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Foreign direct investment (FDI) inflows have been long described as one of the significant ways to deal with the trade deficit between India and China. Between April 2000 and December 2019, India received $2,342 million worth of FDI equity flows from China, representing a 0.51% of inflows. This makes China No. 18 on the list of top investors in India.
During the ongoing Covid-19 crisis, as countries slump into drastically reduced growth rates due to lockdowns, a growing fear has been over opportunistic takeovers or acquisitions.
In this context, by way of the Indian ministry of commerce and industry, Department for Promotion of Industry and Internal Trade (DPIIT)’s press note, ‘PN3’, GoI, reviewing the existing FDI policy, has decided that persons or entities from India’s neighbouring countries cannot (directly or indirectly) invest in India without the prior approval of GoI. While the announcement is intended for shielding Indian companies, one should be made aware of possible retaliations from China.
PN3 states, ‘…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 ministry added that a transfer of ownership in an FDI deal that benefits any country that shares a border with India will also need government approval. The earlier FDI policy was limited to only Pakistani and Bangladeshi entities via the government route. The new rules also bring China under the scanner. Chinese investment in India is bound to be impacted.
Companies from across the world are diversifying their supply links to reduce impacts of constant disruptions in supply chains from China. A few countries like South Korea have also expressed interest in India as a potential manufacturing base for Chinese companies. In case amassive FDI drain does happen from China, it becomes pertinent for China to have a presence in entities in countries like India, so that the possibilities of joint ownership, or purchasing shares, of foreign companies in India stays alive. However, what can be expected from China if these possibilities are completely reduced by announcements such as PN3?
In 2018, the Committee on Foreign Investment in the US was empowered to investigate deals that threaten US industries in critical technological sectors, which are the linchpins of national security. This created an adverse impact on the capabilities of Chinese companies to purchase hi-tech US companies. India’s announcement can be seen as a similar measure to protect India’s interests.
As far as China is concerned, on March 15, 2019, the National People’s Congress promulgated a new Foreign Investment Law (FIL), which was due to come into effect on January 1, 2020. One of the most important features of FIL in this context is Article 40, which states that companies from countries or regions that adopt discriminatory practices against Chinese investments will be faced with reciprocal measures.
While FIL has not yet been used against any country or region so far, given that it’s less than four months old, the fact remains that China does take punitive actions against companies operating in its territory and FIL is just a formalisation of those punitive measures. China had already warned India of retaliatory measures in August last year if Huawei was blocked in India.
At this moment, PN3 is just an announcement, seemingly triggered by the People’s Bank of China’s (PBOC) rising stake in HDFC from 0.8% to 1.01% this year. However, this is portfolio investment, not covered under FDI. So, the purpose seems to be amiss altogether. Also, there are no details in the PN3 announcement as to which authority takes the decision on allowing FDI, or what the process is. Further clarification in this regard is needed.
Given the fact that PN3 so far lacks legal grounding, China will probably adopt a wait-and-watch policy. However, China’s supply chains aregetting disrupted, and it has to ensure that the global economy remains dependent on it. Which could mean that Chinese investors purchasing undervalued shares of listed companies across the world is high.
The need of the hour is to assess the ways in which China may retaliate. In any case, Indian companies in China face tariff and non-tariff barriers. An application of China’s FIL Article 40 to Indian companies is apossibility India needs to be prepared for. Also needed is a clearer announcement of the new PN3 regulations keeping the best interests of Indian companies in mind.
The writer is assistant academic dean, Jindal School of International Affairs, OP Jindal Global University, Sonipat, Haryana
Source: indiatimes.com