Report

Following the money: China Inc’s growing stake in India-China relations

Since 2014, an influx of Chinese capital in India has transformed the structure of India’s trade and investment relations with China. Until that year, the net Chinese investment in India was US$1.6 billion, according to official figures. Most of the investment was in the infrastructure space, involving major Chinese players in this sector, predominantly state-owned enterprises (SOEs). In the next three years, total investment increased five-fold to at least US$8 billion, according to data from the Ministry of Commerce (MOFCOM) in Beijing, with a noticeable shift from state-driven to market-driven investment from the Chinese private sector. Official figures, however, underestimate the amount of investment as they neither account for all Chinese companies’ acquisitions of stakes in the technology sector, nor investments from China routed through third-party countries, such as Singapore. For instance, a US$504 million (Rs. 3,500 crores)1 investment from the Singapore subsidiary of the mobile and telecom firm Xiaomi would not figure in official statistics because of how investments are measured.

The aim of this paper is to provide a more complete picture of Chinese investment in India and to assess the implications of Chinese investment and acquisitions for India’s diplomacy, trade strategy, and security. Rather than attempt to provide a definitive figure, which is beyond this paper’s scope, the broader objective is to examine the growing stakes of Chinese companies in India and assess the implications for the relationship. This paper draws on MOFCOM data, publicly available information sourced from Chinese firms, press reports in China and India, and background information shared by Indian and Chinese officials. It is possible to estimate that the total investment from China exceeds official figures by at least 25%, and this is a very conservative estimate. When announced projects and planned investments are included, the total current and planned investment is three times the current figure, crossing at least US$26 billion. In greenfield investments and capital invested in acquiring or expanding existing facilities in India, Chinese companies have invested at least US$4.4 billion. Chinese companies have also invested in acquiring stakes in Indian companies, mostly in the pharmaceutical and the technology sectors, and participated in numerous funding rounds of Indian startups in the tech space. Another US$15 billion approximately is pledged by Chinese companies in investment plans or in bids for major infrastructure projects that are as yet unapproved.

These figures are likely an underestimation as there are several limitations in the exercise of mapping Chinese investments in India. For one, there is no exhaustive list or record of Chinese companies operating in India or their investments with either the Indian or Chinese governments. One reason is the routing of investments through different countries. A second is the different routes of foreign direct investment (FDI) into India, as a result of which complete FDI statistics are not available with a single government agency. Chinese ministries, on the other hand, may have more accurate country-wise data but tend to be less forthcoming in sharing it. Complicating the picture are investments from funds whose links to Chinese entities are difficult to ascertain. Another limitation is the inability to confirm whether stated investments by Chinese companies have materialised to the fullest extent. Verifying this is beyond this paper’s scope.

The first section of the paper, “Actors in China’s foreign policy”, looks at how China’s foreign policy is shaped by the growing weight and stakes of new actors, such as the private sector and provincial governments. The second section, “China Inc. and India” traces the changing strategies and interests of Chinese companies, both state-owned and private, in doing business and investing in India. The section on “Making in India” describes and analyses investments in five sectors: infrastructure, energy, automobiles, consumer goods, and real estate. The fourth section, “Buying in India”, looks at acquisitions focusing on the technology sector in particular. The last two sections examine the implications of this on India’s relationship with China and suggest five key recommendations for India’s trade and investment policy.

The paper argues that India needs to proactively engage with new actors in China’s foreign policy, particularly the private sector and the provincial state governments, where many decisions regarding trade or investment deals are made. India needs to reexamine and update its trade and investment strategy and better leverage the growing stakes of Chinese companies in the Indian market, if it wishes to more successfully pursue its trade objectives with China. The flush of investment from China’s private sector poses new challenges for India’s regulators and has underlined the need for a transparent, credible and predictable regulatory framework. In China, the boundaries between the state and private sectors are blurry at best, and some of China’s most prominent private technology companies, including those that are major investors in India, are playing key roles in advancing government initiatives at home, including in running an effective censorship regime.

This blurred separation between state-owned enterprise (SOE) and private enterprise raises the question of whether the Chinese private sector can indeed be considered as an entirely distinct entity from the state. This question becomes even more relevant with Chinese and other foreign firms acquiring controlling stakes in Indian companies, particularly in the technology sector where definitions of security or strategic implications are rapidly evolving. Rising investment from China certainly brings advantages both for the government of India, which is looking to correct a lopsided trading relationship, and for Indian companies in need of capital. This paper argues that while it is in India’s interests to enable this process through creating a friendly, open and predictable investment environment, the government will also need to more proactively safeguard longer-term considerations of security and privacy as it opens the door to new sources of investment.

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1 US Dollar-Rupee exchange rate of 69.8 is used throughout the paper.