By Jayant Rao

Edited by  Namrata Caleb,Senior editor,The Indian Economist

With the arrival of the Chinese President, India displays a mixed reaction. Some of them are happy with the bounty of Chinese investments being diverted towards India while others are wary of the fierce competition that the Chinese companies would bring in. For Narendra Modi, it is a welcome move. He went a step further to coin a new word “INCH” (India China) signifying the importance of Indo-Sino collaboration which would bring Ache Din for 35% of the world populace.
Even after our Prime Minister indirectly expressing disapproval on their land expansionist policy in Japan, why is the dragon showing so much love towards India instead of spewing fire? This question must be on every Indian’s mind. Well, they have already done so in the Chumar region, surprisingly when the Summit level talks were on with China. But they have still come forward and pledged to invest $ 20 Bn in India. China is of the view that differences in some areas should not restrict our association in areas on which we agree. But the question still remains- why would China want to invest its money in India? As they say, “There are no free Lunches in this world”, China is not here only to give but to take something from it as well. Maybe Return on Investment?
China, the world’s largest forex reserve holder/hoarder has approximately $ 3.9 Trillion (mostly US $) sitting idle in their coffers. Any money sitting idle would fetch nothing. Let’s see what options they have to put this idle money to work, chronologically in terms of lower to higher risk. They can keep the money locked in coffers like Uncle Scrooge which would fetch them nothing or lend it to U S government and earn almost nothing or maybe go out and acquire some foreign assets like Oil reserves which would help them in addressing future energy needs and the most important option Lend/Invest in countries from which they see potential gains.
As the investment mantra goes, “Do not put all your eggs in the same basket”, the Chinese have to think of diversifying their foreign investments to reduce the risk. Like a smart investor their Outbound Investments are diversified, most of it sitting in the coffers- the safest thing to do but with no returns. Majority of the investments in Energy Sector – to secure their future energy needs, some of it invested in U S government securities –helping them in getting more business from USA and finally some of it invested in natural resources rich African countries. They still have abundant money, at their disposal, to invest. They are looking out for more options to employ this idle reserve.
Everyone would agree that India is a promising destination to invest in. Currently their investments in India are peanuts. Coming to Bilateral trade with India it has reached $ 68 Bn, entirely skewed towards China’s favor.  Ideally a bilateral trade should have parity in terms of trade balances. Indo-Sino trade dynamics are nowhere near that, the Trade Imbalance with China has been on the rise and India is certainly not happy with this. They have already started imposing anti-dumping duty which is affecting Chinese exports. To pacify the Indian side, investing in India would be an indirect way of ploughing back the money from where they earned. Anyway, the Chinese have a lot of disposable money with them and they have to invest it in some avenue. Why not India then, this will help them diversify their outbound investments, would make the Indians happy, would get them more business from India, would earn them return on investments.
How is India to benefit from this? There are a lot of Supply-side bottlenecks that need to be addressed in India, to tame inflation, which is long term in nature. Also India wants a huge sum to be invested in infrastructure. It is the infrastructure that makes or breaks the economy. It is considered to be the backbone of the economy. India finds it difficult to find ready investors, be it foreign or domestic, due to high gestation period. China is a good bet in that case for India. Getting $ 20 Bn of investments over a period of 5 years, signing multiple MoU’s in the interest of both the countries and getting more access to Chinese Markets are after all good bets which would help India grow.
To some extent it can be attributed to Mr. Modi having good relations with the Chinese when he was the Chief Minister of Gujarat. All said and done, India should not forget that the Chinese have intruded into our territory in Arunachal Pradesh, Ladhak and various other places. India should send a stern message that India can be best of friends with her well-wishers but can be the worst enemy of those countries who try to encroach on her territory.

Posted by The Indian Economist | For the Curious Mind