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Conflict unlikely over Doklam plateau, but Chinese venture capital in India likely to face closer regulatory scrutiny

7 Aug 17

The Sino–Indian standoff on the Doklam plateau has spawned a more assertive Indian foreign policy that threatens growing Chinese investments in India.



IHS Markit perspective

Outlook and implications

  • China and India will be eager to negotiate a withdrawal of troops from the Doklam plateau before the 9th BRICS Summit in early September.
  • Firms with significant Chinese participation (whether investment or control) acquiring more than a 49% stake in a company in one of India's "prescribed sectors" should expect delays, or even refusal, of regulatory approval until the standoff is resolved.
  • India's newly assertive use of economic leverage, although limited by Indian reliance on Chinese intermediate goods, is likely to persist and increases regulatory risks to new foreign investments – although not to existing contracts or their enforcement.

Risks

Regulatory burden; Interstate war

Sectors or assets

Chinese investments in Indian businesses

Doklam standoff

On 7 August, The Times of India reported that Indian security sources were "reasonably sure China will not risk a war, or even a small-scale military operation" over the standoff on the Doklam plateau, a region that is disputed between Bhutan – supported by India – and China. China's defence ministry has consistently demanded that Indian troops withdraw from the plateau since late June (Donglang in Chinese; Droklam in Dzongkha, the language of Bhutan). Other Indian army sources cited by national media suggest that about 350 Indian personnel remain, mostly in Doka La in the west of the plateau. On 4 August, the state-run China Central Television broadcast footage that it claimed showed live-fire drills by the Chinese military in an unidentified part of Tibet (but did not explicitly link these to the standoff in Doklam). This followed a 15-page statement of Chinese demands on 2 August that included a map showing Doklam as part of Tibet.

Indian troops have been deployed to the plateau – which India does not claim – since mid-June. The area is disputed between China and Bhutan, and awaits peaceful resolution according to a 1998 agreement between the two countries. Bhutan called on Indian assistance under their 2007 Friendship Treaty in late June, after Chinese workers began extending a road south from Yadong, Tibet, to Doka La on the disputed plateau. In addition to its strong ties with Bhutan, the Indian military has repeatedly highlighted the strategic threat the road would represent to the Siliguri Corridor – a "chicken's neck" of Indian territory that is little more than 20 miles across at its narrowest, which connects India's northeastern states to its mainland.

Military conflict unlikely

National media report that Indian troops have fortified their positions in neighbouring Sikkim state, and additional Bhutanese troops have been deployed to Doklam; these units would initially hold the advantage of higher ground over a Chinese offensive on Doka La through the Chumbi Valley. The Chinese military, however, would be able to quickly mobilise reinforcements using well-maintained highroads through Tibet (the S204); China could also opt to create another contact point. Unconfirmed reports by Asian News International claim that on 25 July up to 12 Chinese soldiers sallied 800 metres into Indian territory in Barahoti, in the district of Chamoli, Uttarakhand, about 700 kilometres to the west of Doklam.

Neither side, however, will desire even a limited conflict. For Chinese president Xi Jinping, a conflict would undermine his narrative of China's peaceful economic leadership of the region shortly before a Party Congress in the autumn. For Indian prime minister Narendra Modi, engaging a superior military risks an embarrassing defeat that would undermine the strong nationalist persona he has cultivated. Any engagement would likely involve small-arms fire at most, a build-up of troops on either side, and subsequently a negotiated, simultaneous withdrawal from the plateau. (This could easily be presented as a victory in India: India would have protected the Siliguri Corridor and proven its commitment to Bhutan.) China and India will be keen to find a resolution to the standoff before the BRICS (Brazil, Russia, India, China, and South Africa) Summit in Xiamen on 3 September.

Indian economic response

Away from Doklam, however, the Indian government is responding more assertively than in the past. National and international media reported in early August that India is considering blocking the USD1.1-billion purchase of Gland Pharma, based in Hyderabad, by Shanghai Fosun Pharma. Indian policymakers have long raised objections to foreign acquisitions of large, export-orientated Indian pharmaceutical companies because of the potential inflation in the price of cheap medicines in India. The Gland Pharma acquisition has received a series of approvals from relevant ministries, but has been pending approval by the Cabinet Committee on Economic Affairs – chaired by Prime Minister Modi – for more than four months.

The indicated blocking of the deal is likely in response to the Doklam standoff. This coincides with Indian anti-dumping probes finding "material injury" to domestic producers from imports of Chinese castings for wind turbines, and some radial tyres. (Taiwanese and Malaysian photovoltaic cells were also cited in in the probes.) The trade imbalance between India and China is heavily skewed towards China – providing India a degree of economic leverage. India's trade deficit with China reached USD46.6 billion in 2016, compared with total trade of USD70.8 billion.

Outlook and implications

Investment involving significant Chinese participation, whether in capital or control, is likely to face delays, or even refusal of regulatory approval until a negotiated withdrawal of all troops from the Doklam plateau. Firms with Chinese-linked participation acquiring more than a 49% stake in a company in one of India's "prescribed sectors", notably including retail trade and financial institutions, will be especially vulnerable. Such investment is now authorised by the ministry of finance's Department for Economic Affairs, which reports directly to finance minister Arun Jaitely, a close ally of Modi (see Foreign investment in 2 February 2017: India: Budget 2017: India unveils fiscal stimulus to mitigate impact of demonetisation, streamlines foreign investment approvals).

However, India's leverage is limited. Anecdotal reporting in national business papers suggests that Chinese investment in India is gradually shifting from large, lumpy strategic investments to smaller venture capital investments focused on yield, as the Chinese government has tightened controls on domestic investment; such investments can be quickly liquidated. In addition, India's trade deficit with China is largely due to the former's import of intermediate goods to supply its rapidly growing telecoms and power sectors. World Bank data show that intermediate goods accounted for over a third of India's imports from China in 2015; all capital goods combined accounted for almost half. Without such imports, these sectors' growth – and Modi's "Make in India" campaign – will slow.

Nonetheless, India's Bharatiya Janata Party (BJP)-led government – which has consolidated more decision-making power in the executive than any recent Indian government – is likely to continue using access to the Indian market as a negotiating tool during military confrontations with China. This new assertiveness increases regulatory risks to new investment, but is unlikely to affect existing investment contracts or their enforcement.

 
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