India may be shooting at its feet by separating China with technology

New Delhi is cracking down on China’s presence in India’s technology ecosystem as people’s sentiment moves towards China as border conflicts continue. With more than 200 Chinese apps banned, Chinese investment in Indian start-ups is increasingly facing regulatory scrutiny.

Prior to such a move, there were restrictions on foreign direct investment (FDI) imposed months ago to prevent opportunistic acquisitions from China. India hopes that these moves will hamper its ability to influence China.

However, these curbs have created invalidity in the Indian startup universe. Over the past few years, China has invested heavily in high-tech startups in India. Since 2015, Chinese private equity (PE) companies have invested $ 3.3 billion in India, many of which have invested in companies that support the Internet-based economy, according to data from financial solutions company Refinitiv. I will.

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Source: Gateway Report (March 2020)

These investments have declined sharply in recent months. Since the end of April, when FDI rules have been tightened, only six transactions have been concluded between Indian technology companies and Chinese PE companies. By comparison, there were 15 such transactions from January to April and 37 last year. Not only investment funds, but even Chinese tech companies are cautious about investing in India. US-based companies seem to be regaining some slack.

The turmoil in the high-tech ecosystem is partly the result of the US-China high-tech war, said Santosh Pai, corporate lawyer and honorary fellow at the China Institute. India is a battlefield where Chinese investors can place bets on US companies, “he said. That’s the situation for David and Goliath: Chinese investors favor the weak starting from zero. US companies come and invest in established business houses. “

India is an important frontier of the high-tech war, and demand for mobile phones and the Internet is increasing. The defense and strategic communities are worried about China’s impact on India’s technology ecosystem, but greater reliance on the United States is not without risk. Arun Natarajan, founder of venture intelligence tracking the flow of venture capital to India, said the Indian ecosystem could regain its vulnerabilities to events in Silicon Valley. ..

Over the last five years, funds in South Asia, including China, have been offset by the volatility of US investment, Natarajan said.

Some of the biggest deals of the year are driven by US-based investors, with Mukesh Ambanis Reliance Industries Ltd (RIL) accounting for the majority of capital inflows.

A recent report from the Parliamentary Finance Commission, chaired by Jayant Sinha, suggests that Indian start-ups will completely reduce their reliance on foreign sources such as the United States and China.

High-tech companies in China and the United States have not emerged on their own. ” Jabin Jacob, an associate professor at the Faculty of International Relations at the University of Sibunadar, said.

But in a capital-deficient economy, foreign funding remains important. Venture capital carries a lot of risks. Perhaps one out of every 100 investments will be really successful, “said Nitin Pai, director of the Takusha Siline Institute. 99 bets that won’t reward venture capitalists will help Indian entrepreneurs learn, innovate and pay bills. “

In an interview with Mint, Sinha reveals that the report is primarily aimed at encouraging the removal of tax distortions that penalize domestic investment in startups, rather than blocking foreign investment. Did. But the government wants the startup ecosystem to be more dependent on domestic sources of funding, he said.

But with the exception of Ambani, Indian sources simply don’t have the kind of money needed to replace something like TikTok. Domestic investors can fund early-stage self-developed consumer apps, but the multi-round capital required by some of these usage-driven apps before they can start generating revenue. We don’t have enough money to provide, “said Natarajan.

Even with firewalls around the early technology ecosystem, Indian companies are hungry for capital and technology. It is worth noting that doing business in India’s digital economy is already quite difficult for foreign companies and investors. India is one of the most protectionist countries in the world, according to the Digital Trade Restriction Index estimated by the European Center for International Political Economy (ECIPE) in 2018.

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Source: ECIPES Digital Trade Restriction Index (2018)

China is not good, but early investment by the Chinese state has helped build a self-sustaining technology ecosystem. It is unlikely that a resource-deficient Indian state can afford such efforts.

The technology ecosystem has shown greater resilience when India’s economy is dysfunctional due to a raging pandemic. Policy makers should aim to promote competition and innovation in the sector, rather than restricting the flow of capital and technology. The state should help support the development of technological capabilities. At the very least, the country shouldn’t get in the way of tech companies.

This is the first in a two-part series on trade and cross-border flow in the post-covid world.

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