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MODI’S ECONOMIC ENGAGEMENT POLICY YIELDING RESULTS

STAGE SET FOR BIG CHINESE INVESTMENT IN INDIA

By Subrata Majumder

 

China has been a long term challenge for India. Politically, China has been a persistent threat on India’s borders and dampener to India’s relation with its neighbours. Economically, India has become a dumping ground of Chinese goods after the recession in the west and rise of free trade power in South East Asian countries.

 

The coercive relation has a twist after the Narendra Modi government came into power. For Prime Minster Narendra Modi, China is not a foe. For President Xi Jinping, India is an opportunity. Both seemed to have taken vow to reinvent the relation from the perspectives of economic engagement, instead of hurling brickbat to each other.  

 

Mr Modi was never averse to China. His hobnob with China is not sudden and new. His relation with China was established well before he became Prime Minister. As Chief Minister of Gujarat, he first visited China in November 2011. He visited China four times before he became the Prime Minster. His priority was to attract Chinese investment in Gujarat. He continued to harp on Chinese investment in India as Prime Minister.

 

China’s President Xi-Jinping pinned for a new look towards India after USA became assertive to have a strong foothold in Asia through its Asia pivot policy, mainly to counter China. Paranoid by USA’s consolidation of political power in Asia and hobnob with India, China viewed India a perceptible tool to counter-balance USA’s threat by enlarging economic engagement with India. Both India and China are in need of investment, however with a difference. While India yearns for domestic investment, China looks for overseas investment, given the bleak chances in domestic investment due to Chinese currency renminbi’s appreciation.

 

The green shoot is visible. The visit of President Pranab Mukherjee to China in May this year reaffirmed each other’s eagerness for economic engagement. Chinese media Xinhua was upbeat with the visit, saying “it will open a new chapter in the development of bilateral relations”. Indian Prez returned with big bang of Chinese investment proposals. China’s biggest industrial park developer CFLD showed interest to set up 10 industrial parks in India. Already MOU were signed between the two governments to set up 4 industrial parks, when India’s Vice President Hamid Ansari, along with Commerce Minister Nirmala Sitharaman, visited China in June 2014. Shanghai Automobile Company, Chint Group for renewable energy, Sopo Group of chemical, Ding Shen and Shanghai Electric Company were keen for large investment in India.

 

Let down by glut in inward investment, China is on the binge for outgoing investment. From a paltry overseas investment of US $ 3 billion in 2005, Chinese overseas investment increased to US $ 90 billion in 2013 and became the third biggest overseas investor in the world. Asia was the biggest receiver of Chinese investment. Chinese investment also made a surging growth in South East Asian countries including Myanmar, Indonesia, Malaysia and Thailand.

 

The glut in China also prompted MNCs to shift their manufacturing bases from China to India. Investment by Ford Motor Company is a case in point. Nearly 80 per cent of total Chinese investment in India in 2015 was made by SAIC General Motors Investment Ltd. It is a joint venture company between General Motors of USA and SAIC Motors Group, China. This investment was made for the second car plant by General Motors India Pvt Ltd in Ahmedabad.

 

China’s bubble burst beacons for Chinese investment surge in India. Given the upward valuation of Chinese renminbi and lackluster demand in China (similar on the line of Japanese bubble burst), China looses its power of investment attraction. This will leverage opportunity for India to attract foreign investment, given the big domestic demand and strong macro-economic factors. A number of Chinese handset manufacturers are planning to set up their manufacturing units for handsets in India. They are Vivo, Huawei, Xiaomi and ZTE.

 

Chinese investment unleashes two benefits. First, Chinese investment will help in curbing the rising trade deficit. More than one-fourth of India’s total trade deficit is factored by cheap imports from China. Second, Chinese investment can be instrumental to normalize the political relation between the two countries. After the change of guards in Chinese leadership in 2012, China wants to improve its relations with India. China upgraded its diplomatic presence in Delhi after Mr Modi became the Prime Minister. In September 2014 President Xi Jinping appointed Mr. Le Yucheng as the new Chinese Ambassador to India, who was at the rank of Vice Minister. China deputes ambassadors at Vice Minister rank only to those countries of strategic importance. Countries like USA, Japan, Russia, North Korea and Great Britain have Chinese ambassadors at the rank of Vice-Minister.

 

Besides investment, China can prove a major fund provider for India’s infrastructure projects. With AIIB (Asian Infrastructure Investment Bank) and BRICS’s National Development Bank becoming reality, where China is the biggest stake holder, China can edge out other funding institutions in providing infrastructure funds to India. One of the reasons is the flexibility in the conditionality of these banks. For example, AIIB funds are more preferable to India for its power projects. This is because funding by World Bank, IMF and ADB were averse to the coal based power generation, given the policy stand to promote clean energy in the world. Since 2012, World Bank did not sign any memorandum of understanding for coal fired electricity projects with its member countries. And, ADB was selective in supporting coal based energy projects.

 

Power is the important infrastructure in India. Its investment requirement is paramount. Over sixty-five percent of electricity generation depends upon coal-based energy. It needs huge investment for coal based power projects.

 

That way, Mr Modi’s new strategy for economic partnership with China, despite security threat, is a timely attempt to seek Chinese economic power to speed up India’s development.

(IPA Service

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