The litmus test for FDI should only be whether it adds value to our economy and adds to our employment.By Mohan Guruswamy
On April 12, Congress leader Rahul Gandhi demanded in a tweet that GoI ‘protect’ Indian corporations from takeover by cash-flush Chinese entities. He was spurred after HDFC announced on April 11 that the People’s Bank of China (PBOC) has increased its shareholding in HDFC from 0.8% to 1.01%.
The Chinese central bank had bought these 17,492,909 crore HDFC shares worth Rs 2,976 crore between January and March 2020. This level of shareholding won’t give PBOC a stool next to the watchman’s at HDFC’s front door. Yet, GoI responded to this somewhat immature and kneejerk demand with surprising alacrity.
It responded on April 18 with a hasty order that entities from countries that share land borders with India — Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar — have to take permission from the government prior to making that investment.
In a day when money doesn’t move in chests atop camels, what have land borders got to do with it? As before, investors from countries not covered by the new policy only have to inform RBI after a transaction, rather than asking for prior permission from the relevant government department.
That means investors from Mauritius ($8.1billion in 2019) and Singapore ($16.2 billion), from where about 50% of our foreign direct investment, FDI ($49 billion in 2019) comes, and the US, Britain, EU, Russia, etc. can invest as usual. The first two countries are the more favoured conduits for Indian money stashed overseas.
According to the Department for the Promotion of Industry and Internal Trade (DPIIT), India received FDI from China worth $2.34 billion (Rs 14.846 crore) between April 2000 and December 2019. This rose from $1.4 billion by about $900 million during Narendra Modi’s prime ministership. 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.
Chinese portfolio investments in startup companies such as Snapdeal, Ola, Swiggy and Paytm now amount a little over $6 billion. All this makes overall Chinese investment in India an unthreatening 1.3% of the cumulative FDI ($621 billion) since 2000. The note specifically aims at curbing ‘opportunistic takeovers or acquisitions’, ignoring the reality that all such buys are just that.
Let us not forget that the Britain’s Jaguar Land Rover and South Korea’s SsangYong sales to Tata Motors and Mahindra were dis-tressed sales. Good times and bad times are equally opportune for corporate buys. Can GoI tell us why the US or British or South Korean FDI are better than Chinese investments in these times?
GoI’s blanket order does not distinguish between greenfield or brownfield investments, or listed and unlisted companies. For all practical purposes, it’s a case-bycase handbrake on Chinese investments. Our policy hitherto allowed FDI in particularly distressed sectors like construction and real estate. These sectors were stressed long before the advent of Covid-19.
They are more distressed now. So, shouldn’t we be getting the cash-flush Chinese to invest in them? It’s not that Indian companies are not flush with cash. We have as many as 52 companies with cash reserves in excess of `25,000 crore each. The problem is that they are not investing in India, showing a marked preference to invest abroad. In March 2020 alone, Indian FDI outflows touched $2.68 billion. It was $2.34 billion in March 2019.
For over a decade, Indian prime ministers have been soliciting Chinese investment, partly to mitigate the huge trade deficits we have been posting with it. Last year it was $57.4 billion.
Heavens are not going to fall if Chinese companies invest more — like when SAIC Motor (under its British brand MG Motor) bought the General Motors’ plant in Halol, Gujarat in 2017, and Great Wall Motors announced in January 2020 its plan to acquire GM’s plant in Talegaon, Maharashtra. Or, if Qindao-based Haier competes more aggressively with the dominant positions of South Korean Samsung and LG in white goods.
India benefits by this. One can understand if we have a policy against Huawei in 5G. But despite reported US pressure, we have welcomed it. Chinese investors have made big bets in India’s startups like Flipkart, Paytm and Zomato, and driven them up to huge valuations.
Instead of FDI, we should be taking a good look at the growing trade deficit with China and narrowing it down. Yet, we have no policy on it. TV and mobile phone kits keep flooding India, as do firecrackers, kites and manja, pichkaris and milk-drinking plastic Ganeshas. Then we have big retailers like Ikea, which mostly sell Chinese goods.
Finally, we must realise that money doesn’t have any colour. The litmus test for FDI should only be whether it adds value to our economy and adds to our employment.
Any company, irrespective of the predominant nationality of its shareholding, is an Indian corporate citizen and is bound by Indian laws and policies. Thus if GoI demands that, say, Nestlé and Brooke Bond must export 20% of their instant coffee or face fiscal disincentives, or buy coffee or cocoa beans only from local producers, they have to comply.
(The writer is Former Advisor, Ministry of Finance, GoI)