The Great Wall against China: Understanding India's new foreign investment rules

China had recently decided to up stake in HDFC Bank to 1 per cent


The finance ministry on Wednesday notified changes in FDI (Foreign Direct Investment) rules which mandate "prior approval" from the Centre for foreign investments from countries "that share border with India", a move that is widely considered a hedge against Chinese takeover of domestic firms that are struggling because of the COVID-19 economic downturn. China, Bangladesh, Pakistan, Bhutan, Nepal, Myanmar and Afghanistan are the countries that share a land border with India. China dubbed India's new rules as "discriminatory" and against the WTO's principles on free trade.

Out of all the neighbouring countries, China undoubtedly leads in investments. According to the DPIIT data, India received FDI from China worth $2.34 billion (Rs 14,846 crore) between April 2000 and December 2019. During the same period, India has attracted Rs 48 lakh from Bangladesh, Rs 18.18 crore from Nepal, Rs 35.78 crore from Myanmar, and Rs 16.42 crore from Afghanistan. There are no investments from Pakistan and Bhutan.

The move comes after the People's Bank of China's decision to up its stake in HDFC bank to over 1 per cent. 

How is FDI allowed in India?

FDI is allowed through automatic route in most of the sectors. However, certain areas such as defence, telecom, media, pharmaceuticals and insurance, government approval is required for foreign investors. Under the government route, foreign investor has to take prior approval of respective ministry/ department. Through automatic approval route, the investor just has to inform the RBI after the investment is made. There are nine sectors where FDI is prohibited. They are the lottery business, gambling and betting, chit funds, Nidhi company [an NBFC that lends and borrows money within members], real estate business, and manufacturing of cigars, cheroots, cigarillos and cigarettes using tobacco. During April-December 2019-20, FDI into India increased by 10 per cent to $36.77 billion.

The ballooning trade deficit in China's favour has also been a major issue for India. The trade deficit in 2018, according to data from China, is now at $57.86 billion, up from $51.72 billion in 2017. India has been pressing China to import more Indian goods, especially pharmaceutical and IT products. 

Is India alone in implementing such restrictions?

Globally, the COVID-19 pandemic has countries are now tightening the screws on hostile foreign takeovers at the time of the economic downturn. The European Union (EU) commission had recently issued guidelines to protect "critical assets from foreign investment". "Among the possible consequences of the current economic shock is an increased potential risk to strategic industries, in particular but by no means limited to healthcare-related industries." "There could be an increased risk of attempts to acquire healthcare capacities [for example for the productions of medical or protective equipment] or related industries such as research establishments [for instance developing vaccines] via foreign direct investment."

European member states have also initiated curbs. Italy announced measures against "foreign takeovers" in sectors far-ranging as energy and insurance-healthcare. Germany is planning to curb “potential interference” in the country, and resisting domestic industry takeover from entities based outside the European Union. Spain has constituted new laws on FDI, requiring government authorisation.

Australia has tightened 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". "All proposed foreign investments will now require approval, regardless of the value or nature of the foreign investor," he said. Canada 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”. 

What is the level of Chinese investment in India?

Almost 18 of India's 23 unicorns have investments from China. According to a report by the thinktank Gateway House, China has remarkable investments in tech sector in India. "TikTok, the video app, has 200 million subscribers and has overtaken YouTube in India. Alibaba, Tencent and ByteDance rival the US penetration of Facebook, Amazon and Google in India. Chinese smartphones like Oppo and Xiaomi lead the Indian market with an estimated 72 per cent share, leaving Samsung and Apple behind," according to the report.

The biggest issue pointed out by experts on Chinese investment is the country's lack of delineation between private and public entities. A lot of the private firms are backed by the Chinese state. 

"The last decade has seen heavy investments from Chinese companies into India, over $5 billion in 2018," the report noted, highlighting the need to view these investments with caution. "They are in myriad sectors, such as consumer goods, especially electronics, logistics, retail, that is normal FDI mostly. Alarming are the investments by China’s powerful BAT companies [Baidu, Alibaba and Tencent] in soft power projects in India, Artificial Intelligence, the Internet of Things and fintech. That’s because the People’s Liberation Army of China and the Communist Party of China have a symbiotic relationship with China’s BAT, the makers of strategic domestic and overseas investments."

Is India right in worrying?

Chinese investments sometimes do follow a pattern. At the peak of the debt crisis, there was a massive inflow of Chinese direct investment into the European Union. A Financial Times report noted that, in 2010, the total stock of Chinese direct investment in the EU was just over €6.1bn, less than what was held by India, Iceland or Nigeria. "By the end of 2012, Chinese investment stock had quadrupled, to nearly €27bn, according to figures compiled by Deutsche Bank." Thilo Hanemann, an expert in Chinese outbound investment, told the publication that “this was partly opportunistic buying because assets were cheap and partly it was a structural secular shift in Chinese outbound investment, from securing natural resources in developing countries to acquiring brands and technology in developed countries.”

A few days back, Bloomberg reported that Chinese firms were getting ready for discount deals in Europe, where domestic companies are reeling under an economic crisis spurred on by the coronavirus pandemic. The publication reported, quoting sources: "Bankers have recently seen a spike in requests from Chinese firms and funds for proposals on targets in Europe. Many of the potential acquirers are state-owned enterprises." 

Chinese response to India's move

India's new norms featuring "additional barriers" for foreign direct investment from specific countries violate WTO's principle of non-discrimination and are against the general trend of free trade, a Chinese embassy spokesperson responded. The impact of the policy was clear on Chinese investors, the official said, adding India's action was also against the consensus arrived at the G20 to realise a free, fair and non-discriminatory environment for investment. Chinese embassy spokesperson Ji Rong said China hoped that India would revise the "relevant discriminatory practices" and treat investments from different countries equally while fostering an "open, fair and equitable" business environment. 

"The additional barriers set by Indian side for investors from specific countries violate WTO's principle of non-discrimination, and go against the general trend of liberalisation and facilitation of trade and investment," the spokesperson said in a statement. "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," Ji said.