On July 5, the Enforcement Directorate (ED), India's financial crime law enforcement agency, raided the local offices of Chinese smartphone maker Vivo and its related entities in India. The search was reportedly part of an investigation into alleged money laundering. Not long ago, on May 1, another Chinese smartphone manufacturer, Xiaomi, has the assets of its subsidiary seized by the Indian authority, involving an amount of up to INR 55.513 billion.
Although Chinese companies investing in India generally do not have high expectations for the local business environment, the recent raids and asset seizures have surprised them.
As China's southern neighbor, India has a population of 1.4 billion, which means it is rich in labor resources and has great market potential. Its unique geographical location in the South Asian subcontinent and its strong nationalist sentiment have shaped the nation, where it has always maintained the ambition of becoming a major power among developing countries.
The investment environment in India, the country's market, and its investment prospects are all crucial issues for foreign investors, including Chinese companies. These issues will determine their investment strategy and if they would remain in India, or relocate out of it.
In their daily research on issues such as international geopolitics, the Belt and Road Initiative (BRI), and Chinese companies' "going global", researchers at ANBOUND have tracked and studied India's history, economy, and domestic politics. In our view, the investment environment in India can be analyzed from two levels: one is the geopolitical level, and the other is the business environment.
Geopolitically, in recent years, India-China relations have been deteriorating. The most direct friction is the border conflicts. In the past few years, there have been deaths and injuries of border guards on both sides. At the international level, the United States and the Western world are wooing India, as it has been an important partner in multiple political and economic strategies led and promoted by the U.S. For instance, in the Indo-Pacific strategy, India is an important pillar. In this strategy that extends from the Western Pacific to the Indian Ocean, India's participation will be indispensable. In the Indo-Pacific Economic Framework (IPEF), India is an important founding member; it is also a part of the Quadrilateral Security Dialogue (QUAD).
It appears that in the national security strategy promoted by the U.S. with China as its long-term strategic competitor, India is seemingly an important player that leans toward the U.S. However, the reality is far more complicated than this simplified "either this or that" binary division. Although India is a partner for the U.S. in its Indo-Pacific strategy, it obviously has its own strategic interests and independent ideas.
As things stand, India is rather different from other American allies such as Japan, South Korea, Australia, and New Zealand. For example, although India is a pillar of the U.S. Indo-Pacific strategy, it is also a founding member of the BRICS countries, along with China. Although India has cooperated with the U.S. to contain China, it has also maintained a close relationship with Russia for a long time. After the Russia-Ukraine war broke up, India did not criticize Russia, and instead increased its purchase of Russian oil and coal. Even though the U.S. continues to exert pressure, India has not complied with it. On his visit to the U.S. after the outbreak of the war in Ukraine, in the face of the U.S. accusations that India was importing Russian energy, Indian Foreign Minister Subrahmanyam Jaishankar unceremoniously responded to these criticisms.
It is not difficult to see that India has its own disposition. This not only has to do with the country's leadership, but also its strategic interests. Although India is a developing regional power, it has never lacked the ambition to become a power with global influence. Since the time of former Indian Prime Minister Jawaharlal Nehru, India has taken "non-alignment" as an important diplomatic strategy. Although this "non-alignment" often does not live up to its name, it has been preserved as a traditional international image. In his 2020 book "The India Way: Strategies for an Uncertain World", Jaishankar said that India's strategy in dealing with different target countries at the current stage is to "engage America, manage China, cultivate Europe, reassure Russia, bring Japan into play, draw neighbors in, extend the neighborhood and expand traditional constituencies of support". It can be seen that India's unique position ultimately depends on its national interests.
Therefore, at the geopolitical level, India cannot simply be assigned to a particular "camp". China, as a major Asian power with more than 1.4 billion people, has some similarities with India in terms of geopolitical interests. For future India-China relations, both countries should not be "adversaries". Instead, China should choose an independent diplomatic strategy and seek to develop in the direction of an influential power together with its neighbor India. China, which is located in East Asia and faces the Pacific Ocean, and India, which is located in South Asia and faces the Indian Ocean, have their own space for geopolitical development.
When it comes to the investment and business environments, India is facing much more severe problems than geopolitical ones. As a democratic country with a developing economy, India does not have a strong central government, and the relationship between the central and local governments is very different from that of China. India is not a country under the rule of law in the modern sense. On the whole, it has obvious differences with China in terms of national and social governance. Due to institutional reasons, India has a big gap with China in terms of government efficiency.
In terms of economic development strategy, India also has its own characteristics. Taking the policy of attracting foreign investment as an example, India is accustomed to using tariff barriers to protect weak domestic industries. In the past few years, the Indian government has gradually erected high tariff barriers to attract more manufacturing to the country. However, with the tightening of India's FDI after the COVID-19 outbreaks, the trend of Chinese companies investing in and building factories in India has slowed down. According to data from the Ministry of Commerce of China, in 2020, the direct investment flow of Chinese enterprises to India was USD 210 million, a year-on-year decrease of 61.6%. In 2021, direct investment in India was USD 63.18 million, a year-on-year decrease of 68.3%. In the field of smartphones, according to statistics from CITIC Securities, from 2014 to 2018, the Indian government raised tariffs on smartphone products five times, from 1% to 20%. Chargers, headphones, and data cables have tariffs as high as 29.44%, and mobile phone batteries are subject to a countervailing duty rate of 12.5%. In 2019, the Indian government raised tariffs on products such as displays and touch modules from 0 to 11%. In March 2022, the tariffs for speakers were raised from 15% to 20%, and smartwatch tariffs were raised from 15% to 25%.
In order to curb opportunistic acquisitions during the pandemic, in 2020, the Ministry of Commerce and Industry of India issued Press Note 3, revising Clause 3.1.1 of the previous FDI policy, which changes the investment, either directly or indirectly from the investment of countries bordering India's land, from the "automatic route" approval of most industries to the "government route". At the same time, the transfer of existing and future foreign direct investment shares in India also requires government approval. The scope of "land bordering countries" has expanded from Bangladesh and Pakistan in 2017 to seven countries including China. Among these countries, China is the most important investor, therefore this policy is also considered to be largely a restriction on Chinese investment.
The business environment in India is less than satisfactory, and tax issues are a typical area in this aspect. Indian government departments often regulate or restrict foreign companies on tax grounds. In recent years, the Indian tax authorities have conducted tax investigations on Shell, Nokia, IBM, Walmart, Cairn Energy, and other foreign companies and issued high fines, though in many of these cases the Indian government has actually lost in court cases. According to incomplete statistics from Caixin, Chinese companies, not just big companies such as Xiaomi, OPPO, and Huawei, but also at least 500 Chinese-funded companies have encountered tax and compliance censuses in India. This is the largest and most far-reaching systemic crisis that Chinese companies have faced since entering India.
Despite India's lackluster business environment, abandoning India is still an unrealistic decision for major companies that have already invested in India. Some analysts believe that the core reason is that companies cannot give up India's huge domestic demand market. Some of these companies have invested billions of dollars in India. Such overseas deployment is an important strategic decision of the company at the group level, and it is impossible to retreat easily. As the China Chamber of Commerce in India stated, it is difficult for new companies to enter India now, and companies that have already entered should cherish the business opportunities of exploring the Indian market, and they should persist if conditions permit. The up-front cost has already been invested, and the withdrawal now is no less than a disaster.
India's future market space is a huge temptation for foreign companies. Due to its industrial structure, although India has vigorously pushed for Prime Minister Narendra Modi's "Made in India", the policy has achieved mediocre results. After 2014, the proportion of India's manufacturing value added to GDP dropped from 15% to 13%. In the 2020-2021 fiscal year, the domestic market size of the Indian electronics industry was USD 67.3 billion, while the export market was only USD 10.6 billion. Less than 14% of electronics produced in India were exported. On the one hand, this shows that India is slow to develop and improve its manufacturing industry. On the other hand, it indicates India's biggest advantage would be its domestic market.
From the perspective of geopolitics and the investment environment, there are two very different Indias. At the geopolitical level, there is space for nation-to-nation cooperation, and at the strategic level there are various possibilities. However, at the level of the investment and business environment, there are no short of problems and risks that bring dissatisfaction to businesses.
As a micro-market entity, how should companies face the Indian market? In our opinion, businesses may ultimately need to be weighed comprehensively from two points, namely company strategy, as well as the market. This also requires the assessment of investment risks and benefits to be measured from these two aspects. If the future benefits of the company in India and related markets are sufficient to cover the cost of the company being "harassed" by frequent tax inspections, then it is necessary for the company to stay and survive in India. If the cost is much higher than the risk benefits, then withdrawal from this market can be considered.
Final analysis conclusion:
India is a geopolitical power, at the same time it is also a huge market and labor supply base with a population of more than 1.4 billion. The evaluation of the Indian market should not be overly simplified, and the strategy related to it needs to be decided according to the specific situation of the business.
