I had blogged earlier here and here urging caution with accessing loans from countries like China and Japan. In this context, Foreign Affairs has a nice cautionary tale about Chinese investments in Sri Lanka, totaling nearly $5 bn in loans since 2010, which describes them as 'predatory lending',
Chinese investment loans are top-down. They are mostly designed to narrowly curry favor with the leadership, particularly with officials who served under the recently ousted President Mahinda Rajapaksa. These investments rarely generate downstream economic returns and thus breed tremendous resentment among the Sri Lankan public... most of the loans China offered were for “white elephants” masquerading as productive infrastructure investments. In other words, they are mostly vanity projects—a new cricket stadium, airport, and seaport (all built in Rajapaksa’s home district), as well as a new theater and a partially built communications tower in Colombo—that are considered frivolous, poorly planned, and debt generating...
construction projects largely financed by China’s Export-Import Bank often come with a caveat: that contracts be awarded to Chinese state–owned companies, which then bring their own labor and raw materials... They force Sri Lankans to borrow at high rates for projects that economically benefit the lender, China... high (sometimes floating) interest rates of three to six percent; undisclosed conditions such as exclusive usage rights; and the absence of competitive bidding, transparency, or accountability, which sometimes results in low-quality products... China has also been blamed for saddling Sri Lanka with unnecessary debt, saturating it with tens of thousands of Chinese workers, and treating the country as a “colony” and Sri Lankans as “slaves.”
Though some of these concerns are not so much relevant to India, many are. Fundamentally any Chinese loans are sovereign debt of India. In a world awash with credit, and at a time when India stands apart as the most attractive emerging market investment destination, does it require such Chinese loans? Especially with the exchange rate, interest rate, and political risks associated with Chinese lending, not to speak of the procurement and contracting conditions?
But turning away cheap creditors may not be the wisest thing for an investment starved economy like India. A more appropriate strategy may be to encourage the Chinese creditors to lend to Indian corporates or specific project entities. The Government of India would do well to create the enabling conditions for India's private sector and project developers to access financing from entities like the China Development Bank. The Chinese could potentially become one more credit channel for private entities.
The Chinese creditors too are likely to find India's largest corporates and big commercially viable infrastructure projects more attractive lending targets than those elsewhere. But whether the Chinese are willing to play the ball on this remains to be seen.