'India-China
economic ties are likely to take a hit in the wake of the new situation, but
that also provides India with a new opportunity to strengthen its manufacturing
base,' points out Dr Rajaram Panda.
IMAGE: Prime Minister Narendra Damodardas Modi,
left, and Chinese President Xi Jinping. Photograph: China Daily/Reuters
In the midst of the
coronavirus pandemic, in a major change in the economic policy announcement,
the Government of India on April 18, 2020 introduced new Foreign Direct Investment rules in order to
discourage opportunistic investment in Indian companies by some neighbouring
countries.
The new FDI rules bars
automatic investments by neighbouring countries, in a policy targeted at China.
This comes after China's
Peoples Bank of China raised its stake in India's largest non-banking mortgage
provider, the Housing Development Finance Corporation, from 0.8 per cent to
1.01 per cent.
As per the new amendment,
FDI investments into Indian companies from neighbouring countries will now
require a nod from the government.
This will be applicable to
all countries that share a land border with India -- China among others.
The amendment specifies
that transfer of ownership of Indian companies arising out of FDI investments
from neighbouring countries will now also be subject to government approval.
Similar FDI restrictions
were earlier placed on Pakistan and Bangladesh.
These do not apply to
Myanmar, Bhutan, Nepal and Sri Lanka as these countries are not major investors
in India.
Notified by the Department
for Promotion of Industry and Internal Trade, the note stated: 'Government has
reviewed the FDI policy for curbing opportunistic takeovers or acquisitions of
Indian companies due to the current COVID-19 pandemic.'
It further stated: 'A
non-resident entity can invest in India, subject to the FDI Policy except in
those sectors/activities which are prohibited. However, an entity of a country,
which shares land border with India or where the beneficial owner of an
investment into India is situated in or is a citizen of any such country, can
invest only under the government route.'
The note added: 'Further, a
citizen of Pakistan or an entity incorporated in Pakistan can invest, only
under the government route, in sectors/activities other than defence, space,
atomic energy and sectors/activities prohibited for foreign investment. In the
event of the transfer of ownership of any existing or future FDI in an entity
in India, directly or indirectly, resulting in the beneficial ownership falling
within the restriction/purview of the mentioned sectors, such subsequent change
in beneficial ownership will also require Government approval.'
India's
market regulator Securities and Exchange Board of India was monitoring equity
transactions in India by Chinese companies and banks.
Such
transactions came under the scanner at a time when the share prices of
companies have dropped due to the economic impact of the coronavirus pandemic.
The
action taken by India is not new.
Globally,
transactions by Chinese firms and institutions have come under scrutiny since
the assets are being purchased at low valuations.
The
United States, Japan, Germany, Australia and the Czech Republic have placed
similar restrictions on Chinese companies buying assets.
As
the coronavirus continued to spread across the world, crippling economies,
China has taken advantage and tried to maximise profit.
That
route was not only unethical, but also suspect.
Though
India did not name China directly, it was obvious that China was the target of
its new FDI rules.
Beijing's reaction, predictably, was strong.
Reacting
quickly, it demanded that India revise its FDI norms, terming the move to amend
them as discriminatory.
It
claimed that the move was not in line with India's World Trade Organisation and
other multilateral commitments.
Beijing
said barriers for investors from specific countries violate the WTO's principle
of non-discrimination.
'The
barriers set by the 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,' Ji Rong, a
spokesperson for the Chinese embassy in New Delhi, said.
'More
importantly, they do not conform to the consensus of G-20 leaders and trade
ministers to realise a free, fair, non-discriminatory, transparent,
predictable, and stable trade and investment environment, and to keep our
markets open,' Ji added.
'Companies
make choices based on market principles. We hope India would revise relevant
discriminatory practices, treat investments from different countries equally,
and foster an open, fair and equitable business environment,' Ji stated.
India's
ministry of external affairs did not react to China's comments immediately.
Indian experts specialising in FDI are unanimous in their
support for the government's decision.
They
argued that India's tweaking FDI rules was not in violation of WTO norms that
allow countries to make such changes when issues of national security were at
stake.
They
argued that several countries in Europe had changed their laws or made new ones
to cope with similar situations.
Biswajit
Dhar, a professor at JNU, reiterated that India had not violated WTO rules.
While
agreeing that though India had agreed to keep markets open at the G-20 trade
ministers' meet in March, he was of the view that "one has to temper that
with the reality on the ground".
Indeed,
the possibility of hostile takeovers was very much real in the present economic
environment.
IMAGE: Employees, wearing masks, work on a
production line manufacturing display television monitors at a factory in
Wuhan. Photograph: China Daily/Reuters
India recognises that
Chinese investments in India had crossed $8 billion till December 2019.
It is true that Chinese
investment has driven the development of India's industries, such as mobile
phones, household electrical appliances, infrastructure, and automobile,
created a large number of jobs in India and promoted mutual beneficial and
win-win cooperation.
But that does not mean that
foreign entities should indulge in predatory trade practices and weaponisation
of trade and take advantage of a difficult situation for selfish economic
gains.
A backlash was inevitable;
it was accelerated by COVID-19.
Another Indian scholar,
Harsh Pant, says India finally bit the Chinese bullet.
The increase in Chinese
stake in HDFC could be the trigger, but many Chinese actions have come the
under scanner before.
Even its handling of the
COVID-19 has been questioned by many countries.
China has been accused of
mishandling the COVID-19 crisis when it originated in Wuhan and that it allowed
it to spread beyond its boundaries, crippling the lives and economies in as
many as 205 countries across the world.
There is no denying the
fact that China has lost the trust of the world considerably.
Japanese and Korean
companies having manufacturing units in Chinese cities are being encouraged by
their governments to relocate either to their home countries or elsewhere in
neighbouring South East Asia and India.
Japan, Korea, India and
many in Southeast Asia are likely to downsize their trade links with China in
the coming months/years, adversely impacting its economy.
It is desirable for China
to change its policy to buy up distressed assets overseas at cheap rates.
India is aware of this
possibility and therefore the tweaking of FDI norms was aimed at that.
After US President Donald J
Trump came to power, he took on China to correct the trade balance that was
hugely in China's favour and against the US.
That trade war precipitated
an aggressive approach by Chinese enterprises with State support to look for other
overseas destinations.
That seems to have reached
a plateau as China has new exposed its own folly, thereby making more critics
than friends.
As a consequence, the
global supply chains are likely to be restructured with India likely to be the
new location as Japanese and Korean firms have already started eyeing India.
India is likely to respond
positively to what Trump had said 'economic decoupling' from China.
IMAGE: A production line at the Dongfeng Honda
factory in Wuhan. Photograph: Aly Song/Reuters
Burgeoning India-China
economic ties are likely to take a hit in the wake of the new situation, but
that also provides India with a new opportunity to strengthen its manufacturing
base.
So, in the short run, there
could be a little loss but in the long run, it would be advantage India.
One aspect of the amended
policy that cannot escape attention is that it makes every type of investment
by Chinese investors subject to government approval.
It does not distinguish
between greenfield and brownfield investments; not does it mention listed and
unlisted companies.
It also does not
distinguish between the different types of investors, such as industry players,
financial institutions, or venture capital funds.
Such a blanket application
could create unintended problems.
So, should it be a matter
of worry that it could send wrong signals to other potential foreign investors?
Definitely not. Japan and
other middle powers such as South Korea and emerging economies such as Vietnam
are attractive choices. Japan and South Korea are already on board.
Vietnam and other nations
in South East Asia too could jump in, taking advantage of this new normal and
deepen economic engagement with India post-COVID-19.
It is time for Vietnam too
to take the cue from Japan and South Korea and start downsizing its economic
engagement with China and look for friendly countries like India and the rest of
Southeast Asia for investment opportunities.
This is also a good
opportunity to give India-Vietnam economic ties a fillip.
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