Amid a severe global pandemic and impending fears of considerable growth deceleration, the Indian government took a major decision to ban foreign direct investment (FDI) under the automatic route from countries sharing land borders with India.
Ministry of Finance, India has announced few changes in FDI (Foreign Direct Investment) rules that mandate “prior approval” from the Centre for foreign investments from countries “that share border with India”. This move is extensively considered a cover against the Chinese acquisition of domestic firms that are struggling because of the COVID-19 economic downturn.
In a sharp response to the recent developments, China has called India’s new rules as “discriminatory” and against the WTO’s principles on free trade. The Chinese government believes that India would reconsider the move and amend the “relevant discriminatory practices” and treat investments from different countries equally while fostering an “open, fair, and equitable” business environment.
FDI rules in India
According to the FDI rules in India, foreign investment is allowed through automatic route in most of the sectors. However, there are certain sectors such as defense, telecom, media, pharmaceuticals, and insurance, government approval is required for foreign investors. For investment under the government route, prior approval of the respective ministry/ department is required by the foreign investor.
In other cases, the investors just need to inform the RBI post the investment is made where the investment is under the automatic approval route. According to the recent statistics, during April-December 2019-20, FDI into India increased by 10 percent to $36.77 billion.
The inflating trade deficit in China’s favor has also been a major issue for India. According to data from China, the trade deficit in 2018 stood at $57.86 billion, up from $51.72 billion in 2017. India has been demanding China to import more Indian goods, especially pharmaceutical and IT products.
Chinese investments in Indian Markets
As per Brookings, a research group, the existing and planned investments of Chinese firms in India stand at approximately $26 billion in March, with the world’s second-most populous nation developing as a crucial market for everything from automobiles to digital tech. Chinese investments are in multiple sectors, such as consumer goods, especially electronics, logistics, retail, that is normal FDI mostly.
A report by the thinktank Gateway House says China has remarkable investments in the tech sector in India. There have been heavy investments of over $5 billion in 2018 from Chinese companies in India. Around 18 of India’s 23 unicorns have investments from China. Chinese smartphone companies like Oppo and Xiaomi lead the Indian smartphone segment with an estimated 72 percent share, leaving Samsung and Apple behind. Hence, there is a need to view these investments with caution.
Issues worrying Indian industries
One of the major issues pointed out by experts on Chinese investment is the country’s lack of delineation between private and public entities. The majority of private firms are backed by Chinese companies. There is this fear of predatory capital from China acquiring strategic stakes in India that are not completely unfounded. This is not completely unfounded considering the tune of the amount that Chinese companies have invested in two-thirds of Indian start-ups valued at over $1 billion.
Significant stakes are being bought by companies like Alibaba (in Paytm, Bigbasket, and Zomato) and Tencent (in Ola, Flipkart, and BYJU’s). This, along with China’s strategic acquisitions in U.S. and European Union (EU) companies over the years, created panic across the world and resulted in similar barriers being erected by countries like Germany, Italy, Spain, and Australia.
What is the world doing to combat hostile foreign investors?
Globally, many countries are now tightening the screws on hostile foreign takeovers at the time of the economic downturn. In recently issued guidelines, the European Union commission has vowed to protect “critical assets from foreign investment”. European member states have also initiated curbs. Italy has declared measures against “foreign takeovers” in sectors far-ranging as energy and insurance-healthcare. Germany is also planning to curb “potential interference by foreign investors” in the country, and opposing domestic industry takeover from entities based outside the European Union. Spain has established new laws on FDI, requiring government authorization.
Australia has also toughened laws on foreign investments, with Prime Minister Scott Morrison speaking in Parliament about protecting “nation’s sovereignty” and preventing a “fire sale of Australian businesses to foreign interests”. The Prime Minister announced that all proposed foreign investments will now require approval, regardless of the value or nature of the foreign investor. Canada has introduced rules to ensure that “in-bound investment does not introduce new risks to Canada’s economy or national security, including the health and safety of Canadians”.
Will the new rules prove a gamble by the Indian Government?
The raised voices to safeguard Indian companies resonate well with global trends and go down very well with domestic audiences as a populist measure, the move appears to have been rushed. Foreign investments in India has proved to be revolutionary in many sectors like automobiles, pharmaceuticals, aviation, real estate, and fintech, providing employment, transmitting technology, and adding value to the economy.
Also, China’s exposure through various investment channels is not alien to India. A look at the FDI patterns in India, over the last two decades, we can see that India received a cumulative $456.91 billion in FDI. The breakup of these figures shows that over 72 percent of the total amount is coming from just 5 countries which are Mauritius (31 percent), Singapore (20.7 percent), Japan (7.2 percent), Netherlands (6.7 percent), and United States (6.2 percent). While looking at the share of China’s investments in India during the same period, it constituted a mere $2.34 billion (0.51 percent) of total inflows. The rate of China’s FDI exposure to India has been increasing over the last few years but the proportion is still negligible, making it hard to explain such selective targeting.
India has an enormous trade deficit with China that runs over $55 billion; governments have always tried to bridge that gap partly through investments. This FDI ban imposed by India will have severe consequences for sectors like automobiles, construction, and real estate, and other service sectors, which are already stressed due to decelerating demand, tepid lending, and India’s inherent weakness in capital formation.