THE INDO-CHINESE FDI ALGORITHM

by Aishanya Gupta

Shortly after Covid-19 managed to shake the world with its angst and not withdrawing from the blunt fact that it is expected to shrink the global economy by over 3 percent in 2020, many global powers like European Union and Italy have tightened their Foreign Direct Investment (FDI) policies to keep their economy from going into shambles.


India too adopted a similar motion i.e. banning FDI under the automatic route from India’s neighbor countries namely Myanmar, Bhutan, Afghanistan, Pakistan, Bangladesh, Nepal, and China.


This led to diplomatic establishments like the World Trade Organization (WTO) and committees of Bilateral Investment Treaties (BITS) being overwhelmed with disapproval in many forms for Delhi from the People’s Republic of China exclusively.


It is not oblivious to us that India has directly been subjected to comparatively greater scrutiny from Chinese enterprises.


The elementary prevention of “opportunistic acquisitions/takeovers” as stated in the official Press Release of Department for Promotion of Industry and Internal Trade (DPIIT) has been deemed as discriminatory and against the very letter and spirit of WTO and against the general trend of a trade by the State of Beijing.


For outside onlookers, this harsh statement does come to a surprise after President Xi Jinping visited India last October and was given a grand reception, which was seen as a sign the two countries were paving the way for new trade and strategic relationship.


In addition, we all know that to hinder financial vulnerability (that is being faced by over 75% Indian firms), one needs to step up their game of profit and loss.


But why is China so disturbed by the recent revision in the aforementioned policy change?

The above can be answered with the obvious chronology of events. The new policy came into effect not soon after the People’s Bank of China passed the unanimous decision of increasing its stake-holding in the largest private bank of the country, HDFC (from 0.8% to over 1.01%).


Now, although no open reference is made in ink, it is no magic trick to put two and two together and understand why China reacted in the way it did.


It is not the best idea to blame India and call it a foul play of simple macroeconomics like China itself. Here’s why:


The new set-up might have had a controversial timing but it was under the process of being implemented for a long time, experts familiar with the development stated.


Over the last few years, Chinese companies have invested in two-thirds of Indian unicorns at over $1 billion, stakes being bought by companies like Alibaba (in Paytm, Bigbasket), etc.


So much so that, Ajit Doval, India’s national security adviser, flagged concerns over China’s dominant economic footprint in India. He pointed out worrying possibilities of startups being controlled by the Communist rulers in Beijing through a web of opaque linkages.


This, along with China’s hushed backdoor acquisitions across Africa, Pakistan and Nepal give a strong foundation of India’s more spread federal involvement.


Does that strain whatever is left of China and India?


Well, it is not wrong to think that China is going to make this change as a hostile move towards itself and want to indulge in activities that it may not have taken to otherwise but what still stops them from acting on it in the most obvious way is because India’s new move has unsurprisingly found favor across the political and economic spectrum.


Should China decide to act on this unwelcomed disbarment on their renowned business scheme, they might enter into trouble waters with a lot of countries, let alone the United Nations and WTO, because under the official WTO principles agreed upon by all its member nations, all member nations are given the liberty to act on their trade policies should the situation of a global emergency arise which has in fact arisen and been validated loud and clear by the WHO as a Global Health Emergency. (Reference has been made to Article 1 of the Agreement on Trade-Related Investment Measures (TRIMs))


Can India be let off easily on the subject of targeting China?


No, it cannot because even though so far it looks like India’s decision seems practical and timely but statistics speak otherwise.


For example, when we look at the FDI patterns in India, over the last two decades, India received a cumulative $456.91 billion in FDI, the proportion of China’s FDI in India during the same period constituted a mere $2.34 billion (0.51 percent) of total inflows.


According to the Ministry of Commerce and Industry, the majority of this inflow from China happened over the last five years ($1.81 billion).


Though the rate of China’s FDI exposure to India has been increased over the last few years, the proportion is still negligible, making it hard to explain such selective targeting, because to put it in simple words, the revision means that an American company can invest in India without placing its proposal before the government but a Chinese company can’t do the same.


What's next? What are the lingering gray areas of this massive game-changer?


The prime concern is the duration of this FDI amendment being temporal — while the intention may be to prevent opportunistic takeovers, why do the rules not include a ‘sunset clause’ — the date beyond which the rules will not apply?

At this stage of India’s economic development and evolving economic dynamics due to the COVID-19 pandemic, can the country afford to risk its ambiguous relationship with China?


And most importantly, will stick to the last vestiges of this obvious Protectionism help India after all?


For China


Why does the uncomplicated and highly justified incorporation of additional barriers set a sea of worries for China?


It does not seem like its righteous intention of expanding its presence would not be deterred unless we are not aware of any hidden intentions?


Lastly, the indisputable fact still remains that this matter needs to be dealt with more cogency, not only from Beijing but also in New Delhi.




References


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