China Makes Proposal to Finance India’s Infrastructure Development

BEIJING – In the first week of February, a Chinese working group submitted a five-year trade and economic planning cooperation proposal to the Indian government, offering to finance as much as 30 percent of the US$1 trillion targeted investment in infrastructure during India’s 12th Five-Year Plan (2012-2017).

If approved, the investment would be the largest by any single country in India, exceeding the Japanese funds, which previously helped finance a large number of India’s most ambitious projects, such as the Delhi Mumbai Industrial Corridor and the Delhi Metro. Between April 2000 and December 2013, China contributed only 0.15 percent of US$313 million of India’s total foreign direct investment inflows, compared to Japanese investments of $15.3billion, about 7.3 percent.

The historic dimensions of the Indian government’s current development plans reflect the urgency of the matter. “India’s transport sector is grossly overstretched,” it says in the official Five-Year Plan. “The pace of economic development after the economic reforms has imposed a heavy burden on this sector [and] capacity needs are expected to double every decade in the medium term.”

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Following several years of economic contraction, India’s government is under pressure to present a viable plan to steer the economy back on its path towards success. In this respect, infrastructure is becoming ever more important.

Energy needs of a rapidly growing industrial sector and India’s massive population have put the existing infrastructure under intense stress. Given its scarce domestic reserves of natural resources, India is forced to import a big share of total energy consumption in order to meet the ever increasing demand, which drives up energy prices. Moreover, the lack of adequate means of transport and power supplies is starting to choke off further growth opportunities.

Facing increasing pressure to develop its deficient infrastructure, India is weighing carefully whether they can afford to reject the generous Chinese offer. “China has expressed a strong desire to invest in India’s infrastructure sector,” an official said. “However, it needs to be assessed how to leverage that. We need to identify sectors from where we can gain, such as software or IT, pharma, among others.”

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Previously, India had rejected most Chinese investment proposals, as it was nervous about China’s growing influence in South Asia, especially in critical areas such as telecom or power. After the Sino-Indian war of 1962, there is still some disagreement about the northeast borders, which causes tensions to flare occasionally. Due to these ongoing disputes, India may have strong reservations against Chinese investments in sensitive regions such as Jammu and Kashmir, especially so since infrastructure is a critical industry enabling the smooth functioning of all economic activity.

Due to a persistent trade surplus over the last decades, China commands a large financial resource of US$3.8 trillion, which enables the government to make significant investments abroad. However, they balance their options carefully. Amid a period of declining growth in global trade, China is facing economic challenges of its own.  Supporting India’s economic development may help China to secure a sustainable future market for its manufacturing products. Given the different structure of the two economies, China seems confident that there is not much economic rivalry to fear. Moreover, the Chinese investment in India may complement their current activities in Africa and boost the entire region.

On the other hand, India perceives itself on an equal footing with China. Accepting the investment proposal may therefore cause a problem of perception considering that Chinese outbound FDI had been focused on poor developing countries in Africa in the past.

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Still, in other sectors, India and China have already agreed upon Chinese involvement. According to the Economic Times, India’s Department of Industrial Policy and Promotion has identified sites in Uttar Pradesh, Haryana and Andhra Pradesh where Chinese companies could set up industrial parks for agro-processing and manufacturing, hoping that this would help narrow the trade deficit with China.

However, China is not the only investor showing a vital interest in financing India’s infrastructure development plans. Being one of India’s main trading partners, the United Arab Emirates have also been discussing how to get involved, and the Japanese are in talks to build a road network in the critical northeast region.

Ultimately, infrastructure investment can take several, very different forms. While Chinese involvement in nuclear energy is likely to raise concerns, sectors like roads, tunnels and railway tracks should receive broad support for Chinese infrastructure investment.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

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