Niti Aayog’s China Proposal Like Letting the Fox Guard the Henhouse

Niti Aayog recommends allowing Chinese investment up to 24% in Indian companies, dumping the current requirement for national security vetting for investment from countries that share a land border with India — a clear euphemism for China, since Pakistan, Bhutan, Nepal, Myanmar and Bangladesh are not exactly in a race to top global charts for outward investment. Perhaps, the Niti Aayog would next suggest educational reform that awards 25% marks if a student tots up 2 and 2 and gets 1. Next in line could be do-it-yourself test kits to assess if a woman is 25% pregnant, 50% or cent-percent pregnant.

Let us appreciate the rationale for restricting Chinese investment. Any economic activity generates value, and to the extent a part of the value would accrue to labour, even in a factory owned 100% by the Chinese, local Indian workers would get jobs and incomes. Ancillary industries that supply food to the Chinese-owned factory’s workforce, ferry workers to and fro between home and workplace, supply inputs and transport finished goods, would multiply the jobs and incomes created by the Chinese factory. What is the rationale for restricting any investment at all?

The rationale is national security and strategic autonomy. At present, practically all electronic components, including those that go into the armed forces’ communication networks, are sourced from China. Do these contain covert windows for data to leak to Beijing? To the best of our testing ability, these do not. But our testing abilities are as great as our manufacturing abilities in electronics.

Policy has not been coherent while announcing incentives for local production. We have production-linked incentive schemes and design-incentive schemes for drones. But when it comes to the key control modules, Indian drone makers tend to import these from China. India wants to vastly expand the production and deployment of drones, for everything ranging from sophisticated defence-related uses to agriculture, transport of critical drugs in remote areas, and surveillance of all things from forest fires to law and order maintenance.

If armies of these unmanned flying objects routinely drone over cityscapes, monitoring traffic congestion and filming wedding procession and funerals, it is easy to overlook their potential for mischief. The ability to immobilize or bring down any drone that deviates from its officially permitted flight path becomes crucial. There is no incentive scheme for the production of kit that needs to be deployed to keep tabs on every drone in the sky, and bring down any drone that shows signs of going rogue to do harm to the community.

Drones can be monitored by satellites in low-earth orbits and by interconnected, stationary tracking devices that make use of ubiquitous telecom connectivity. But are the telecom equipment and the repeaters and optical amplifiers inside the fiber network deployed for backhaul of telecom signals free of snooping devices, or kit that interferes with the jamming of rogue drones? The answer depends on the limits of our testing ability, once again.

There are economists who argue that it is better for India to invite the Chinese to locate their production here and generate local value, substituting a portion, at least, of what we import from China. Our bilateral trade deficit with China is embarrassingly large, after all. This is sound, up to a point.

Chinese investment should be regulated by the sectors in which they propose to operate, not by the proportionate size of their holding. If they want to produce pianos in India for export — China is the world’s biggest producer of pianos — by all means. If they want to invest in noodles or chopsticks or office furniture, let them. Paints and additives? Why not? The only consideration is that production should not be concentrated enough in Chinese controlled factories to create critical dependence.

But Chinese investment should be barred in sectors that impinge on national security, even indirectly. Not just the Chinese, for that matter. Mahindra is tying up with Israeli firms for drone technology. Ukraine, under attack from Russia, has innovated all kinds of drone technology beyond anything others have. What prevents Indian companies from developing their own drone capabilities? If India can offer talent that global capability centres use to carry out cutting-edge R&D for their own projects, why can’t Indian companies find the talent to develop their own proprietary technology?

Nothing more than an unworthy diffidence, a long habit of feeding only off the lowest-hanging branches, of avoiding the risk of losing some money on research that does not succeed in its original goal — that is the only answer.

Minority stakes are no guarantee against corporate control, especially in technology-intensive sectors, where the provider of the technology calls the shots.

Let us carefully and critically identify the sectors where it is crucial to have indigenous capability, and foreign control of technology or production process can dilute national autonomy. Throw all other sectors open to Chinese and other investment up to whatever level.

Decide permissible foreign investment by sectors, not by the level of investment.