Earlier this week, the Global Times cited reports from Indian media stating that the Modi government has further tightened regulations, explicitly prohibiting companies from "hostile nations" with land borders, such as China and Pakistan, from directly participating in any commercial projects in India. It's reported that the Department for Promotion of Industry and Internal Trade (DPIIT) has conveyed this directive to state governments via official letters.
As of this writing, there hasn't been any public response from the Indian government regarding these tightened measures. However, this recent signal from Indian media contradicts other official indications. In its September report, the India Brand Equity Foundation (IBEF) suggested a relaxation of regulations, stating that the "government is considering easing scrutiny on foreign direct investments (FDIs) from bordering countries."
India Tightens Restrictions on Business Projects from "Hostile Nations" Including China
IBEF, a trust established by the Ministry of Commerce and Industry of India, primarily aims to enhance the international reputation of "Made in India" and promote knowledge of Indian products and services abroad.
The initial report on the tightened regulations came from the Hindustan Times, a prominent English news website in India controlled by the Birla family, one of India's largest conglomerates. The newspaper is perceived to support the Congress Party (Indira faction), which is currently in opposition. This report was subsequently picked up and republished by other notable Indian publications, including Outlook India and the right-leaning Swarajya Mag.
In reality, similar regulations have been in place for three years. However, the previous requirement was to "restrict" rather than "prohibit." It mandated that any commercial project from neighboring countries on land borders needed approval from the central government in India.
India shares land borders with China, Pakistan, Bangladesh, Bhutan, Nepal, and Myanmar. Additionally, India claims a land border with Afghanistan, although this is technically with the Pakistan-controlled Kashmir region.
While the Indian government hasn't publicly singled out China, the intent to target Chinese companies is an open secret. The official stance is that the rule applies to all countries with land borders, but Indian media has been forthright in stating that the primary objective is to prevent potential "hostile" takeovers of Indian companies by Chinese investors and to limit the presence of Chinese companies in India.
Starting in 2020, the Modi government has repeatedly tightened commercial restrictions against China. In April of that year, the DPIIT issued a notification removing Chinese investments from the "automatic approval" list. The Indian side claimed this move was primarily due to concerns about takeovers, especially during the outbreak of the COVID-19 pandemic, fearing that many Indian companies could be "maliciously" acquired by Chinese capital.
From May 2020, tensions escalated between Indian and Chinese border troops along the Line of Actual Control, culminating in a violent physical confrontation in the Galwan Valley on June 15, marking a further escalation in tensions. Since then, the Indian government has taken a series of retaliatory actions against Chinese companies, essentially closing the door to Chinese capital.
On June 29 of that year, the Modi government announced a ban on 59 mobile apps, including TikTok, UC Browser, and WeChat, most of which were from Chinese companies. The Indian government cited concerns that these apps "endanger the sovereignty, defense, and public security of India." Subsequently, more Chinese companies were added to this list.
On July 23, 2020, the Indian government, citing national security, restricted the purchase of public projects from companies in countries bordering India, including public-private partnership projects. According to the government's public statement, this wasn't an outright ban but required prior approval.
Regarding the latest tightening measures, Indian media sources, citing a state chief secretary, mentioned that the central government noticed some state private companies attempting to involve Chinese contractors in infrastructure projects. Another informed source stated that due to this, certain private infrastructure projects in some states are currently in limbo.
According to data as of the end of May this year, about 40-50 FDI proposals from countries bordering India are awaiting approval.
Another report last week mentioned that due to difficulties in obtaining Indian visas, executives from China's BYD Auto Company had to meet with Indian private enterprise executives in neighboring countries like Nepal and Sri Lanka.
The Modi government's administrative measures targeting Chinese companies are evident in the FDI approval records over the past three years.
Data obtained by Indian media shows that during the fiscal years 2021-2023, the Ministry of Commerce and Industry of India rejected 58 Chinese FDI applications. In the fiscal year 2021, 10 were rejected, and this number surged to a record high of 33 in 2022. In the fiscal year 2023, the number decreased slightly to 15, but only three were approved during this period.
This not only includes mainland China but also encompasses Taiwan, Hong Kong, and Chinese companies or individuals operating in other countries/regions.
Furthermore, the Indian government has been trying to dilute the influence of Chinese companies by acquiring equity. From April 2000 to March 2023, India obtained $2.5 billion in FDI equity from Chinese companies, significantly more than from other neighboring countries during the same period. For instance, Myanmar contributed $9 million, Nepal $3.31 million, and Bangladesh $76,000.
A source revealed at the end of July this year that the Indian government is asking Chinese mobile phone and car manufacturers to incorporate majority Indian equity partners.
In addition to using administrative measures to restrict Chinese investments, the Indian government has also tried to prevent Chinese products from entering through various economic means, such as imposing anti-dumping duties on goods originating from China and promoting the "Make in India" campaign to replace "Made in China."
Meanwhile, the U.S. is becoming India's largest source of foreign investment. According to data released by the Reserve Bank of India in September, the U.S. became the primary source of FDI for India in the fiscal year 2023, accounting for 17.2% of the total. Mauritius, the UK, and Singapore followed closely, collectively contributing to 60% of India's total FDI inflow.
However, overall, FDI inflow into India has seen its first decline in a decade. In the fiscal year 2023, the FDI inflow into India was $71 billion, a 16% decrease year-on-year, marking the first time in a decade. The primary reasons are high inflation in the U.S. and Europe and weak demand, leading to reduced funds flowing into Indian startups.
In response, some Indian media outlets have written that while this doesn't necessarily indicate a worrying growth outlook for this South Asian giant, several potential reasons can explain why foreign investors are hesitant. "Apart from the well-known investment barriers, investors now also have to deal with policy uncertainty. After all, an uncertain business environment, an unfair competitive environment, and fears of arbitrarily changing the rules of the game midway have a strong deterrent effect."
