Can Indian Startups Afford to Turn their Backs on China?

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The Indo-China relationship has been excessively strained these past few months, owing to a change in India’s FDI policy and the border dispute that recently escalated despite a de-escalation truce. While the latter left a bigger impression in the minds of people, the former comes with tremendous economic implications that could change India’s start-up landscape for the worse.

India’s FDI policy previously allowed all its neighboring countries and their citizens to invest in Indian companies automatically, i.e., without government approval. However, in April this year, this provision was altered, mandating all investments from neighboring countries to obtain government approval first.

The alleged reason behind this change is to prevent “hostile takeovers” of Indian companies by investors, who might want to use the economic repercussions of the ongoing pandemic to their benefit. Essentially, the change mitigates possible coups by foreign investors of Indian companies.

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While the rule applies to every country in the bordering vicinity of India, there is a tacit agreement among experts that it is primarily a tool to monitor and control Chinese investments. The above-mentioned fears aren’t completely unfounded, but the change in procedure holds massive consequences for the Indian start-up ecosystem, says a report by analytics firm GlobalData.

Chinese Investments in Indian Start-ups

According to official figures, China invests about $2.34 billion in the Indian economy. Out of this, investment in infrastructure and technology seems to be the highest. However, an alternate estimate, and one which experts seem to agree with more, chalks the value of Chinese FDIs in India to be well in the $8 billion range.

This enormous discrepancy is due to incomplete records and rerouted investments through countries like Singapore. Interestingly, Singapore is the biggest foreign investor in India.

Keeping numbers aside, China’s recent emergence as a significant investor in India is hard to dispute. Out of the 30 startup unicorns of the country, 18 have Chinese stakeholders. These include companies like Paytm, Zomato, Ola, and Oyo. In technological startups specifically, China invests approximately $4 billion, half of its total investment estimate.

Most investments come from the well-known conglomerates Alibaba and Tencent.

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These figures make it evident that with the new FDI rules, Indian start-ups have been put in a tough spot. With recent global economic adversity, start-ups were relying on FDI to make ends meet and move forward to emerge out of the current crisis.

Following the change, many companies withdrew and cancelled contracts with Chinese investors. Additionally, many new investments have now been delayed as the government reviews them for approval.

“To mitigate this direct impact on the startup ecosystem, startups will have to scout for other avenues for big-ticket investments while seeking support from investors from newer geographies. Companies which fall under the portfolio of Chinese investors will also have to look for new alternatives as their transactions will get delayed due to these macro events,” Burgeon Law founder Roma Priya told Business Insider.

The Shorter End of the Stick Lies with India

While this decision will affect both economies, India is likely to suffer more.

China will incur a loss of 3% in exports and 1% in imports if trade between the two countries becomes more controlled. On the other hand, India will lose 14% in imports and 5% in exports.

Clearly stakes for India here is much higher than China as the dependency of India on Chinese money is quite evident. Startups in India have always enjoyed a better valuation and relaxed terms from Chinese investors as compared to the ones from other countries, especially US or South African.

As the relationship between the two countries have constantly straining for the last couple of months, Indian startups would find it difficult to continue with some of their strategies, deep discounting specially, that have been very effective so far to attract new customers and capture the market.

Writing is on the wall; Indian startups already have started revisiting strategies to stay afloat for an extended duration with the money already in their account. Considering the tough business scenario in the US as well, it won’t be seen as an alternate source of investments.

As the campaigns like #BoyCottChina are already making things moved, Indian startups would definitely face the heat. It may be a bit too early to be conclusive but given the recent developments, it’s going to be a bumpy ride ahead for Indian startups.

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