Nagrik Dialogue

Will changes in FDI policy meet India’s long-term strategic needs?

The proposed amendments might save Indian firms for the time being, but, more than geographic restrictions, it is sectoral restrictions that may play the desired role

With the COVID-19 pandemic, the world is facing an unprecedented disruption in demand and supply. This has led governments to protect themselves against cash-rich economies and their actors who are busy in hostile takeovers and mergers. Several governments and regional organisations have come up with different strategies to protect themselves. Led by the European Union, and quickly followed by Germany, France and others, tweaking of FDI norms is now part of the new normal. Probably the post-COVID-19 world would see many such developments.

Prof Sachin Chaturvedi
Director General, Research and Information System for Developing Countries (RIS), New Delhi

New Provisions

In India, the Department for Promotion of Industry and Internal Trade (DPIIT), on April 18, issued a notification, announcing amendments to India’s FDI policy by changing norms about doing business with countries with shared borders. According to prevailing commentaries, this is to block China. This perception prevailed so much that the China’s embassy in India issued a statement saying that this is violation of WTO norms.

Chinese embassy spokesperson Ji Rong was quoted saying, ‘The additional 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.’

Reality Check

At present, there are two routes with which FDI can be made: automatic, in which companies do not need any approval from the government, and through the government route in which approval is required.

India removed the automatic route for investments with countries with which it shares borders and made it mandatory for companies to get approval. The revised text says, “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.”

This means investments from Bangladesh, Bhutan, China, Nepal and Pakistan. This was part of a review undertaken by the government of the extant FDI policy for curbing opportunistic takeovers/acquisitions of the Indian companies due to the pandemic.

It does not block any country from investing in India. The only point that this policy makes is to channel the investment flows through prior approval of the government, which is also the case right now for many sectors.

The second point that this is in violation of WTO provisions is also not correct, as the WTO cannot make any global regulations on investment.

Global Trends

It is also pertinent to take stock of FDI trends in India. The attractiveness of India, as an FDI destination has multiplied in the recent times. India was among the top 10 recipients of FDI in 2019, attracting $49 billion in inflows. The majority went into services sector, which includes financial, banking, insurance, business outsourcing, R&D, courier and technology (18 percent), information technology (10 percent), telecommunications (8 percent), while trade and construction attracted 6 percent each.

In light of the policy changes, it seems, mergers and acquisitions (M&A) are primary apprehensions. Let us see what trends have been there in this area.

According to the United Nations Conference on Trade and Development (UNCTAD) in the Wold Investment Report (2019) there has been a consistent decline in cross-border M&As since 2014. In 2019, it declined by 40 percent to $490 billion. The decline was deepest in the services sector, followed by manufacturing and then the primary sector.

As can be easily imagined, there was also a decline in the number of mega deals. The number of large deals (above $5 billion) declined from 39 to 30 from 2018 to 2019. The report has also brought out the emerging decline of Chinese outbound FDI. In 2019 itself, there was a decline of around 9.8 percent.

New Dynamism

There is little doubt that the Indian economy is going through a difficult phase. The trade and external sector per se is going through unprecedented shrinkage. In March, the exports declined by more than one-third (35 percent) and imports contracted by more than a one-fourth (29 percent). With these figures the average has worsened further. In the year 2019-20, exports have declined by 4.8 percent and imports have declined by 9.1 percent.

The FDI inflows were negative during the week that ended on April 17, while the net outflows were at nearly $1 billion during the financial year 2020-21. With this the challenges have multiplied manifold.

FDI For National Development Goals

There is little denying from the fact that companies from China have demonstrated remarkable interest in the Indian economy. The cumulative FDI now stands at $8 billion, but in the last one year itself the startups have attracted investment of nearly $1.5 billion. With the emerging shortfalls, it would be important for India to have a calibrated approach on FDI norms.

The global experiences on FDI governance are full with several instances when governments have leveraged FDI for meeting national development objectives. Almost all the developed countries, and including developing countries, have come up with policy reference points. It was in 1998, when Singapore promulgated a national legislation insisting on local partnership for all foreign investors, when investment was targeted in frontier technologies. Germany and China imposed restrictions on technology cooperation while the United States blocked ports and other areas for construction related FDI.

While the proposed amendment for the time being may save Indian companies from changing hands, at some point India should get into the idea of identifying sectors of national strategic importance from various perspectives. The considerations may vary from narrow, commercial and economic national interests, to security and strategic interests. Pharmaceuticals (especially APIs, vaccines and medical devices), electronics and banking finance are some of the sectors where indigenous strength would play an important role. Given the liberal financial policies of several countries, it is not geographic restrictions that would serve the purpose, but sectoral restrictions that may play the desired role.

Source: MoneyControl.Com

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