A Dance With the Dragon—India’s Amendment to the FDI Policy
As the battle against COVID-19 intensifies around the globe, the underlying fear of its impact on the world economy has come to the forefront. The world is tottering on the brink of a possible repeat of the Great Depression, and it has become imperative for nations to take measures to safeguard their economies. In light of this situation, India decided to amend its Foreign Direct Investment (FDI) policy. The recent policy change was notified in a press release by the Ministry of Commerce and Industry and stands to help the country prepare for the post-pandemic phase.
Understanding the FDI policy—Then Versus Now
Foreign Direct Investment, better known as FDI, is an investment made by an organisation or individual in the business interests and propositions of another country. Contrary to popular belief, this investment is not restricted to capital infusion into the business, for it also expands to cover any form of assistance that will help run the business. An underlying feature of FDI is that it tends to give foreign corporations a significant amount of influence over domestic markets. FDI not only helps offshore companies with their daily production but also gives them the golden opportunity of being an integral part of the concerned nation’s economy.
Before the change was announced on 17th April 2020, India’s FDI policy allowed every non-resident entity the opportunity to hold stakes in various sectors of the economy, excluding the prohibited sectors. To carry out the process, they had to inform RBI of their investment once it came through. Furthermore, entities belonging to Pakistan and Bangladesh were additionally required to obtain prior approval from the Government before initiating any venture. They were also prohibited from investing in the defence, space, and atomic energy sectors. Now, however, with recent development in foreign affairs, the new policy compels all countries sharing a land border with India to glean approval from the Indian Government before investing in Indian businesses.
Reasons for the Policy Change
The subject of the released statement makes intentions clear “Review of Foreign Direct Investment (FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”.
We can infer from this that the Government intends to prevent another nation from taking control of companies that have sustained a significant hit during these trying times. It is still not clear whether the change was already in the works before the pandemic was declared or if this decision was taken recently to safeguard the home economy. However, we can be sure that recent events at HDFC Ltd. played a significant role in powering the policy change.
The Indian Government faced harsh criticism when the People’s Bank of China (PBOC) increased its stake in HDFC Ltd from 0.8% to 1.01%, especially when the latter was trading at a low due to the coronavirus outbreak. Subsequent media coverage, along with unresolved conflicts between the two nations, resulted in an increasing fear of China’s growing influence over the Indian economy.
The commotion behind Chinese FDI has a troubling background. According to a research paper published in Brookings.Edu, written by Ananth Krishnan, Associate Editor for the India Today Group, Beijing, the net worth of all current and planned Chinese investment in India exceeds about 26 billion dollars. Chinese firms are deeply entrenched in different sectors of the economy. Among these, influence in the technological domain encompasses a wide variety—from tech start-ups in every field to even the incubation centres helping them. Several renowned companies, such as Paytm, Ola, and Swiggy, receive a lot of support from Chinese investors.
Impacts and Consequences
While the worry over the possibility of economic domination by China is undoubtedly valid, it is crucial to question the need for this policy change. In the current scenario with COVID-19 wreaking global havoc, Indian companies need viable sources of investment to remain afloat. The decision to choke the ready flow of capital from a country that is already one of the largest investors in India is being questioned by economists.
Apart from the strain on the economy, the policy change will further bruise diplomatic relations between the two most populated countries in the world. The argument made for this policy change is that, while investments from China are certainly welcome, the line separating the private businesses and Chinese state-run businesses is admittedly faint, if not invisible. There is an underlying fear of external interferences in the Indian economy to achieve geopolitical goals. Another reason for taking this decision is possibly to reduce our already substantial dependency on Chinese industries, thereby boosting productivity and enabling Indian enterprises to reach self-sustenance.
Reaction and Response
While the economic ramifications of the policy change will present themselves eventually, China has denounced this move as being prejudiced and against WTO’s principle of non-discrimination, and liberalisation.
The Chinese Embassy in India opposed this move by saying that companies invest purely based on the market and has asked for a revision of this decision. The Indian Government has responded that no existing WTO mandates were broken, as it is merely a safeguard for their interests. India is not alone in reviewing its trade policy with China, as several European countries, along with Australia, have recently tried to secure their economy as well. Japan too, has recently announced two billion dollars in aid as a bid to help domestic companies reduce their dependency on China.
The future of the current world order seems uncertain, and the consequences of this decision cannot be predicted. However, a surety in this situation is that countries will continue comprehensive reviews of their policies as a means to safeguard their economic interests. While the world’s battle against the Coronavirus will be won, the large-scale global impact of this pandemic, the biggest crisis since the Second World War, is a significant source of concern that is expected to last for long.
Written by: Anirudh Iyer and Rithika Iyer, of The Economics and Finance Society of Manipal
Edited by: Devangshi Debraj, of The MIT Post
Featured image credits: The Economics and Finance Society of Manipal