Is India decoupling from Beijing ?

 

Is India’s latest crackdown on Chinese firms part of plan to decouple from Beijing?

• India is now urging law enforcement agencies to employ a coordinated effort in investigating the finances of Chinese companies
• Relations between India and China soured soon after a deadly clash between the countries at a disputed Himalayan border area

India’s arrest of a man, described as the “mastermind” behind shell companies linked to China, is the most recent sign of New Delhi’s increased pressure campaign on mainland companies in recent months.

The Ministry of Corporate Affairs said on Sunday that the suspect had appointed dummy directors onto the boards of these fraudulent businesses, which were potentially involved in “financial crimes detrimental to the financial security of the country”.

His arrest came after several raids were conducted, including at the Gurgaon offices of Jilian Consultants India Private Ltd, a wholly owned subsidiary of Jilian Hong Kong Ltd.

According to Alex Capri, a research fellow at the Hinrich Foundation, this amplified crackdown is part of India’s strategic decoupling from China, which is becoming increasingly important as Delhi builds its own domestic manufacturing base and asserts itself as a global alternative to China for foreign investments.

“Moving away from an opaque system, where there is room for these shell companies to operate and a lack of enforcement against corruption, and instead being able to say that we are enforcing the rules properly and we have transparent standards is essential for the long-term investment climate India is seeking,” he added.

In August, India began urging law enforcement agencies to employ a coordinated effort in investigating the finances of Chinese companies, prompting allegations of tax evasion and money laundering.

For example, Chinese telecommunications giants, such as Xiaomi and Vivo, which make up a large share of India’s smartphone market, have come under fire over suspected financial irregularities.

 In May, India’s financial crime watchdog said it seized US$725 million from Xiaomi, accusing the Beijing-based firm of illegal remittances. The company was later asked by India’s finance ministry to pay US$87.8 million in import taxes that it allegedly owed.

Indian authorities also conducted a raid on dozens of Vivo offices in July, seizing 119 bank accounts linked to Vivo India, containing a combined US$58.7 million. The move followed similar investigations of Xiaomi and Chinese telecoms giant Huawei Technologies Co.

Earlier this month, the Directorate of Enforcement raided the offices of several payment services under the country’s anti-money-laundering act. The agency said in a statement that Chinese-affiliated apps were involved in “extortion and harassment” of locals who had taken out small loans.

China’s smartphone monopoly in India

India tightened its grip on Chinese companies in the summer of 2020 after more than a dozen Indian soldiers died following a clash between the countries on a disputed Himalayan border. Relations between the nuclear-armed neighbours soured soon after the incident.

Major Chinese apps were blacklisted in India, with the ministry of information technology saying in a statement the decision was “a targeted move to ensure safety and sovereignty of Indian cyberspace”.

Chinese smartphone makers, however, have continued to dominate the marketplace, despite the renewed crackdown.

According to a July report by Canalys, four out of every five smartphones bought in India during the second quarter of 2022 came from China, led by Xiaomi’s 7 million units.

Beyond increased scrutiny of their finances, India has been employing new tactics to dislodge Chinese companies from the market. In August, Bloomberg reported that India was seeking to restrict Chinese smartphone makers from selling devices cheaper than US$250.

India’s minister of state for information technology Rajeev Chandrasekhar, however, denied the proposal existed, saying the government instead asked Chinese companies to be more transparent with their supply chains and increase their exports from India.

“It is not about exclusion of foreign suppliers or foreign brands but we believe that it is our policy and the government of India’s obligatory duty to build Indian brands,” the minister said, and added it is the government’s duty to intervene on behalf of “Indian brands due to unfair trade practices”.

 

According to Capri of the Hinrich foundation, one of India’s overarching geopolitical objectives is to wean itself off of Chinese smartphone technology, and focus on domestic production.

“Smartphones are an anchor technology when it comes to the digital ecosystem,” he said. “If you are dependent on a foreign supplier for your phones, you’re granting them leverage to seed that market, not just for the phones, but for digital apps, for the wireless infrastructure, and so on.”

Growing security concerns

In August, online newspaper The Print reported Indian government officials became more concerned with security and data privacy, fearing information from Indian users is being saved onto cloud servers that are accessible by parent companies in China.

“The allegations of data saved in cloud servers pose serious threats to India’s national security given the background of border skirmishes and the underlying economic competition between the two nations,” said Soumya Bhowmick, associate fellow at New Delhi-based think tank Observer Research Foundation.

Capri similarly described the companies as “de facto Chinese proxies” when it comes to data privacy as they are expected to operate under mainland security laws.

“Chinese laws seem to have an extraterritorial character,” added Dr Jabin T Jacob, an associate professor at Shiv Nadar University in New Delhi specialising in China. “In recent years, governments have realised that Chinese companies have to continue operating under those laws no matter where they are, causing issues of data privacy and data security to crop up.”

Easing border tensions

Earlier this month, there was an encouraging omen as Indian and Chinese troops began to pull back from the disputed border area.

Experts say that although the de-escalation might be a positive sign of diplomacy, issues regarding border tensions and India’s clamping down on Chinese firms should not be conflated.

“This crackdown had been coming for a long time, it was inevitable because the nature of the relationship between the party state and Chinese entities has become clearer for a lot of governments, not just India,” said Dr Jacob. “The tensions at the border just provided the government an opportunity to accelerate the crackdown.”

“China and India’s relationships can be best described as a volatile sea with moments of recurring calm and storm,” said Bhowmick of the Observer Research Foundation. “I don’t believe that both countries can afford to take a major step that would hamper their economic partnerships.”

The numbers show that beyond hitches in strategic sectors like telecommunications, India’s economic ties to China remain robust, with bilateral trade even growing in Beijing’s favour in early 2022.