India's Distancing from Foreign Direct Investment from China: Implications and Future

Updated: Aug 5

Vasu Sharma,

Research Intern,

Internationalism

Introduction


Foreign Direct Investment (FDI) is a major tool for economic growth and development. Since the New Economic Policy in 1991 and the adoption of Liberalization, Privatization and Globalization FDI and economic growth go parallel with each other in India. Enhancing technology, creation of employment and jobs, inducing competitive market, providing stimulus to economic development, etc are a few handful advantages of FDI. Agriculture and animal husbandry, Airports (greenfield and brownfield), Automobiles, Pharmaceuticals (greenfield), construction of hospitals, ports and shipping, roads and highways, e-commerce, and Industrial Parks are some sectors where 100 per cent FDI is allowed under the automatic route. Through government route, most FDI only a certain percentage of FDI is allowed i.e. banking (public sector) – 20 per cent, Digital media – 26 per cent, broadcasting (content services) – 49 per cent, etc. Under the automatic route, neither the non-resident investor nor the Indian company requires government approval. However, under the government route, government approval is required. [1]


Since the outbreak of COVID19, pandemic politics has been characterized by few countries criticizing international organizations and bodies, many countries aligning with international co-operation and multilateralism, and certain war of words being conducted between countries. However, the month of April has witnessed several European nations, the USA, Australia, and India have amended the policy frameworks of FDI protect businesses at home, policy frameworks have been changed. Such a move by these nations has come when Chinese firms and entities (state-backed) have tried opportunistic takeovers of businesses, companies, and firms of major economies.


The Indian policymakers were alarmed when the Public Bank of China (PBOC) increased its stakes from one per cent, resulting in a 1.75 per cent stake in HDFC Bank, India's largest non-banking mortgage provider. Following this situation, the Government of India amended the existing rules of FDI. The amendment states that entities and firms belonging to neighbouring countries will have to undergo a process of scrutiny and require government approval as well. Since Pakistan and Bangladesh already are subject to restrictions, it is clear that this policy has been indicated to China only, since it is the only neighbour in South Asia who invests heavily and primarily. China has subtly responded by blaming India to violate the Free Trade norms of the World Trade Organization. [2]


A global scenario


Since the outbreak of the virus, China has been criticized over its censorship on the flow of information, the mishandling of the situation, and opportunistic takeovers of businesses that Asian supergiant is trying. Certain distrust and distancing are been observed globally. Distrust regarding the handling of virus and distancing with China, to protect the economy at home. European countries like Spain, Italy, and Germany, United Kingdom, Australia Canada, and the USA are major countries that have changed their policies of Foreign Direct Investment to avoid any takeover, by China or by any other country. [3]


Including India, a common feature of all policy changes executed is that none of the countries has especially or exclusively mentioned China. However, as clear it seems to be, China has not only been a major investor in infrastructural projects in developing or underdeveloped economies, but also an essential investor in startups and other businesses.

To contain the virus, countries have chosen to execute shutdowns. Due to a sudden break on any trade activities in a globalized society, economies around the globe have faced a major jolt. Pandemic might result in a global economic recession or a major slowdown. Considering these situations, China has been particularly attempting to takeover sectors that are severely affected.


However, China is not alone to utilize opportunism. Cuevas AG, a German firm working actively for on vaccine of COVID 19, was offered to be taken over by Washington. However, these reports were later denied.[4] Whether this incident was true or not would be proven later, but one cannot deny the fact that many countries had alleged Trump administration of hijacking consignments of masks, diverting routes and blamed Washington


The source of funds


Before the outbreak, China through Belt and Road Initiative, under opaque terms of loans was a major investor of funds and supported infrastructural projects in Africa, West Asia, Bangladesh, Sri Lanka, and Pakistan. China was providing such economies a platform to develop and in exchange got political, military, economic, and psychological leverage over the recipient countries. The recipient countries have simply walked into what is called 'debt trap policy'.


However, the same cannot be done in economies that are already developed or are developing rapidly. Two years ago, the US enabled CFIUS – Committee on Foreign Investment in the United States, which could control foreign investment and export regimes in major technologies. [5] In India, China is a major investor for start-up companies, especially technology firms. 18 out of 30 unicorn companies (major tech start-ups whose market capitalization has either reached one billion USD or above) have major Chinese investment. Not only through start-ups, but Chinese firms like Alibaba and Tencent games also have a huge database of Indian users. [6]


Chinese investment in Indian start-ups is a major issue of concern because Indian start-ups are heavily relied on Chinese investment, considering the poor infrastructure in India to provide stimulus to start-ups.


Why the Red Dragon an Issue of Concern?

As Tencent games and Alibaba has a huge number of Indian users, they can access a huge amount of data from Indian users. 5G Technology giant Huawei has been banned in the US, Australia, and reportedly New Zealand as well. In December 2019, Canada arrested the Chief Financial Officer (CFO) of the tech giant as well. Such strong are apprehensions of a Chinese tech firm because of concerns of data privacy, intelligence sharing, cybersecurity, and the threat to national security. The sole reason is that such firms can easily access personal and sensitive data of individuals. Furthermore, after the black gold 'crude oil', data is the next big thing and the cause of conflicts and concerns. [7]

Prudence or Protectionism

Pandemic has forced economies to implement policies which conceptually ignite protectionism. In a globalized world, such shutdowns create havoc and chaos in global markets. An important question that is disturbing the academicians, intelligentsia, economists, policymakers, etc is whether restricting and curbing FDI, or even scrutinizing the procedure and firms related, an action of prudence or protectionism. Although the measures indicate protectionism, what preludes the protectionism can be termed as prudence. An argument made by Kanwal Sibbal as well as prudence, not protectionism. [8]

Such measures can be termed as prudence because, amidst a global shutdown and pandemic, countries have implemented protectionist policies to protect from the domestic economy from any Chinese invasion of businesses.


Conclusions


COVID 19 has deeply impacted FDI regimes among major economies. Bilateral relations witch China, especially for the countries that have amended the FDI rules could see a downfall. Although it might seem that post-pandemic trade with China would continue [9], it seems to be ambivalent about what would be the position of Beijing then.

India, through its policy change of FDI, can be seen in a strengthened position with leverage against its immediate neighbour. In an attempt to protect their domestic firms from opportunistic takeovers, European Economies, Australia, the US, New Zealand, and India have virtually isolated China as well. This isolation would impact the global market, world order, and bilateral relations. It would be important to argue, whether these countries will practice stringent rules of FDI post-pandemic or not. If such measures will be implemented post-pandemic, it would surely accelerate an 'anti-globalized era' because these are major economies of the globe, who three decades ago were pioneers of Globalization.

China can be seen to invoke, what are conceptually called non-traditional challenges to National Security. Beijing is observed as a direct or indirect threat to cybersecurity and the economic security of countries across the globe. However, countries like India, US, Canada, Australia, New Zealand, and European superpowers can be seen resisting the invasion of Red Dragon, but countries in Africa and South Asia (Bangladesh, Pakistan and Sri Lanka) can be seen not only falling into 'debt trap policy'[9] of BRI but also can be seen passively falling into the Sino bloc. This foreign policy agenda of Sino Bloc can be regarded as a new chapter in books of 'neo-colonialism'.



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