Enter the dragon

Rising Chinese direct investment in India is welcome

Partly in response to India’s concerns about a huge trade imbalance in favour of China and partly in pursuit of the Indian middle-class market, Chinese companies have decided to invest in India. Sinovel, China’s largest wind turbine manufacturer, and four Chinese automobile majors have announced plans to set up manufacturing units. This follows an earlier announcement by prominent Chinese power equipment manufacturers to do likewise. The motivations for the investments are diverse. In the case of power equipment, the Indian government’s stipulation that only companies that manufacture their products domestically are eligible to compete for government-owned power projects effectively poses a barrier to entry for Chinese firms, which to date have been exporting capital equipment. On the other hand, “tariff hopping” and reducing transaction costs seem to be the guiding motivations for the automobile firms, while Chinese firms in the consumer space such as Haier (white goods) have merely wanted to be close to the consumer in order to quickly respond to market signals. With the Indian auto and auto components industry gaining in strength with every passing day, relocating manufacturing units to India makes eminent sense given the vast agglomeration economies available domestically. On the other hand, the picture for large-scale manufacturing, as with power equipment, is a lot less encouraging, owing to considerable gaps in the manufacturing ecosystem, most visibly in the quality of physical infrastructure. Overall, the increase in foreign direct investment (FDI), though admittedly far below potential, signals that India as a host country is perceived as a lot more hassle-free than, say, a decade ago.

Given that capital goods (“electric and non-electric machinery”) comprise a significant proportion of China’s export basket to India, the existing trade surplus of $20 billion that China enjoys should significantly decrease, depending on how much of capital goods manufacturing relocates to India. Even though the procurement restrictions do not apply to private power producers, it would make little sense for Chinese producers to use separate channels to supply public and private sector power plants in India. Chinese firms have already secured orders for up to 30,000 Mw of new capacity in plants that are expected to be commissioned during the 12th Five-Year Plan. It would be interesting to see how Chinese power companies fare in the new scenario, without the benefit of tariff waivers and other surcharges that domestic firms have to contend with. From India’s standpoint, the “markets for technology” argument will have limited utility, since China’s technological capability in both consumer and capital goods is way behind the competition. With prices already headed south owing to intense competition, especially in the white electronics and automobile industries, any difference made by Chinese products in this space will only be at the margin. On balance, more Chinese FDI in India is a positive development that deserves to be encouraged. Hopefully, this growing business-to-business relationship will foster better people-to-people relations and make it easier for both countries to resolve their territorial disputes. This, apart from more transparent China-Pakistan military relations, will help build trust between the two Asian giants.