India suspects that China could be engaging in unfair trade practices by supplying goods and investments through a third party such as Hong Kong and Singapore, but may not bar legitimate Chinese trade and investments in India while scanning them from the perspective of national interest, people with direct knowledge of the matter said.

Data suggests significant indirect inflow of Chinese goods and investments through locations with which India has free trade agreements (FTAs), preferential trade agreements (PTAs) or other bilateral commercial arrangements. This is not only illegal but also injuring domestic industry, the people said, requesting anonymity.

The development comes a day after the Narendra Modi government announced ban on 59 mostly Chinese mobile applications such s Tik-Tok, UC Browser and WeChat, citing concerns that these are “prejudicial to sovereignty of India, defence of India, security of state and public order.”

Sino-Indian tensions have shot up after a violent brawl between Chinese and Indian soldiers on June 15 along the Line of Actual Control in the Galwan Valley in eastern Ladakh in which 20 Indian army personnel were killed.

Data shows that total foreign direct investment (FDI) from China is minuscule, but many Indian firms have received Chinese investments. Similarly, imports from China have registered a minor decline recently, but at the same time imports from Hong Kong and Singapore have surged. These figures show that something is amiss and needs to be probed, one of the people cited above, who works in an economic ministry, said.

According to the Federation of Indian Export Organisations (FIEO), while India’s trade deficit with China narrowed by $6.05 billion to $51.25 billion in 2019, the gap with Hong Kong widened sharply by $5.8 billion in 2019, nullifying almost all the gains.

Similarly, India trade deficit with Singapore was $5.82 billion in the previous financial year, the person mentioned above said.

“The principal imports from Hong Kong, which have shown a significant increase, are electrical and electronic products where imports jumped from $1.3 billion to $8.6 billion between 2017 and 2019,” FIEO director general and chief executive officer Ajay Sahai said.

The increase in imports is definitely a setback to domestic industry, he said. “If the goods made in China are re-routed through Hong Kong and Singapore, showing such origin of products, customs can always ask importers to provide the proof of adhering to the Rules of Origin,” he said.

He advised the government to be extra cautious in case of imports from Singapore because of the India-Singapore Comprehensive Economic Cooperation Agreement (CECA) as well as India-ASEAN {Association of South-East Asian Nations} Free Trade Agreement (FTA) that increase the possibilities of re-routing of Chinese products to India to derive a preferential tariff advantage.

“Any increase in imports has an adverse bearing on domestic industry and thus on job creation,” Sahai said .

“Many times, a product originally belonging to China enters from Singapore, Vietnam or even Hong Kong and we might lose the revenue which could come as tax. In simple terms, if consumers will get cheaper imports, market share and profit margins of the domestic manufacturer will get hurt,” Trade Promotion Council of India (TPIC) chairman Mohit Singla said.

A second person working in another economic ministry said, “Even the Chinese FDI inflow also appears skewed.”

The latest official data shows foreign direct investment from China between April 2000 and March 2020 was $2.378.71 billion, which is 0.51% of the total FDI inflow into the country in the two decades.

The second person quoted above said, “Apparently the FDI figures do not capture actual Chinese investments in India and possibly some investments could have flowed into the country undetected, routed through a third country. All such suspicious Chinese inflows need to be scanned properly.”

Email queries sent to ministries of finance and commerce did not elicit any response.

Even before the current standoff with China over border issue, India in April clubbed FDI proposals from China with those from other hostile countries such as Pakistan, making prior government approval mandatory for any investment in the country to prevent opportunistic takeovers of Indian firms during the Covid-19 pandemic.

Burgeon Law, which styles itself as new-age boutique law firm that caters to start-ups and emerging companies, said start-ups will have to scout for other avenues of investment from newer geographies.

“With recent events of Indo-Chinese face off and developments of scrutinizing the FDI from nations that share a land border with India, the situation depicts a tightness between the neighbouring countries,” said Roma Priya, founder of the legal firm. “The immediate impact of this can be observed in business relations as well, with contractions, trade deficit and funding being put on hold.”

“Companies which fall under the portfolio of Chinese investors will also have to look for newer alternatives as their transactions will get delayed due to these macro events,” Priya added.