Has India's door finally opened?

Ladies and gentlemen, India recently revised its foreign investment approval policies for its landlocked neighbors, and the media has been interpreting this as a relaxation of restrictions on Chinese investment. At first glance, it sounds plausible, but if we think about it carefully, has India actually opened the door? Is it open, or not? India’s landlocked neighbors are Pakistan, Bangladesh, Afghanistan, Nepal, Bhutan, and Myanmar—none of which sound like they’d be likely to invest in India. So many people assumed India was opening its doors to us in a sort of “proud yet coy” way. The very next day, however, the Indian government issued a clarification: the door hasn’t been opened; Chinese companies investing in India still require approval as before. Setting aside whether India has opened the door or not, would our companies even dare to go there? So, is the door open or not? Or is it just a token gesture? What if it’s just a crack wide open? Sorry, it’s not open. And that crack isn’t reserved for Chinese companies anyway. The original text of the Indian Cabinet notice reads: “Investors with non-controlling beneficial ownership of up to 10% shall be permitted on the automatic route.” In other words, investors with non-controlling beneficial ownership of up to 10% may proceed through the automatic approval channel. However, first of all, the subject here is “investors”—not a landlocked neighboring country, nor investors from a landlocked neighboring country. Second, “beneficial ownership” is defined in relation to “direct ownership”; it refers to multi-tiered, penetrative shareholding structures. If a company is registered in China and controlled by Chinese entities, that constitutes direct ownership, and it must still go through the manual approval process. The entities eligible for India’s relaxed approval process are those in which China holds an indirect beneficial ownership interest of less than 10 percent—and such entities cannot be registered in China. Therefore, this new policy is actually aimed at Western investors and global funds, not Chinese enterprises. At this point, we must go back to 2020. Many people believe that India’s crackdown on Chinese investment began with the border clashes between the two countries, but that is not the case. On April 17, 2020, India’s third press release announced foreign investment scrutiny for its landlocked neighbors, while the Galwan Valley clash occurred on June 15. There were also some minor skirmishes in May, but all of these took place in late April. India’s decision to scrutinize foreign investment was largely driven by the impact of the pandemic. At the time, valuations of Indian companies were falling, and to prevent foreign investors from buying at rock-bottom prices, India tightened government controls. In the first quarter of 2020, the People’s Bank of China increased its stake in HDFC, India’s largest private mortgage lender, a move that put India on high alert. During the same period, a global wave of investment protectionism was sweeping the world, with the European Union urging member states to protect critical assets from foreign takeovers. Within a month, many countries tightened their FDI review policies. Tensions between China and India have indeed prompted India to strengthen protectionist measures, particularly in strategically important sectors such as technology, pharmaceuticals, and manufacturing. On the other hand, China is indeed the largest and most promising investor and was once very active in venture capital investments in Indian tech startups. Therefore, as the political climate shifted abruptly, India had to use foreign investment reviews as a pretext to build an economic shield against Chinese control of strategic assets. What do you call this? It’s wise to be on guard—we’re on guard too. We also have security review measures for foreign investment, but ours are more neutral, with higher trigger thresholds, greater transparency, and clearly defined procedural rules. But India? Its precautions are excessive. It’s essentially a “wall of confusion”—extremely opaque. Many projects are met with neither approval nor rejection, leaving investors unsure how to proceed. Moreover, the regulations are overly broad. Out of fear of penetration by Chinese state-owned capital, India is particularly wary of equity tracing and simply blocks such investments outright. Any investment fund with even a 1% stake from a Chinese institution in its capital structure is barred from entry. This applies even to Western asset management firms like BlackRock and Carlyle, which, due to their global operations, inevitably have Chinese limited partners. To invest in India, they have no choice but to hold their noses and wait for approval. As a result, over the course of several years, out of more than 600 projects submitted for review, only about 100 were approved. Global capital realized, “India is really hard to get into, isn’t it? If it’s that hard, we’ll just stay out.” Therefore, India’s policy adjustments were primarily aimed at eliminating indirect friction for Western investors, rather than directly opening the doors to Chinese investors. That said, who should India be attracting to invest? Not all capital is created equal—even if the amount is the same, the source of the funds, where they’re directed, and the ultimate economic impact can vary significantly. Since the end of the pandemic, the global landscape of foreign direct investment has undergone a dramatic shift, with growth concentrated almost exclusively in the developed economies of the U.S. and Europe. Developing countries generally face pressure from capital outflows, and while India’s performance in attracting foreign investment has been somewhat volatile, it has been quite good overall. However, the capital it has attracted comes from the United States, Singapore, the United Arab Emirates, and the Netherlands—primarily in the financial and service sectors—while manufacturing investment has flowed heavily into Southeast Asia. China’s outbound investment has poured into the region, establishing production bases and shaping the manufacturing landscape of the Association of Southeast Asian Nations (ASEAN). This has left India feeling rather uneasy, as its government’s plans clearly prioritize manufacturing over financial services—the latter being merely supplementary, while the former, particularly in sectors such as electronic components, semiconductors, and solar energy, must take center stage. Consequently, India’s new policy specifically includes a provision stating that investment approvals for certain sectors—including capital goods for manufacturing, electronic components, and finance—must be expedited, with the approval process shortened to 60 days. India still aspires to be a manufacturing powerhouse, but as long as it pursues manufacturing, it cannot avoid China—this is not my opinion, but that of our consulting firm, Asia Group. The current situation is that India does indeed have some plans for manufacturing and has eased restrictions on capital that indirectly benefits China. Since last year, relations between China and India have indeed improved—for example, visas have been reinstated, direct flights have resumed, and Modi paid a visit last year. However, major Chinese companies, such as BYD and Great Wall, have still been turned down when seeking to invest in India. This isn’t good news for the Indian public—they love BYD—but import quotas are completely off-limits, so now they have no choice but to consider local knock-down assembly. If that works out, it would be a positive development: it would avoid tariffs on complete vehicles and meet India’s requirements for increasing the localization rate in manufacturing. Overall, there are some positive signs now, but India is still falling far short—we need to make them more dependent on us. A couple of days ago, I saw a report saying India hopes we’ll ease restrictions on urea exports. With the Middle East in total chaos, India’s LNG imports have been disrupted, forcing fertilizer plants to shut down and causing urea prices to skyrocket by 21% in just one week. Although Indian officials are making a big show of claiming there’s no supply shortage, the rating agency ICRA has pointed out that domestic production capacity in this largest importer of urea is highly problematic. Well, duh—if there weren’t problems, why would they be turning to China? The monsoon season is coming in June, and the busy farming season is about to begin. With 46% of the population being farmers, a shortage of fertilizer could be quite deadly. I think we could lend a hand here, but we shouldn’t do it for nothing—you agree, right?