with Asean countries including Vietnam and Philippines in an ostensible show of strength.  

Cutting Edge Duty

However, on Tuesday, the Indian government’s budget acceded to the pleas of electronic firms, including a bevy of Chinese companies ranging from Xiaomi, Oppo, Vivo, One Plus, Huawei, Lenovo and others, to reduce customs duty on raw material by a fourth to 15 per cent.

The logic given out is that this will promote indigenisation, help develop cutting edge technology here. But the fact is it will help existing Chinese players in the market as well as future entrants who have queuing for long to enter India.

Chinese firms have been knocking on India’s doors without much success as New Delhi has been dragging its feet over FDI from China, which its security agencies often view with suspicion.

A  day before the budget, the finance ministry’s Economic Survey, also made out a case for “focusing on FDI from China”, arguing it could be a more viable strategy than competing with China and pointing out that East Asian economies had successfully done this in the past. 

Chinese FDI

The thinking in Raisina Hill also went along with the premise that Delhi should try get back some of the US $ 90-100 billion  that India gives to China annually by way of imports, by gnawing it back as Foreign Direct Investment.

China’s investment here peaked in 2014-15 at US $ 495 million after the Modi 1.0 government came to power. However, since then clashes on the  border overtook the camaraderie which was seen in the early days of the NDA rule.

Fears over China taking control of key Indian companies through acquisitions accentuated the suspicions that India’s security planners had over Chinese investments here.  

Since then, some 58 FDI proposals from China have been rejected and 14 put on hold. As a result, China’s investment in India shrank to a measly US $10.52  million in 2022-23.

Not only that, India has even been tardy in giving visas to Chinese vendor firms supplying equipment to new factories here being set up under the PLI scheme. Protests by Indian companies who bought the equipment is however changing that.

India’s policy planners are unlikely to give a blanket approval to Chinese firms and security considerations will certainly continue to weigh heavily. However the frosty uninviting attitude of Raisina Hill towards Chinese investments looks likely to change.

Mandarins in New Delhi’s Vanijya Bhavan, home to India’s commerce ministry, say they have been pushing for this change.

Mixed Singals

When the US came up with the idea of decoupling its economy from China, it encouraged the global supply chain to shift away from Beijing. The gainers in global trade from this move, however, have been countries like Vietnam, Mexico, Taiwan and  Canada.

India has also gained from this deliberate shift in the global supply chain. But as many trade specialists have pointed out, the ability of the Chinese firms selling to the US to shift base to countries like Vietnam, Mexico or even European Union has meant that these countries have gained far more. 

The fact remains that nations which have been raising barriers to import of Chinese Electric vehicles fearing their markets will be swamped, are going out of their way to woo Chinese investment. 

European nations saw their share of greenfield investments by Chinese firms shoot up by  78 per cent in 2023, this was over and above the increase by 51 per cent in 2022.  Large greenfield projects in 2023 came from private firms CATL, AESC and Huayou Cobalt, who invested in battery plants in Hungary, Germany and France.

Of course these signals that are emanating from New Delhi will be viewed and studied not only by Beijing as it works out strategies for its long drawn ‘Cold War’ with the US , but also by Washington, which has not been too happy with India’s unwillingness to be drawn into a direct military alliance with the West in confronting China.

It will remain a tough job for India’s tiny breed of diplomats in South Bloc to convince the West, that it is not running with hares as it runs with hounds, even though it may be doing just that.