India’s Outward Foreign Direct Investment in the context of China’s Belt and Road Initiative

Introduction¹

India’s development strategy in recent years has been “India for India” and “Make in India.” A form of self-reliance, or “strategic autonomy,” India’s policy approach is a reaction to insufficient progress with prior policies that opened India’s economy to global investment.² Today’s measured approach to foreign investment is not indicative of India’s insularity but of a deliberate and judicious decision-making process regarding foreign investments.

This policy of prudential engagement has also led India to step back from China’s outward investment under the Belt and Road Initiative (BRI) platform. India cannot – and does not want – to respond to BRI with the scale of investment that China has committed. However, there is a new emphasis on outward foreign investment from India. The Indian government has encouraged international investments by reducing the restrictions on Indian companies investing abroad and substantially raising the annual overseas investment ceiling to establish joint ventures and wholly owned subsidiaries. There has been an evolution in the upper limit for overseas investments with fewer restrictions on approvals over time. Since 2003, Indian firms have been granted permission to invest 100% of their net worth overseas in foreign joint ventures or wholly owned subsidiaries.³  In 2010, the ceiling was increased to 400% of net worth.⁴

This article aims to explore India’s outward foreign direct investment (OFDI), focusing on China’s BRI initiatives in India’s neighbors, which include Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan. We analyze similarities and differences between India and China in terms of the timing, scale, scope, and number of OFDI projects and financial commitments, using monthly investment data for Indian and Chinese projects in India’s neighbors during the period 2011-2022.⁵ The two data sets we use report overseas investments by entities in India and in China by project and by host country, reporting the total amount of the investment. We argue that China is moving aggressively to influence countries in India’s neighborhood using large-scale investment projects under the BRI initiative as an investment platform, while India has not responded in a major way to this challenge.

China’s BRI Investments

Before the year 2000, China severely restricted its companies from investing abroad. The “Go Out Policy,” later called the “China Goes Global” strategy, was decided on in 1999 and formalized in 2000. Initially, only state-owned companies were approved for OFDI, but later, large private companies were allowed to invest abroad, followed by others who qualified. This loosening of the regulations was reversed in 2017, with certain types of investments, such as entertainment, hotels, and real estate, being restricted to focus OFDI on technology, infrastructure, and resources and to manage the overall outflow of capital.⁶ Chinese OFDI increased steadily, initially in emerging markets and subsequently in developed economies, including the U.S. and EU. According to the Ministry of Commerce, as reported by the Rhodium Group, China’s annual outward investment peaked in 2016 at $181 billion, including $158 billion in mergers and acquisitions. Mergers and acquisitions began to drop substantially after 2018. Still, in 2022, the Ministry reported $117 billion dollars of investments, including $24 billion of mergers and acquisitions.⁷

In 2013, President Xi Jinping launched One Belt One Road, later renamed in English as the Belt and Road Initiative, as a channel for much of China’s OFDI. According to a joint working paper by the Green Finance & Development Center and the Griffith Asia Institute, 148 countries have officially joined the BRI platform.⁸ A 10-year celebration of the BRI was held in Beijing in October 2023. Representatives from many participating countries attended. Xinhua, China’s news agency, reported:

Statistics show that the BRI has helped lift about 40 million people out of poverty in participating countries. It has also galvanized up to 1 trillion U.S. dollars of investment globally and created more than 3,000 projects and 420,000 jobs over the past decade.⁹

After many years of large-scale infrastructure and energy projects, the future focus of BRI is changing toward more green projects, with smaller and private sector-led investments. Beijing is also approaching other countries, such as Saudi Arabia,
to help finance the next stages. The number of projects and amounts invested have fallen substantially since 2016. This decrease in Chinese OFDI is partly due to a growing sovereign debt burden in the BRI countries.¹⁰

The Regional Context

India is surrounded by countries that have formally signed memorandums of understanding related to BRI, including Pakistan, Afghanistan, Bangladesh, Myanmar, Nepal, and Sri Lanka. (See Table 1.) Pakistan is one of the largest recipients of investment from China, which began many years before the official launch of BRI in 2013. Bhutan is the only neighbor that has not joined the BRI. However, even Bhutan, which does not have diplomatic relations with the PRC, recently began talks with China to resolve their border dispute, adding to India’s concerns.¹¹

Table 1. Timing of India’s Neighbors joining BRI¹²

India’s Neighbors	Year joined BRI
Pakistan	December 2013
Myanmar	August 2016
Bangladesh	October 2016
Sri Lanka	April 2017
Nepal	May 2017
Afghanistan	May 2023
Bhutan	Has not joined

Numerous corridors also connect the BRI countries with China and China to distant lands, including Europe. Table 2 lists the four corridors that concern India the most. The China-Pakistan Economic Corridor is one of the most established and has been a concern to India for many years. It provides easy trade access to China, bypassing the Strait of Malacca, and provides Pakistan with significant military benefits.

Table 2. Four BRI Corridors in India’s Neighborhood¹³

Four BRI Corridors of Concern to India

BCIM Economic Corridor: Bangladesh-China-India-Myanmar (1999)

MSR: China Twenty-First Century Maritime Silk Road (2013)

CPEC: China-Pakistan Economic Corridor (2015)

Trans-Himalayan Economic Corridor (2017)

At the start of China’s “Going Out Policy” in 2013, Manmohan Singh was Prime Minister of India (2004-2014). Initially India saw economic integration with China as a way to promote development by moving the long-time bilateral border dispute to the background. The Singh government welcomed the promotion of regional connectivity. When the Modi government came to power in 2014 the approach to BRI changed. The response was to reject BRI and instead to invest in India’s own connectivity projects, and to revive others.

For example, Project Mausam was begun in 2014 to promote connection between countries in the Indian Ocean via communications, culture and trade. The “Cotton Route,” initiated in 2015, aimed to connect India with Russia in one direction, and with SE Asia and East Africa, in the other direction. The “Spice Route” initiative is led by the State of Kerela to connect with countries that were involved in the ancient spice trade. Another major project was the revitalization of the Chabahar Port in Iran. India built the port in the early 2000s, committed to renovate it in 2015, and began the work in 2017.¹⁴ These were seen as part of a renewal of India’s long-standing “Look East” policy, now referred to as “Act East Policy,” which was directed toward strengthening India’s relationships with countries in South and Southeast Asia.¹⁵

This approach of promoting India’s connections with its neighbors was strengthened after President Xi visited Pakistan in May 2015 to announce the development of the China-Pakistan Economic Corridor, which would connect Kashgar in Xinjiang, China, to the port of Gwadar in Pakistan. India strongly opposed the project, mainly because it would go through Pakistan-occupied Kashmir. The proposed corridor between China and Pakistan triggered a significant change in India’s perception of the security relations in the region. The border clash with China in 2020 was another major setback in relations between India and ChinaTable 3 and calculations using the two databases..

The timing of these connectivity projects is consistent with an interpretation of India countering China’s BRI initiatives in the region. India’s official statements regarding BRI suggest that its objections to the BRI arise from a lack of consultation regarding the strategy and process of project selection and formulation and concerns over the debt burdens of BRI participant countries arising from Chinese investments. Although Beijing welcomed India’s participation in BRI, which could have been signaled by India’s participation in the 2017 BRI Forum, India decided not to attend.

While large Chinese investments tied to the Belt and Road Initiative may improve infrastructure development and increase opportunities in the Asia-Pacific region, India has been increasingly guarded about China’s outward foreign investment motives. The scale and number of Chinese investments in India’s continental and maritime neighborhood are of particular concern. India’s cautiousness stems from a worry that China’s expansive OFDI may increase China’s political influence in the region.

In the next section, we examine Chinese and Indian investments in India’s neighboring nations to understand if India’s investments are a reaction to China’s BRI investments. As noted previously, we focus on the following neighboring countries: Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan. While India has no investments in Pakistan according to our database, China’s investments in Pakistan are important in understanding China’s political, military and economic motives.

Regional Outward FDI

At the regional level, as seen in Table 3, China has made a small number of very large investments in India’s neighbors. From 2011 to 2018, China steadily increased the number of investments from 14 to 26 in these nations. The value of these investments totaled $6.3 billion in 2011 and climbed to $27 billion by 2015, and then dropped to $14.65 billion by 2018.There was a significant drop in Chinese investments to $7.3 billion from 2019 to 2020, coinciding with the pandemic. Post-COVID, China’s investments in these nations declined steeply, both in the number and value of investments, with only 12 investments valued at $2.3 billion in 2022. The 2022 level was even lower than the pre-BRI level of Chinese investments in these countries.

An examination of China’s investments in India’s neighboring nations shows that over 53% of China’s OFDI went to Pakistan, 27% to Bangladesh, and 10% to Sri Lanka, with the remaining 6% going to Myanmar, 3% to Nepal, and less than 1% to Afghanistan. The largest Chinese investment, both by number and value, was in Pakistan (87 investments worth $57.7 billion), with about half that value in Bangladesh (64 investments at $29.2 billion), followed by Sri Lanka (31 investments at $10.98 billion). China’s 19 investments in Myanmar were at $6.23 billion, 18 in Nepal at $3.51 billion, and two in Afghanistan at $0.61 billion.¹⁶

As Table 3 indicates, over the period 2011-2022, India made hundreds of small investments in its neighboring nations while never remotely approaching the amounts that China invested in. A large drop in India’s OFDI in 2014 coincided with China’s anticipated introduction of the overall BRI policy and the Modi government’s election in India that year.

India’s pattern of OFDI, measured as the percent of the total value of investment, primarily focused on Sri Lanka (52%), Myanmar (21%), and Bangladesh (21%), followed by a little over 6% in Nepal and less than 0.2% in Afghanistan. The number of India’s investments was highest in Sri Lanka (1197), followed closely by Bangladesh (1094) and about half the number in Myanmar (575), and fewer in Nepal (328) and Afghanistan (14). India’s focus on Sri Lanka contrasts with China’s relatively small investments.

Table 3: Total Number and Value of Investments by year in neighboring countries

	India				China
Year	Total Financial Commitment		Total No. of Investments		Total Financial Commitment		Total No. of Investments
	in $*	Percent change	#	Percent change	in $*	Percent change	#	Percent change
2011	0.16		118		6.29		14
2012	0.19	18.80%	265	124.60%	2.5	-60.30%	11	-21.40%
2013	0.19	0.00%	287	8.30%	4.69	87.60%	20	81.80%
2014	0.08	-57.90%	214	-25.40%	6.68	42.40%	21	5.00%
2015	0.13	62.50%	198	-7.50%	27.11	305.80%	23	9.50%
2016	0.08	-38.50%	212	7.10%	14.7	-45.80%	25	8.70%
2017	0.23	187.50%	371	75.00%	8.35	-43.20%	24	-4.00%
2018	0.38	65.20%	364	-1.90%	14.65	75.40%	26	8.30%
2019	0.56	47.40%	395	8.50%	9.92	-32.30%	18	-30.80%
2020	0.22	-60.70%	258	-34.70%	7.28	-26.60%	13	-27.80%
2021	0.48	118.20%	248	-3.90%	3.73	-48.80%	14	7.70%
2022	0.35	-27.10%	278	12.10%	2.32	-37.80%	12	-14.30%

*In USD Billions

Note: Neighboring countries include Bangladesh, Sri Lanka, Myanmar, Nepal, Afghanistan, and Pakistan

While some India government policies have directly encouraged Indian OFDI, other events within India during this period may also have spurred Indian OFDI, which is mostly private capital seeking profits. For example, the demonetization in 2016 and the introduction of the Goods and Services Tax in 2017 may have made Indian exports more expensive, incentivizing domestic firms to look for alternate investment options. Given India’s increasing technology prowess and the fact that OFDI technology spillovers are significantly positive in India, this further incentivizes firms to look outside India for investment options to complement exports.¹⁷ The rapid decline in the economic growth rate in India from a little over 8% in 2016 to approximately 4% in 2019 may also be a reason for Indian firms to seek investment options abroad to diversify their portfolios. Around the 2014 through 2019 period, the Indian financial sector faced one of its worst crises due to many non-performing assets in the banks, which hamstrung lending.¹⁸ Moody’s downgrading of India’s economic outlook from “stable” to “negative” in 2019 may have also incentivized Indian firms to invest outside India to hedge their bets and move their production abroad, increasing OFDI.¹⁹

Conclusion

Indian and Chinese entities have increased investment in South Asia. OFDI incentives differ between the two countries: private firms lead the way in India, while in China, it is the government. The BRI is the most apparent, explicit tool that China is using to increase its influence in the region, but even more importantly, to build infrastructure to be able to acquire resources from afar.

India’s policymakers and leaders are aware of China’s growing presence and are considering ways to respond. While the Indian government has initiated several projects, such as the Spice and Cotton Routes, Project Mausam and the revitalization of Chabahar Port in Iran, they are significantly smaller than China’s investments in terms of the number of OFDI projects, their scale and scope. India has indicated an interest in improving regional interconnectivity, which is similar to the goals of many of the BRI projects. However, the lack of transparency and the scale and geopolitical aspects of BRI have made India cautious about joining the BRI.

India has long maintained economic, political and military alliances, particularly with Bangladesh, Sri Lanka, and Myanmar. Given this, China’s value, type, and sectoral investments in these three nations may particularly draw interest from India about China’s OFDI motives. Given that these three nations are among the BRI nations, India’s investments in them may also be strategic from geopolitical and economic points of view.²⁰

However, our analysis indicates that while China is likely using BRI as a strategy to increase its presence and influence in India’s neighboring countries, the Indian government has yet to respond in a significant way to China’s moves. We also do not see any patterns of increased Indian OFDI in response to its neighbors joining BRI.²¹

Indian companies have invested in the region, primarily in Sri Lanka, Bangladesh, and Myanmar. However, our data show no priority for OFDI in neighboring countries or specifically in response to BRI. We do not find any OFDI response to BRI measured by timing or investment size.

Most Indian OFDI is driven by private sector companies that make investment decisions that align with their profit strategies. They have initiated many small projects and often favor Western, developed countries. In contrast, Chinese OFDI includes considerable investments by state-owned enterprises and potential governmental influence over the location and scale of OFDI. Chinese projects tend to be very large, funded by loans offered to the host countries by state-owned financial institutions, and led by state-owned companies. Finally, while not large in scale as measured by financing, India’s small, numerous, privately funded projects in this region may prove more sustainable with long-term positive impacts than China’s large-scale investment schemes.