India must rethink its Chinese investment strategy beyond Press Note 3

As middle powers rethink ties with China, India must move beyond ad hoc relaxations of Press Note 3 and adopt a clearer, sector-specific strategy for economic security

Middle powers across the world are reexamining their economic relations with China. The Prime Ministers of Canada and the United Kingdom, and the President of France recently visited President Xi Jinping, hoping to reset relations. The European Community is struggling to balance the dangers of opening up its markets to Chinese goods and the need to keep Chinese companies in its supply chain. Much is expected as well of American President Donald Trump’s trip to Beijing in a few weeks. In this context, it is vital that India also once again examine the costs and benefits of its current strategy about Chinese investment, most often associated with the so-called Press Note 3, which was issued in 2020. The strict restrictions on all inbound investment from countries with which India shares land borders, outlined in Press Note 3, have since been somewhat relaxed. But it is precisely the ad hoc nature of this relaxation that suggests it is time for a more comprehensive review of India’s strategy in this domain. 

The government has proved willing to relax the requirements for certain companies and ecosystems. One major example of this is mobile manufacturing and, specifically, the vast constellation of subcontractors, component suppliers, and design shops surrounding Apple Inc’s interests in the Pearl River delta in China. When Apple made it clear that its plan to make in India would not happen without the availability of many of its contractors in China, various instances of case-specific loosening of the rules were reportedly indulged in. But this cannot be a plan. For one, the government is not in the best position usually to pick long-term winners — whether a particular industry or, for that matter, companies within an industry. The second reason is that it entrenches a major differential between the largest companies in any sector, which will be able to lobby for exemption, and smaller enterprises. When it is the latter that provide much economic dynamism, support much of the workforce, but are also excluded from global supply chains, policy should not be brought in to disadvantage them. 

The broader logic of Press Note 3 must also be scrutinised, given the experience over the years. What does it mean to rule out investment from China? The problem obviously is the state-entangled capital that comes from the mainland. But why should Taiwan and even Hong Kong, which serves as a major entrepot for global capital to Asia, be included? How is Singapore, which carries a great deal of capital from the mainland to the world, be less dangerous than Hong Kong? Further, who can tell whether non-Chinese companies are in fact Chinese? Do European subsidiaries of Chinese companies, or European companies partially owned by Chinese capital, count as any less dangerous? These are all difficult questions, the answers to which are both empirical and dynamic. They depend upon other countries’ choices as well as India’s. 

India has been particularly slow in developing a coherent strategy for its economic security, such as has been worked on for a decade by Australia, Japan, and others. It is important that New Delhi identifies the specific sectors it views as strategic, and what means might be used by hostile actors to undermine those sectors. A broad sense of possible hostility rather than just “land neighbours” must be taken into account. A comprehensive negative list for such investment is overdue.