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Moves to attract US technology should be prioritised. Yet the constraints that the US-China tech war can impose on India must not be overlooked.

As tensions continue to dominate Sino-American relations, India holds an increasingly volatile position at the centre of this geopolitical struggle. With Indian and Chinese troops locked in a tense stand-off at multiple locations along their disputed 3,488-km boundary on the Tibetan plateau, Chinese assertiveness has continued to grow with Beijing stamping its dominance over Hong Kong and the South China Sea. Yet India’s strategic challenges are only increasing; the news of a new security and economic deal between China and Iran, similar to the China-Pakistan Economic Corridor (CPEC) arrangement, threatens to complete India’s encirclement by China as both Pakistan and Iran transform into virtual Chinese satellite states. Mounting pressure has therefore been placed on India to break through this strategic encirclement by aligning more closely with the US and allies.

While the US administration has always seen India as a geopolitical counterbalance to China, New Delhi’s alliance with Washington has indeed deepened as simmering tensions between the nuclear-armed neighbours have been inflamed by the coronavirus pandemic. The subsequent rise in anti-Beijing sentiment has pushed India closer to an alliance with the US as a result. Not only has US President Donald Trump extended an invitation to India to participate in the upcoming G7 meeting, the Trump administration and Narendra Modi’s government have also started an annual foreign and defence ministers’ dialogue, upgraded their trilateral relations with Japan and revived a quadrilateral dialogue that includes Australia.

Yet as this broader geopolitical contest between the US and China continues to escalate, technology is becoming a central battleground, with particular rivalry over the Indian market of 1.37 billion people. It was only relatively recently that Chinese interest in Indian technology rapidly increased, with Alibaba and Tencent leading the way and Chinese venture capital investments in India totalling $4.3 billion between the start of 2017 and June this year. However, companies with close ties to China are beginning to bear the brunt of the fallout from political tensions between New Delhi and Beijing. According to the data provider Refinitiv, the number of fundraising deals involving one or more Chinese investors fell from six in January this year to zero in June. In comparison, there were nine venture capital deals involving a US investor in June. Even more recently in July, Google pledged $10 billion dollars of investment in India as part of an ‘India digitisation fund.’

Therefore, as political tensions dominate India’s relations with China, an opportunity for US companies has opened up. Rising anti-Beijing sentiment during the coronavirus pandemic, for example, can be seen to have prompted New Delhi to tighten restrictions on foreign direct investment in April. This attempt to block opportunistic Chinese takeovers can thus be seen to have tilted the playing field towards US investors, as seen by Facebook’s subsequent $5.7 billion investment in Jio Platforms. Moreover, following the June border dispute in which 20 Indian soldiers were killed in a brutal clash with Chinese troops, New Delhi banned TikTok along with 58 other apps, citing national security concerns. This ‘boycott China’ movement can further be seen to have gained traction as protestors took to the streets of India to express their outrage: A group of Zomato food delivery platform employees in Kolkata, for example, tore and burnt their red uniforms to protest Chinese investment in the firm. “Chinese companies are making profits from here and attacking the Army of our country,” stated one of the protestors, exemplifying the extent to which this burst of nationalist anger was directed at the billions of dollars or Chinese investment into India’s tech sector.

Moreover, India’s more recent move to cut Huawei equipment from its telecoms networks strikes a fresh blow to the beleaguered tech giants in one of their most important markets. Although New Delhi has not issued any formal written ban on Chinese equipment suppliers, industry executives and government officials say key ministries have clearly indicated that local telecom service providers should avoid using Chinese equipment in future investments. Huawei, previously one of the three biggest telecoms equipment suppliers in India (the world’s second biggest mobile market, with more than 850 million users), has thus been targeted amid concerns that it could allow Beijing to hack into countries’ power grids and other critical infrastructure.

Therefore, two major superpowers are indeed going head to head in a tech cold war in India. Such hostility is threatening the position that China’s tech groups have rapidly built up with a record flow of money from Chinese investment into Indian startups. As a result, US tech companies and funds are in a far better position to take on their Chinese rivals. Especially in the context of Donald Trump’s hostility towards China and the US President’s strategic embrace of India and Mr. Modi, US tech companies have indeed been given the upper hand. Yet India is not passive in this geopolitical rivalry: in the context of Chinese hostility and over-reach, coupled with the moves that other countries in the region have made, India has outgrown its strategic principles that cautioned against taking sides.

Moves to attract US technology should, therefore, be prioritised as the US-India alliance is strengthened. Although India has fostered a burgeoning start-up and innovation culture, moving up the rankings from 81 to 52 on the global Innovation Index between 2015 and 2019 and recently ranked as having the third-largest startup ecosystem in the world, India needs to further develop government regulations to improve its risk profile and attract significant US investment in technology.

Yet the constraints this US-China tech war would impose on India should not be overlooked. India’s harsh turn in sentiment against China can be seen to have exposed the unpredictable nature of investing in India’s emerging market. By adopting various tactics to assert local control over successful international businesses, the risk of being hit with new regulations remains a powerful deterrent for any foreign investor. Vodafone’s Indian joint venture, for example, have warned it may to ‘shut shop’ after India’s Supreme Court rejected an application from telecoms companies to defer paying billions of dollars in historic levies to the government. The impact of this ‘very harsh order,’ which threatens to bankrupt the country’s second largest carrier, would have significant repercussions for Prime Minister Narendra Modi, who won a second term in office promising to make India a $5 trillion economy by 2025.

Moreover, although the blossoming US-India partnership may lead to strengthened economic ties and technological investments, mistrust of China is arguably insufficient to keep the two democracies aligned. Despite the fact that both countries concur that China poses a geopolitical challenge and that their partnership is a critical part of the required response, the nature and urgency of the China challenge, as well as how to respond to it, remains a highly contentious issue. However, with the Americans buying more and more into the Indian story, a wave of US investors, including private equity groups Silver Lake and KKR, are seemingly prepared to overlook such limitations and follow Facebook and Google in investing in Jio Platforms. Therefore, in the final analysis, India stands to gain significantly from such intense competition as Silicon Valley seizes its golden moment in this febrile climate.

Sophia Lewis (ORF)
11 September 2020

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