The change in India’s foreign direct investment (FDI) policy, announced by the government last Friday, was a specific response to a situation that has arisen due to the economic disruption caused by the pandemic-related lockdown. The government tightened the FDI rules, mandating specific approval of inward investments by entities based in neighbouring countries. The automatic route of approvals has been closed now. Restrictions on investments from Pakistan and Bangladesh have existed, and so the latest change is effectively directed at China. The government has explained that the change is needed to prevent opportunistic takeovers of Indian companies. Many Indian companies can now be bought cheap after they lost much of their share value in the last few weeks’ market crash. They have become easy targets for takeover.
The latest red flag about China’s investments was raised when its central bank recently bought about 0.21% stake in HDFC Ltd, taking its total holding in the Indian bank to over 1% and thus required reporting. There has been a large inflow of Chinese investments into many Indian companies and there are reports that much more is in the pipeline. Concerns over Chinese acquisition of economic assets are prompted by the strategic and security underpinnings that many such investments may have. India’s apprehensions are shared by other countries also, and some of them, including the US and some members of the European Union, have taken steps to counter or reduce the inflow of Chinese capital. There is strong political backing in China for promoting its economic interests abroad. The Belt and Road Initiative (BRI) is the most obvious example of the conjoining of its economic, strategic and political interests. India rightly decided not to get drawn into it and not to join other initiatives like the Regional Comprehensive Economic Partnership (RCEP) which would have boosted China’s economic advantage to India’s detriment.
Obstruction of the free flow of capital and adoption of protectionist policies go against the idea behind the opening up of the economy since 1991. But the present situation is very different and involves not just economics but national security and other vital interests. Since China has shown that it is ready to leverage its economic and technological advantages for dominance over other countries, others have to take steps to protect their own interests. The FDI decision may be considered as one such decision. It should be noted that Chinese investments can also come into India from companies in which China has stakes but are located in other countries. Such loopholes should also be plugged. China has protested India’s action, but the government should stand firm.