India pulls welcome mat from Chinese investors

By Jayanthi Iyengar

NEW DELHI - Ever since the Red Dragon stirred out of its hibernation from behind the bamboo curtain and decided to join the world economic order, its emergence has been perceived as the biggest threat to US hegemony in the unipolar world of post Cold War politics. Yet the US is not alone in fearing the world's most populous nation. India, its neighbor, has been quick to clamp down checks on China, both on the trade and the investment front. On April 1, 2000,

India phased out quantitative restrictions (QRs). Since then, it has taken several steps to check Chinese economic intrusions, all of which are World Trade Organization compatible. These checks are both in the nature of blocking cheap Chinese imports, as well as Chinese foreign direct investment (FDI). The unstated reasons for subtly blocking cheap Chinese imports is that they are inimical to domestic interests.

The explanation for blocking FDI, particularly from Chinese nationals, is that it poses a threat to national security. Recent events prove that perhaps India's fears of its security and its domestic interests being compromised by opening up to China are not necessarily unfounded. At the same time, despite their legality, the steps taken so far also have hampered the free flow of goods, services and capital between the two countries. On the import front, India's curbs on cheap Chinese imports have taken place in three distinct phases since the QR phase-out.

Soon after April 1, 2000, Indian industry began expressing fears of it being wiped out by competition from cheap Chinese imports. Making a presentation to the then finance minister Yashwant Sinha in mid-2000, the Federation of Indian Chambers of Commerce and Industry, one of India's three apex chambers, stated that Indian industry was being hurt by cheap, low quality imports. "Particularly noteworthy is the deluge of dramatically cheaper Chinese products, including consumer electronics goods, toys, bicycles, crockery, locks, auto parts, electrical appliances and machinery.

Apart from direct imports, a sizeable volume of Chinese goods is sneaking into the market, through neighboring countries as well," it said. The Confederation of India Industry was not one to be left behind. Its senior advisor (policy), T K Bhaumik said, "China is a major economic power in Asia. India has a trade deficit with it. In terms of composition of trade, there is a need of qualitative improvement." Pressured by Indian industry, the government set up a "war-room" to monitor the imports of 300 "sensitive" items. The "war-room" was (and is) a monitoring cell in the commerce ministry. The selection of items was based on their sensitivity to domestic interest and comprised items such as fresh fruits, agricultural products, bicycles, umbrella, batteries, fans etc - all of which were either grown or manufactured in India.

The government followed up this psychological warfare by a taking a leaf out of European Union's book. Free imports were barred. Imports were suddenly permitted only through designated ports. India's plant variety laws were strengthened. Food imports were subject to certification. All these measures made imports cumbersome and costly. Further, anti-dumping measures were strengthened and cases slapped wherever possible. Though Chinese products were not intentionally targeted, statistics show that out of the 93 anti-dumping cases launched up to August 2001, 42 were against China. Simultaneously, the Indian government mounted customs raids on traders who stocked Chinese products.

The raids began on November 12, 2000 and lasted a week. They were on directions from Brijesh Mishra, principal secretary to Prime Minister Atal Bihari Vajpayee and were overseen by the then revenue secretary S Narayan (who is current finance secretary to the government of India). The aim was to check only infraction of smuggled Chinese goods, but it scared off even legitimate trade in Chinese goods. By April 2001, Chinese imports were down to US$762 million for the month, from $1.2 billion a month on the eve of the raids and $729 million on the eve of the QR phase-out. Figures for April 2002 show that the Chinese imports, particularly of the 300 sensitive items such as toys, silk and umbrellas, are beginning to peak again, touching $3.4 billion during the month in question. But despite this escalation, India would now find it difficult to go back to its old pressure tactics, as the raids nearly caused a diplomatic stink the first time round. Smuggling of Chinese goods is a cause for concern for several reasons. It is made possible on two counts. India shares a porous border with China. But more than India, Nepal shares an even more open border with the Red Dragon. As a result, officials say that the Chinese tend to route their smuggled goods into India via Nepal. The advantage of this routing is that Nepal, along with India, is part of the seven-member regional alliance, the South Asian Association for Regional Cooperation (SAARC). The SAARC countries, including India, Nepal, Bangladesh, Bhutan, Maldives, Pakistan and Sri Lanka, are also signatories to the South Asian Preferential Trade Agreement.

Under this agreement, member countries extend preferential treatment to each other, including tariff exemptions on goods moving from one region to another. Indian government sources say that it is this regional alliance that the Chinese have been exploiting to the hilt to dump non-duty paid Chinese goods into the Indian market. The Chinese are, however, not one to cower down by either such allegations or pressure tactics. As is clear from their reaction, they had mounted their own counter offensive by mid 2001. Suddenly, India's Foreign Investment Promotion Board (FIPB), the clearing authority for foreign investment proposals, started to see a slew of applications from Chinese nationals. Further, the Chinese stepped up their official presence in India. Only recently, they participated in the first ever trade fair in India.

As if to demonstrate their might, the Chinese turned up with the largest contingent and showcased over 280 products, ranging from high-end electronics to low-end toys. Chinese FDI is not unknown to India, but until two years ago it had been coming in only through known Chinese entities. Thus, the big three of Chinese electronics companies, Konka Electronics, Haier and TCL, were already in India prior to the QR phase-out. The post QR phase-out period, however, saw a flood of applications from Chinese individuals wanting to primarily trade in India. The FIPB clamped down on these applications. It took the view that it did not want FDI merely in trading. Besides, FDI in retail trading is not permitted in India and many of the Chinese FDI applications also faced rejection on this ground. In December 2001, however, things took a new turn. The FIPB was considering an application for FDI in the power sector from Chinese National Water Resources and Hydro Engineering Corporation.

The Chinese company wanted to set up a joint venture project with the Himachal Pradesh government at Patkari. The proposal was referred as usual by the FIPB to the ministry of external affairs. The procedure followed until then was that the external affairs ministry would check out the antecedents of the company concerned through its embassy in that country. Such a cross verification procedure was followed in cases where applications came from countries where there was a political dimension. In such cases, the embassy checked out the antecedents of the applicants and gave the green signal, which was passed on by the external affairs ministry to the FIPB. In this case, though, the ministry took the view that a decision on the Patkari power project should be deferred until the Cabinet Committee on Security, comprising the union ministers of home, external affairs, finance and defense, reviewed the FDI policy for India's neighbors. The union minister for commerce and industry was also invited to this meeting, as the FDI policy falls under his jurisdiction. The meeting was supposed to be a hush-hush affair. The media, however, got a wind of it and the dailies splashed the headlines. Reports highlighted the fact that a FDI review meeting was scheduled.

Quoting government sources, they also said that 185 Chinese engineers working with a Bangalore-based Huawei Technologies were likely to be deported on account of the company's alleged involvement with the Taliban. "The government has also got credible information that the company helped Iraq improve its military communication systems," the Hindustan Times said, quoting top official sources. "The company was completing the project under contract, which now turns out was from the Taliban," the Economic Times said. It added that the company had brought in 185 telecom engineers from China to in September 2001 on a six-month visa to ensure total secrecy in the project. Huawei Technologies reacted immediately. Huawei chief operating officer, Jack Lu Ke rushed back from China. He flatly denied the reports. Further, he met the local government's information technology secretary, Vivek Kulkarni, to allay fears of the company's alleged misconduct in international dealings. Ke's allusions were to Huawei's background. It was reportedly promoted by Ren Zhengfei, a former officer in China's People's Army. Further, two years earlier, the company had also been accused of linking Iraqi missile stations with fiber optic lines. As these details resurfaced, the Chinese government jumped to the company's defense.

Reports followed that Kulkarni, who had investigated the matter, had given Huawei Technologies a clean chit. The Indian government went underground. The proposed cabinet meeting did not take place. It seemed the Intelligence Bureau's case, based on an FBI tip-off, had been a red herring. Later events, however, proved the impression to be wrong. Within weeks of the Huawei incident, Chinese National Water Resources and Hydro Engineering Corporation had quietly withdrawn its FIPB application for its proposed hydro power venture in Himachal Pradesh. The FIPB, which records all proceedings, failed to mention the withdrawal of the application in its minutes of the meeting. It was as if a hydro power project at Patkari had never been considered. Exactly a year down the line, Huawei Technologies and Chinese FDI are back in news.

Two months ago, the company approached the FIPB for transferring residual shares held by two Indian nationals in its Indian subsidiary Huawei Telecommunications to Hong Kong-based Huawei Tech Investment Co Ltd. Following the transfer, the Indian company would become a full subsidiary of the Hong Kong-based investment company. Such transfer of residual shareholding in favor of the parent company based outside India is not uncommon. Normally, foreign investors investing even in 100 percent subsidiaries prefer to incorporate a company in India first, only to externalize the residual shareholding at a later date. This residual shareholding is a token amount - often as little as one or two shares - and are often held by the company's lawyer or chartered accountant who helped set up the company. The FIPB gets over 20 such proposals a month, but it deferred a decision on this proposal on the grounds that the matter would be decided after a committee of secretaries looking into FDI policy for China, Pakistan, Bangladesh and Sri Lanka, makes its recommendations. Reports coming in at this stage indicate that this committee may recommend a bar on FDI from individuals in these countries. Besides, it may cap FDI from these countries at 49 percent, even in sectors where 100 percent foreign investment is permitted. Investment locations may be prescribed and the Reserve Bank of India's automatic approval route amended to incorporate a "security clause".

This means that while companies from these countries may be permitted to set up units in the deep south and the interiors, they will be barred from setting up units in the Northeast, Gujarat, Rajashthan, Himachal Pradesh, Maharashtra etc. Regulation of FDI locations is not uncommon. India has not followed this policy so far, but China permits travel by foreigners only to 1,000 destinations and permits FDI only in 359 locations. Interestingly, Huawei Technologies set up its Indian research and development center in Bangalore in February 2001. This center is the company's largest software development center outside China. It is engaged in research in telecommunications and networking solutions, especially third generation (3G) systems. It has invested over $8 million in the center so far and employs over 250 software engineers. Huawei Technologies' customers include China Telecom, China Mobile, China Unicom, China Netcom as well as Thai AIS, South Korea Telecom, SingTel, Hutchison Global Crossing, PCCW and Telemar (Brazil). India apart, it has research institutes in Dallas (US), Stockholm (Sweden), Moscow (Russia), Beijing and Shanghai.

It also has a joint venture in Russia. Its sales in 2001 was $328 million and it employees number 22,336 persons worldwide. The cumulative approvals to FDI from China up to end August 2002 stand at $14.69 million, against $11.78 billion from the US and $7 billion from Mauritius. China is ranked 24 among India's FDI partners in terms of approvals. The US and Mauritius stand first and second on this list, though they are ranked the other way round when it comes to FDI realization. The bulk of FDI approvals to China were given by the FIPB prior to 2000. No approvals were granted during the years 2000 and 2001, though one application worth $2.061 million was cleared in 2002. (©2003 Asia Times Online Co, Ltd.

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