On June 29, the Indian government banned 59 Chinese-owned mobile apps. The list included many but the most prominent ones were TikTok and WeChat, both hugely popular among Indian users. India has the world’s second largest number of mobile phone users. The number of mobile phones in use in India is estimated to be 1.38 billion, with more than 104 connections for every 100 citizens. Even if a third of those are on smart phones, it is a staggeringly huge number that accesses internet on their mobile apps, a market that most global app makers worldwide cannot afford to miss.
The ban on Chinese apps came shortly after a border clash between troops from the two countries left 20 Indian soldiers dead earlier in June. The Indian government blocked the apps ostensibly because of cybersecurity risks and the possibility that some of the apps could be used to compromise India’s defence systems. But the ban may have also been a way of sending a message to China. Ever since the most recent border clash between the two countries occurred—at a time when India is struggling with a massive internal problem of containing the rapidly spreading pandemic of Coronavirus within the country—there has been a clamour for boycotting all Chinese products and services in India.
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TikTok and a host of other apps that have been blocked or banned in India will no doubt affect users as well as the makers and suppliers of those apps but China’s less visible but ubiquitous presence in India’s tech and internet landscape goes way beyond Chinese apps that have been popular in that market. Chinese venture capital is probably the biggest component of funding that India’s start-ups, most of them internet based and online. In many ways, Chinese funding is the lifeline for India’s bustling and vibrant start-up industry.
Chinese venture capitalists and private equity investors have invested huge amounts in India’s tech start-ups. And one could argue that without their funding, India’s start-up sector could lose much of its buoyancy. US investors who earlier dominated India’s start-up funding have been eclipsed by Chinese funders. According to GlobalData, an analytics firm, Chinese investments in Indian start-ups increased 12 times since 2016 to $4.6 billion. Eleven of the 30 Indian unicorns (start-up firms with a valuation of $1 billion or higher), at least 15 are funded by Chinese venture capitalists, with two of the biggest funders being China’s Tencent and Alibaba.
Some Indian start-ups that have become household names in India have raised huge amounts from Chinese firms. Paytm, the mobile payment system that has become ubiquitous in India, particularly after the government resorted to demonetisation of large currency notes, has raised $3.5 billion; Flipkart, India’s challenge to e-tailing giant Amazon has raised $7.7 billion; food delivery major Swiggy got $1.6 billion; and Uber’s Indian rival Ola $3.8 billion. All of their funding coming almost exclusively from Chinese venture capitalists. Between 2016 and 2018, Chinese funds for Indian start-ups grew an eye-popping five-fold.
Much of this has happened because of the potential that Chinese investors see in India. India’s population of 1.3 billion is expected to cross China’s 1.4 billion. Middle-income earners in India who comprise the biggest chunk of consumers are estimated at more than 30% of the total population. Moreover, there have been changes in the global dynamics of manufacturing and supply of products. Tech giants from across the world have been steadily shifting their manufacturing bases to emerging markets and India is a prime destination for them. This trend has a multiplier effect, spawning new start-up ancillaries and other firms in India, all of which need funding, which has translated into opportunities for Chinese venture capitalists and private equity investors.
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Some Chinese investors appraise the Indian market as China was some years ago when the mobile access to internet began taking off. There are other similarities with China—the size of the market and the willingness of Indian consumers to quickly adopt new apps for convenience or recreation when they are launched. Chinese investors not only have a deeper understanding of the Indian market (because it is not unlike China’s) but they are also funds-rich.
The recent ban on Chinese apps is likely, of course, to have an impact. Both on users as well as app makers who are set to lose what is probably their biggest market with the promise of a huge potential. But what could happen if India follows it up with a decision to curb or restrict Chinese investment in Indian companies? In April this year, the Indian government amended its foreign direct investment (FDI) policy by stipulating that any country that shares a border with India cannot any longer take recourse to the automatic route for FDI but has to take government permission before investing in Indian firms. Besides China, India shares borders with Pakistan, Afghanistan, Nepal, Myanmar, and Bhutan, but those latter countries account for negligible amounts of investment in India.
The new policy, therefore, is presumably aimed at a closer scrutiny of China’s investments in India. This could hit India’s start-up industry hard. Some start-ups, such as the popular food delivery major, Zomato, are already witnessing a slowdown in investments that were slated to come from Chinese funds. It is early days still because the policy has just been implemented but by all reckoning, it will have an adverse effect on Indian firms whose business models pin their hopes on easy funding from Chinese investors.
What exacerbates the situation is India’s large trade deficit with China—in 2019 it was $57 billion. India imports a vast range of products from China. Much of it is capital goods such as telecom equipment, power plants, railway coaches, value-added iron and steel items; electronic and household durables such as air conditioners, washing machines, refrigerators and so on; as well as mobile phone components, chemicals, auto components, and pharmaceuticals.
If the tensions at the Sino-Indian border spills over to the economic front, there could be a bigger impact on the Indian economy. Banning apps is just the tip of the looming iceberg below. If Indian firms’ funding is affected, India’s burgeoning start-up industry would suffer. If India resorts to trade restrictions in the form of import sanctions, it is conceivable that the economy could be hit hard. In both countries’ interests it is, therefore, prudent to dial down the tensions at the borders they share and foster greater economic ties instead.