Recently, the debate has intensified around whether India should allow foreign direct investment (FDI) from China, particularly as bilateral relations appear less tense than in previous years. However, the question remains whether the current state of relations has improved enough to justify permitting FDI from China. Given the strategic and security concerns intertwined with economic ties, the issue raises doubts about the true extent of progress in India-China relations and whether such investments could pose risks beyond economic considerations.

Current State of India-China Relations

• Diplomatic Dynamics: India’s External Affairs Minister S. Jaishankar indicated on September 12 that around 75% of the “disengagement problems” with China have been resolved, yet he highlighted ongoing concerns regarding the militarization of the border. National Security Adviser Ajit Doval’s recent meeting with Chinese officials showed a commitment to further disengagement, though there was no breakthrough on critical border disputes, particularly in areas like Depsang Plains and Demchok.
• The Border Situation: The issue of what constitutes the “restoration of peace and tranquillity” in border areas remains ambiguous. The lack of clarity on terms of disengagement along various friction points and India’s inability to access certain patrolling locations in Ladakh raises questions about accepting the “new normal” established by Chinese actions.
• Economic Considerations: Despite the precarious national security situation, the Economic Survey 2024 suggests that India should engage more with Chinese supply chains by attracting Chinese investments. This perspective is shared by some economists who argue that FDI from China could help bridge investment gaps and bolster India’s presence in global supply chains.

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Criticism of Pro-Chinese Investment Stance

• Economic nationalism and resultant fear of Coercion: Some experts want India to work more closely with China on trade and investment. However, this idea doesn’t consider the serious security risks involved. With ongoing tensions and unresolved border issues, it’s wrong to assume that India’s relationship with China is improving. China has a history of using trade as a way to exert pressure on other countries. If India deepens its economic ties with China, it might become vulnerable to similar pressures, which could lead to more problems rather than solutions. Ignoring these complicated issues could harm India’s long-term security and stability.

• “Altered” Status Quo: In recent Track 1.5 and Track 2 dialogues, which involve informal discussions between government officials, business leaders, and scholars from both India and China, Chinese participants implicitly acknowledged that the status quo along the border has changed since the pre-2020 period. China seems to expect India to accept the altered border situation and move towards full normalcy in bilateral relations. However, India remains firm that normalising ties cannot be divorced from addressing the core border issues. During these dialogues, Chinese scholars highlighted four key demands for improving economic and diplomatic ties:
  • A level playing field for Chinese companies, free from discrimination in India;
  • Easier visa facilitation for Chinese businessmen and officials;
  • Resumption of direct flights between India and China;
  • Permission for Chinese journalists to be stationed in India.
    • India’s Stance: India has made it clear that these demands only address surface-level issues, and do not tackle the core concern—the unresolved border dispute. Without a meaningful resolution to the border problems, India continues to view economic cooperation and normalcy in relations with caution. 

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• Trade imbalance: India has long faced a massive trade deficit with China, a key point of contention. In 2023, India’s trade deficit with China surpassed $105 billion, while Indian exports to China shrank to $16 billion, exacerbating its dependency on Chinese imports, particularly in critical sectors like Active Pharmaceutical Ingredients (APIs). This imbalance not only weakens India’s economic position but also leaves it vulnerable to China’s tendency to weaponize trade dependencies.
• Import dependency: As Western nations, including the U.S. and its allies, look to decouple from China, India is seen as a promising alternative by groups like Rhodium. However, India’s deepening integration with Chinese supply chains could deter potential foreign investors, who may question how India can offer a stable alternative when its own economy remains so reliant on China.
• Market access issues: China’s demand for more access to the Indian market, while maintaining a controlled, non-market economy, poses further risks. Beijing heavily subsidises key industries, such as electric vehicles and lithium-ion batteries, giving its companies an edge in global competition. This tactic, combined with China’s slow domestic consumption and focus on export-driven growth, exacerbates tensions with both advanced and emerging economies, including India.
• Technology and Investment Scrutiny: India expects that Chinese FDI will help build its technological capacity, but evidence suggests otherwise. According to the Mercator Institute for China Studies (MERICS), China ensures that core manufacturing processes stay within its borders. Instead of exporting cutting-edge technologies, China outsources only assembly work to countries like India. This means that India’s technological base remains limited, with the more advanced production elements still controlled by China.
• No Guaranteed Trade Deficit Reduction: Another expectation is that Chinese FDI will reduce India’s trade deficit with China. However, the experience of ASEAN countries tells a different story. Despite significant Chinese investments, their imports from China actually increased between 2021 and 2023. This suggests that FDI from China does not automatically lead to a more balanced trade relationship. Furthermore, China often circumvents trade restrictions imposed by countries like the U.S., routing goods through third-party nations such as Vietnam and Mexico, further complicating trade balances.

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Conclusion

China’s status as a global manufacturing hub makes complete economic separation from India impractical.India must be cautious about the sectors in which it allows Chinese investments. By strategically directing FDI into areas that foster genuine industrial development and do not compromise national security, India can gain from these investments without deepening its vulnerability. Ultimately, a balanced approach that weighs both economic opportunities and geopolitical risks is necessary to ensure that Chinese FDI contributes to India’s growth on its own terms.

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