Strategy Shift or Step Back? Center Gives Green Light to Chinese Investments to Fuel Electronics Production

Restrictions on Chinese investment in India through foreign direct investment (FDI) appear to be easing, signaling a notable shift in policy given lingering border tensions.

Recently, an inter-ministerial panel approved five to six investment proposals in the electronics manufacturing sector, including some pure-play Chinese companies and others with links to China, reports AND.

The approvals include Chinese electronics giant Luxshare, a supplier to Apple, and a joint venture between Bhagwati Products (Micromax) and Huaqin Technology, in which the latter holds a minority stake. In addition, the approvals include companies based in Taiwan with links to Hong Kong.

It is worth mentioning that in 2020, India introduced Press Note 3 (PN3), which mandates prior government approval for FDI proposals from countries sharing a land border with India, including China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan.

The policy was introduced after the Galwan Valley conflict in June 2020, and since then the government has rejected several proposals from Chinese electronics companies, such as Vivo and BYD, that sought to enter the Indian market.

However, there is now growing pressure from Indian companies to have these restrictions reviewed.

The Indian Communications and Electronics Association (ICEA), which represents major mobile phone brands and manufacturers such as Apple, Oppo and Dixon Technologies, pointed out that Press Note 3 has effectively put a stop to further investment by Chinese companies in India. This has significantly hampered supply chain change, thereby affecting domestic value addition (DVA).

For example, a major Chinese manufacturer initially committed to setting up a factory in India to produce Apple iPads. However, due to restrictions, the company eventually moved its operations to Vietnam, where it now produces iPads worth $8 billion to $10 billion a year.

It is worth noting that industry body Confederation of Indian Industry (CII) had also advocated in June this year for a reassessment of India's trade relations with China to become a global electronics manufacturing hub.

The CII suggested adopting a non-restrictive approach to investments, encouraging technology transfer in deficient areas and facilitating the movement of skilled labour. In the current context, consideration should be given to adopting adequate safeguards, the CII said in its report.

The pre-budget economic survey on July 22 also supported increasing FDI flows from China to strengthen India's participation in the global supply chain and boost exports.

Apparently, the government's decision to gradually open up to Chinese investment, with appropriate guarantees, is explained by the fact that it believes that local value added must increase to achieve self-sufficiency in the manufacturing of electronic products.

To strike a balance, the center has formed an inter-ministerial group to expedite the approval of Chinese investment proposals, provided they meet specific criteria.

These conditions include ensuring that investment and technology are essential to the development of the local supply chain in areas such as high-tech components, excluding Chinese nationals from key management positions and limiting the participation of Chinese companies to a minority in partnerships with Indian companies.

The policy shift, which comes after Commerce and Industry Minister Piyush Goyal said on July 30 that the Centre had no plans to review restrictions on Chinese investments, raises many questions.

Nonetheless, if these conditional approvals help India become more competitive and self-reliant in a China-dominated value chain while preserving national security, it is a step worth considering.