Why India should selectively reopen door to investment from China

cGiven modern financial engineering, this effort is not absolutely straightforward, but it is one that many major economies are undertaking in an age of increasing geoeconomic contestation

Due to a combination of factors — shifts in the geopolitical environment, relative tranquillity on the border, and India’s own economic requirements — there has been increased discussion in recent months on re-evaluating the country’s relationship with China, particularly when it comes to trade and investment. The foundational assumption that it would be dangerous to allow Beijing control of core infrastructure or access to sensitive systems and sectors is not being questioned. Yet, the steps taken by New Delhi in the post-Galwan period to sever economic ties with the Chinese mainland should be re-examined in the light of changed circumstances. In this context, a high-level committee tasked with easing business conditions in the country conducting such a re-evaluation — as this newspaper has reported — should be seen as a welcome move.

 

It appears that the committee, led by Rajiv Gauba, former cabinet secretary and now a member of the NITI Aayog, has presented two options for the government to consider. First, to withdraw what is generally known as Press Note 3 — a notification from 2020 that stipulated mandatory government approval of foreign direct investment proposals from any country with which India shares a land border. Even if China was not named, it was obviously directed at investment from there. It should be noted that aspects of this restriction have already been weakened since, including in implementation. But withdrawing the note entirely would allow a ground-up restructuring of the economic security measures put in place by New Delhi. Second, to automatically allow investment proposals as long as Chinese investors have no more than 10 per cent beneficial ownership. This would require some complicated regulatory definitions but provide a convenient middle point between the status quo and the more radical suggestion.

 

The exact process by which the committee arrived at this 10 per cent threshold is unclear. It is hoped that some rigour went into reaching this conclusion — an analysis, perhaps, of the various declined investment proposals in the past five years. If necessary, this threshold could be adjusted upwards or downwards. Yet, the broad thrust of the committee’s argument cannot be denied. Ruling out all Chinese investment, even in non-strategic sectors, is not a sustainable option if India has to develop and enter global value chains. Nor can the Chinese Communist Party be given free entry into the most important sectors of the Indian economy. What is necessary at this point is to frame a set of economic security principles that can be applied in this case and can also illuminate India’s economic relationship with other great powers. For example, a set of strategic and non-strategic sectors can be defined; beneficiary thresholds can be derived in consonance with the control levels imposed by company and other laws; and proper transparency regulations can be put in place so that any restrictions hit the real targets and not innocent bystanders.

 

Given modern financial engineering, this effort is not absolutely straightforward, but it is one that many major economies are undertaking in an age of increasing geoeconomic contestation. India should not be left behind. But the initial impetus must be to reframe and revise Press Note 3 — to open the door somewhat to Chinese investment that is clearly in the national interest and does not cause overdependence or leak control offshore, and to broadly re-evaluate what an economic relationship with China that preserves Indian autonomy and sovereignty must look like.