Changes in India's FDI Policy

IN NEWS:

In the wake of COVID-19 crisis and the resultant economic slowdown, the government has amended its Foreign Direct Investment (FDI) policy to prevent opportunistic takeovers of Indian companies.

FOREIGN DIRECT INVESTMENT:

• FDI is an investment made by a firm or individual in one country into business interests located in another country.
• FDI is different from Foreign Portfolio Investments (FPI). FPIs involves investments made in securities and other financial assets issued in another country. But, FDI involves capital investment as well as provisions of management and/or technology.
• With FDI, foreign companies are directly involved with the day-to-day operations in the other country.
• The investments can be categorised into two:
  • Greenfield investments: It is a form of FDI in which a multinational sets up a foreign subsidiary or foreign operations from scratch.
  • Brownfield investments: It is a form of FDI where a company invests in an existing facility to start its operations.

INDIA’S FDI POLICY:

• Since the 1991 economic reforms, India has been pursuing a policy of attracting Foreign Direct Investments.
• India, today is a part of top 100 club on Ease of Doing Business (EoDB) and globally ranks 1st in the greenfield FDI ranking.
• There are two routes by which FDI is allowed in India:
  1. Automatic route: By this route, FDI is allowed without prior approval by Government or RBI. 100% FDI is permitted through the automatic route in areas such as Agriculture & Animal husbandry, Asset reconstruction companies, Automobiles, e commerce activities, Coal and single brand retailing.
  2. Government route: Under this route, prior approval from the Government \is required for investment. Proposals for foreign investment are considered by respective Administrative department or Ministry. Upto 100% FDI is permitted through this route. It includes areas such as Banking, multi brand retailing and digital media.
• FDI is prohibited in certain areas such as sectors not open to private sector investment like Atomic energy, Chit funds, Lottery and Gambling ND Real Estate Business

WHAT CHANGES WERE MADE IN THE FDI POLICY?

• An entity of a country that shares a land border with India can now invest in Indian firms only under the Government route.
• It also covers those instances where the owner of investment into India is situated in or is a citizen of any such country.

WHY THE CHANGE:

• Protect Indian firms: Economic slowdown due to COVID-19 has decreased the valuation of many firms, thereby making them susceptible to hostile takeovers. China, with it largely unaffected domestic market, stands to gain from this.
• Prevent Chinese domination: As of December 2019, China’s cumulative investment in India has exceeded $8 billion, which is far more than investments by other countries that share borders with India. If it is to continue, it could create significant influence of Chinese interests on Indian economy.
• Prevent distress sale in strategic areas: India is already concerned with the rising Chinese FDI in areas such as telecom, digital technology and other advanced sectors. As the economic slowdown is expected to create panic in these areas, the change is expected to prevent distress sales.
• Following global trend: A number of European Countries and Australia have tightened rules their investment related rules to prevent cheap foreign takeovers.

CONCLUSION:

• China has called the changes as ‘discriminatory’ and called for treatment of investments from different countries equally. India maintained that the policy is not aimed at any one country, but is aimed at curbing ‘opportunistic’ takeovers of Indian firms.
• It needs to be seen whether the additional barriers set by India for investors from specific countries violates WTO’s principle of non-discrimination and go against the general trend of liberalization and facilitation of trade and investment.
• However, the recent change clearly underlines the emerging perception in India that there is no separating commerce and security in dealing with China.
• The new changes can be viewed as the rise of high-power business diplomacy in foreign relations. Many countries have started rethinking the nature of their commercial engagement with China. But the puzzle of dealing with a rising China’s strategic economic onslaught will test Delhi for a long time in the coming years.

PRACTICE QUESTION:

Q. The COVID-19 pandemic has forced India to adopt a conservative stand in foreign investments. Discuss, with special emphasis on India-China relationship?