Editorial Notes

[Editorial Notes] Resetting balance

Delhi’s decision on FDI from China is part of its own learning curve on linkages between commerce and national security.
By IASToppers
April 25, 2020

Contents

  • Introduction
  • Background
  • Reason why Automatic route of FDI flows restricted?
  • Impact
  • The amount of Chinese investment in India
  • What China said on India’s move?
  • Conclusion

Resetting balance

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Introduction

  • India’s move to prevent a predatory Chinese hunt for Indian companies underlines the emerging perception in India that there is no separating commerce and security in dealing with China. 
  • India’s concerns are similar to those being expressed elsewhere in the world. A number of European countries have already moved in that direction.
  • Since the early 1990s, India bet that expanding economic cooperation with China will help mitigate political disputes. But the differences have only become intractable even as China became stronger economically.
  • In recent years, apprehensions have grown that China is targeting their infrastructural, industrial and technological assets for control. But many governments were willing to give the benefit of doubt to China
  • However, that willingness has rapidly eroded in the wake of the corona crisis.

Background

  • In India, FDI is allowed under two modes – either through the automatic route, for which companies don’t need government approval, or through the government route, for which companies need approval from the centre.
  • Most FDI flows into India are under the automatic route, which means companies only need to inform authorities after the investment is made.

Reason why Automatic route of FDI flows restricted?

  • Recently, People’s Bank of China has increased its stake in HDFC Bank, the country’s largest private lender, to over 1%.
  • But its investment came through the portfolio investment route, the FDI move is more strategic and is aimed at blocking any attempt to restrict entities from across the border to acquire a significant beneficial interest.
  • Such move signals a growing worry within government that China might seek to acquire Indian companies by exploiting their financial vulnerability.
  • Even Securities and Exchange Board of India (SEBI) is separately keeping tabs on investments from China and some other countries.

Impact

  • The latest move by India will not just impact new investments but also equity infusion in existing companies in India, where Chinese entities have equity stakes.
  • Putting FDI from all countries under the approval route would have also slowed down inflows, which are critical at this time.

The amount of Chinese investment in India

  • As of December 2019, China’s cumulative investment in India has exceeded 8 billion US dollars, far more than the total investments of India’s other border-sharing countries. The impact of the policy on Chinese investors is clear.
  • Chinese investment has driven the development of India’s industries, such as mobile phone, household electrical appliances, infrastructure and automobile, creating a large number of jobs in India, and promoting mutual beneficial and win-win cooperation.
  • Chinese enterprises actively made donations to help India fight COVID-19 epidemic.

What China said on India’s move?

  • The move violate WTO’s principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment.
  • China also accused India of not conforming to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, predictable and stable trade and investment environment, and to keep our markets open.
  • Therefore, Without the appropriate legal and regulatory sanction, India might experience reciprocal measures.

Conclusion

  • Cheap imports from China undermine India’s manufacturing sector and run up a massive trade surplus. India allowed massive Chinese penetration of its telecom, digital and other advanced sectors only to discover the multiple negative consequences.
  • Hence, at time of crisis, there is a need for developing new legal and institutional tool similar to employed by US and EU member states such as data protection laws or revised mergers and acquisitions rules.
  • In order to protect India’s big companies there is need to devise a scheme of preferential or special shares which an Indian company can issue to foreign investor.
  • These shares will preserve the decision making by Indian innovators, while also providing them access to foreign capital.
  • After each crisis in recent years, China has consolidated itself. Indian government is trying to pre-empt acquisitions. Countries need to strengthen their domestic capabilities to meet the Chinese challenge.

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