India Begins A Rebalance Of Security Concerns Over China And Economic Aspirations – Analysis

By Harsh Pant and Kalpit A Mankikar

Since first assuming office in 2014, Prime Minister Narendra Modi’s government has aimed to increase the share of manufacturing in India’s GDP. In 2014, the government launched theMake-in-Indiacampaign, which pushed for more manufacturing and invited foreign direct investment (FDI), even in sensitive sectors like defence and railways.

Chinese companies like Oppo and ZTE were among those who sought to cash in on the manufacturing bandwagon. At the time, India was mulling greater economic engagement with China and invited Chinese President Xi Jinping for asummitin October 2019. The agenda included establishing a dialogue mechanism to improve trade and develop a manufacturing partnership.

But the economic crisis triggered by the COVID-19 pandemic underscored the need for guardrails to prevent the takeover of Indian corporate groups. India tweaked itsFDI policy, increasing scrutiny on investments from nations with which it shares a land border — a move widely interpreted as an effort to curtail China’s economic influence. Under the revised regulations, Chinese capital inflows required government approval.

The June 2020 clash between Indian and Chinese soldiers in Galwan marked an important inflection point in their relationship. The tense standoff continues at the border, with both armies still deploying large numbers of troops. The border issue looms over the evolving dynamics between the two nations. On the sidelines of a G20 meeting in March 2023, Indian Foreign Minister S Jaishankar described relations with China as ‘abnormal’, while India’s Defence Minister Rajnath Singh said China’s actions on the border ‘violated the basis’ of their relations.

India has consistently held that peace along the Line of Actual Control is important for a reset and further development of bilateral ties. As a result of pandemic-era regulations and these geopolitical factors, Chinese capital inflow to India accounted for just0.43 per cent(US$2.45 billion) of FDI received between April 2000 and December 2021.

In the United States, the political class has also re-examined the role of Chinese capital, but its approach differs from that in India. The US government, for instance, bannedChinese 5Gtechnology, pointing to national security concerns. In March 2024, it also announced aninvestigationinto national security risks posed by electric vehicles and internet-connected cars produced in China. The Biden administration likened connected vehicles to smartphones on wheels, suggesting that these vehicles could relay sensitive information back to China through their navigation systems.

The US has focused on sectors where China may pose asecurity riskand, depending on the level of threat, has either completely prohibited Chinese investment or subjected it to meticulous examination before clearance. This strategy is known as the ‘small yard, high fence’ approach. In contrast, Indian attitudes toward Chinese investment stem primarily from a surge in nationalistic sentiment in India following the military confrontation in 2020, which led to publiccallsfor a ban on Chinese economic engagement.

India aspires to become the world’sthird-largest economyby 2029 and has an ambitious roadmap to attain developed nation status by2047, marking its centenary of independence. But there is a growing realisation that the measurement of economic prowess has shifted from simply the volume of national productionto the quality of value added. India needs to produce more sophisticated components at a large scale to secure its position in international value chains.

This new development vision is being sought through a bolstered industrial policy comprising schemes like theProduction-Linked Incentives(PLIs), which are designed to promote Indian exports, address trade deficits and generate jobs. As of May 2024, the PLI scheme has attractedRs 1.28 lakh crore(roughly US$15.24 billion) in investment and generated more than 850,000 jobs.

There is also a realisation that India faces a tough task in balancing economic development aspirations and security concerns. The Finance Ministry’s 2023–24Economic Surveyproposed that attracting Chinese investment could help India improve itsparticipation in international supply chainsthrough exports, a proposal eventuallyrejectedby the government.

Yet there seems to have been a recalibration of India’s stance on economic engagement with China recently, as evidenced by theconditional approvalsgranted to companies with investments from mainland China or Hong Kong. These ventures, particularly in the electronics-manufacturing sector, will have clauses mandating value-add, compelling them to bolster local manufacturing capabilities in sophisticated components. Another condition is that they cannot hire Chinese citizens for important positions.

India’s stance on Chinese investment is changing for several reasons. Prime Minister Modi’s visit to the United States in 2023 raised hopes of greater economic engagement with Washington but American FDI inflows plummeted toUS$4.99 billionin 2023-24 from US$6 billion in 2022-23. Total net FDI inflows have also dropped toUS$26.5 billion(2023-24) from US$42 billion (2022-23).Modi’s third-term government is also increasingly awareof the pressures of unemployment and its implications for social stability.

With alternative sources of funding seemingly drying up and a new imperative for employment generation, India is assembling the nuts and bolts of a manufacturing ecosystem. New Delhi now seems to acknowledge that to some extent this involves leveraging Chinese capital for internal consolidation while still pushing back on the security front.

• About the authors: Harsh V Pant is Vice President of Studies and Foreign Policy at the Observer Research Foundation and Professor of International Relations, King’s College London and Kalpit A Mankikar is a China Fellow at the Observer Research Foundation, New Delhi.
• Source: This article was published by East Asia Forum