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CAUTIOUSLY WELCOME CHINESE INVESTMENT

Syllabus:

• GS 2: Bilateral Relations
• GS 3: Foreign Direct Investment

Why in the News?

India saw a decrease, in its Foreign Direct Investment (FDI) from $84 billion in the year 2021 22 to $44 billion underscoring the obstacles and adjustments required to reach the government’s target of attracting $100 billion, in FDI.

Source: Statesman

Introduction

• Foreign direct investment (FDI), in India reached a record high of $84 billion in the year 2021 22 before dropping to $44 billion within a span of two years.
• Although the FDI inflow saw a decline it continues to play a role in driving progress and fostering economic development.
• Striking a balance between addressing security issues and fulfilling requirements concerning investments, from China calls for a thoughtful and intricate strategy.

Foreign Direct Investment (FDI) in India

Decline in FDI Inflows

• Net FDI, after subtracting outgoing investment, decreased by 62% to $11 billion, marking a 17-year low.

Government’s FDI Ambition

• The government aims to achieve $100 billion in FDI annually.
• This target represents less than 3% of India’s GDP.
• FDI at this level would constitute less than one-tenth of the industrial and economic investment needed for higher GDP growth.
• The majority of investment will still come from domestic savings.

Importance and Future of Foreign Direct Investment (FDI)

Benefits of FDI

• Knowledge and Technology Transfer: FDI brings valuable know-how, cutting-edge technology, and best management practices.
• Integration into Global Value Chains: It helps India connect with global value chains and improve its human capital.
• Increased Productivity and Competitiveness: The osmotic effect of FDI enhances productivity and competitiveness.

Recent Trends

• Previous Growth: Before the recent decline, FDI was on the rise, with an average annual inflow of about $70 billion over the past five years.
• Current Target: To harness the benefits, FDI needs to increase to $100 billion.
• Future Prospects: India, with its high growth potential and large domestic market, must attract global FDI to achieve this target and fully leverage its economic potential.

China’s Role in Global Foreign Direct Investment (FDI)

Major Source of FDI

• Global Investment Leader: China invested $148 billion globally last year, ranking third in the world for FDI outflows.
• Impact on Global Flows: This occurred during a period when overall global FDI flows were declining.

Lack of Investment in India

• Investment to India: Despite its significant FDI contributions globally, China has not invested in India, highlighting a missed opportunity for India to tap into this substantial source of capital.

Restrictions and Scrutiny on Chinese FDI

Press Note 3 and National Security

• Regulation Introduction: Prior to the Galwan clash, India implemented Press Note 3, which restricts FDI from China.
• Scrutiny Process: Investments from countries sharing land borders with India, like China, are subject to case-by-case review by the home ministry for national security risks.

Chinese Investment Proposals and Outcomes

• Proposals Received: Since April 2020, India has received 526 FDI proposals from Chinese investors, amounting to $11.6 billion.
• Approval Status: Out of these, 201 proposals were rejected, and 200 remain pending.
• Investment Changes: Some intended equity investments have been reclassified as long-term debt, while the rest has been withdrawn.

Historical Context

• FDI Approval from China: Since 2000, India has approved only $2.5 billion in FDI from China, representing less than 1% of the total foreign investment received.

Growing Trade Flows Between India and China

Historical Trade Growth

• Early Trade Levels: At the start of the 2000s, trade between India and China was nearly balanced, with total trade below $4 billion.
• Current Trade Volume: By 2023-24, bilateral trade surged to $120 billion.
• China has been India’s largest trading partner over the past decade, except for a few years when the US or UAE surpassed it.

Trade Growth Rates

• Annual Growth Rate: The compound annual growth rate of trade between India and China has been an impressive 17% in dollar terms, outpacing the GDP growth rates of both countries.

Shift in Export Rankings

• Export Destination: In 2001, India was the 19th largest destination for Chinese exports.
• By the end of the next decade, India climbed to the 6th position, highlighting its significant market size and importance to Chinese exporters.

Trade Imbalance

• Trade Deficit: Despite the substantial increase in trade, the growth is uneven, resulting in a large trade deficit for India.

Managing Trade Deficits and Capital Inflows

Chinese Imports and Trade Remedies

• Ongoing Imports: Despite anti-dumping duties, imports from China keep increasing.
• Surplus with US: India has a substantial trade surplus with the US, helping to balance other deficits.
• The current account deficit is below 1% of GDP.

Offsetting the Deficit with Capital Inflows

• Potential Capital: Investing a portion of China’s foreign exchange reserves in Indian infrastructure could reduce the trade deficit.
• Investment Sectors: Investments in infrastructure, automotive, renewable energy, and EVs should not be seen as threats to national security.

Receptivity to Chinese FDI

Economic Survey Recommendations

• Boost to Global Value Chains: The Economic Survey advises India to embrace Chinese FDI to enhance its role in global value chains and improve manufacturing competitiveness and exports.
• Crucial Imports: Chinese imports are essential for Indian industries such as pharmaceuticals, specialty chemicals, electronics, telecom equipment, solar energy, and EVs.

Examples and Future Outlook

• Critical Vendors: The success of domestic iPhone assembly depends on Chinese vendors; two have been acquired by Tata Group.
• Investment Template: Future Chinese investments could mirror MG Motors’ sale of 38% shares to JSW Group.

Compartmentalized Approach with China

Strategic Segmentation

• Separate Issues: India should compartmentalize relations with China, handling trade, investment, cultural, and scientific exchanges separately from border and geopolitical issues, similar to the US approach of “high fence, small yard.”

Economic Opportunities

• Consumer Market: China’s $7 trillion consumer market offers significant export opportunities.
• There are secure areas for Chinese investments, potentially through bilateral deals avoiding dollar currency risk.

Conclusion

To maximize economic gains while managing security concerns, India should adopt a balanced approach, integrating trade and investment with strategic oversight, fostering growth without compromising national interests.

Source:Livemint

Mains Practice Question:

Discuss the factors contributing to the recent decline in Foreign Direct Investment (FDI) inflows to India, and analyse the impact of Chinese investment restrictions on India economic prospects.

Associated Article:

https://universalinstitutions.com/india-china-partnership/