India and Taiwan’s bilateral investment treaty presents a great insensitive for India to develop its human capital and transition into a knowledge economy. The treaty strengthens relations between India and Taiwan and is in line with India’s Act East Policy. However, it will be a hard road for India in the making of the changes needed and its partnership with Taiwan will not go unnoticed by China.

Need for Change

In December 2018, Taiwan and India signed a new bilateral investment agreement to update the treaty originally signed in 2002. According to Taiwan’s Bureau of Foreign Trade, bilateral trade reached USD 6 billion in 2017. Over 106 Taiwanese companies including Foxconn, Gigabyte, and MSI are already present in India.

For India, competition from other regional players has become a major pushing factor to differentiate itself as a knowledge economy. The Philippines for example, has become a more attractive environment for foreign investment in services, due to the lower cost of labour, the high levels of education within its population and the widely-spoken English language. The Indian states of Hyderabad and Karnataka are already building the resources to become knowledge centres and help the country make that transition.

For Taiwan, the current trade war between China and the United States has made many Taiwanese companies eager to reduce their exposure to China. Indian Government Initiatives, such as Make in India, Digital India, Smart Cities and Start-up India, have been undertaken with the intent to increase India’s desirability to foreign investors, making it an attractive destination for Taiwanese business.

Potential Friction with China

The investment treaty between the countries aligns with Indian Prime Minister Narendra Modi’s Act East Policy which seeks to counter China’s rising influence in the Indian Ocean.

India’s concerns also extend to China’s sphere of influence and territorial expansion in the Indian subcontinent. Through its One Belt One Road (OBOR) Initiative, China is partnering with South Asian countries such as Pakistan, Bangladesh, and Sri Lanka which encircle India.

India is cautious about becoming a part of the OBOR initiative itself, in large part because of the China Pakistan Economic Corridor, which runs through territories that, India claims, falls within its borders. Further, India and China are locked in a border dispute in Dokhlam in the southern Himalayan region, which has sparked some critical moments in the past.

India’s alignment with Taiwan has the potential to cause tension with China. Since 1949 China has claimed sovereignty over Taiwan and is strongly opposed to any country having separate diplomatic relations with it. China has applied pressure on international companies who list Taiwan separately from China, to protect its claim over the island.

In January 2019, China warned India against providing military technology to Taiwan after it was revealed that an Indian firm submitted a proposal to Taiwan to build submarines.

Need for Human Capital Development

India is a huge market that presents a host of profitable opportunities to Taiwanese companies. Indeed, recently Modi’s Government has made many improvements to India’s business environment such as overhauling India’s indirect tax structure and consolidating its bankruptcy laws. These and other efforts to improve the business environment has led to a marked improvement in country’s Ease of Doing Business score. Within two years, India jumped 53 positions in the World Bank Doing Business Index landing at the 77th place in 2018.

However, India is classified as a lower middle income country by the World Bank despite being one of the world’s 10 largest economies. One of the major problems is the high levels of inequality which is partly attributed to significant gaps in level of economic development between states, over-reliance on agriculture, and lack of access to higher education for a large section of the population.

India must address its shortfalls in human capital development, particularly regarding the health and education level of its population. The country ranked of 115 out of 157 in the World Bank’s 2018 human capital index because of factors including low levels of primary education, high mortality rates, and high rates of child stunting. According to the report, “a child born in India today will be 44 percent as productive when she grows up as she could be if she enjoyed complete education and full health”. While India is credited for its high economic growth, much of the growth is concentrated in certain regions of the country, where it mainly benefits people who are already relatively well-off.

Taiwan is one of the global leaders in ICT, and the country has expressed an interest in developing the technology, auto, and electric vehicle sectors in India. To transition into a knowledge economy and avail the opportunities that Taiwanese companies can offer, India needs to focus on increasing higher education opportunities to large sections of its population.

The key indicator to watch in terms of India’s ability to reap the benefits of an economic partnership with Taiwan will be whether the Government invests in continued human capital development.