Focus: GS-III Indian Economy
Why in news?
- In May 2020, India mandated government approval for foreign direct investment (FDI) from countries with which it shares land borders.
- The curbs aimed to shield Indian companies from predatory investments, particularly those from China—a big hint that policymakers in New Delhi have become ever more cautious of Beijing’s growing role in the Indian economy.
Restrictions on China
- Latest data from Global Trade Alert shows it has faced more trade restrictions than any other country since 2019.
- The fear of predatory investments in the wake of covid-19 disruptions has made India more alert, but analysts and diplomats have been sounding alarm over it for a very long time.
- India’s FDI measure against its neighbours came days after the Chinese central bank raised its stake in HDFC to over 1% in April.
- To be sure, China’s investments, even after including Hong Kong, contribute only a tiny share in India’s total FDI inflow.
- This holds true even if one goes by China’s numbers, which are higher.
- Given the small FDI share, some of the fears may even be exaggerated because of the growing mistrust towards Beijing, but not all of it.
China’s Debt-trap Diplomacy
- Research shows developing countries owe much larger debts to China than was earlier believe.
- They allege many loans to build infrastructure projects using Chinese contractors in strategically located developing nations are a form of debt-trap diplomacy.
- China is accused of extending excessive credit with the intention of extracting economic or political concessions when countries cannot honour their debts. This raises fears that China’s credit to countries such as Pakistan, Sri Lanka and Nepal could be a strategic disadvantage for India.
India’s Dependence on Chinese Imports
- India must remember that even though its widening trade deficit with China remains an eyesore for policymakers, dependence on Chinese products has only grown year after year.
- In 2019, Chinese imports alone accounted for 34% of all the foreign value-added in India’s exports, data from the United Nations Conference on Trade and Development shows. In 2009, this figure was just 1.8%.
- Over the last decade, India’s dependence on China for inputs for the manufacture of drugs and consumer goods has shown a marked increase. All this will matter even more in this time of crisis after the coronavirus.
- A strengthening anti-China sentiment and louder calls for self-reliance could actually go against India’s interests and economic logic.
India’s Handling and Way Forward
- Indeed, India has played it safe by only blocking the automatic route for investments and not tightening the limit itself. Nor has it named China explicitly.
- To recover from the demand shock, India needs low prices that Chinese goods provide.
- There is no single policy to tackle the complex and multifaceted relationship. Even as India confronts China militarily, the need of the hour is better economic cooperation.