With world merchandise trade predicted to fall in the range of 13% - 31% in 2020 and foreign direct investment (FDI) expected to fall between 30% and 40% roughly, the government’s foreign direct investment policy choices will be one of the crucial factors of economic recovery.
Amid this pandemic, India is presented with an opportunity to attract foreign direct investment (FDI) - especially from large companies which are diversifying their investments into new geographies away from China to mitigate risks and to ramp up production across product lines. This can give a significant boost to India’s manufacturing sector and aid the ‘Make in India’ programme that has fallen prey to the Chinese predatory pricing strategies.
In line with this, the central government has facilitated the formation of an empowered group of secretaries headed by Rajiv Gauba, Cabinet Secretary to make India a more investor friendly destination. The government has opened up the coal sector for commercial mining under the automatic route, increased the limits from 49% to 74% in defence manufacturing, initiated planning of the corporatisation of the Ordnance Factory Board and also focused on bringing up a new regulation in the FDI policy which allows for 100% FDI under the automatic route in satellite builders, launchers and space-based service providers and the
There is another angle to the story as well. Recently, The People’s Bank of China, increased its stake in India’s largest non-banking mortgage provider, HDFC, from 0.8% to 1.01%
under a situation when HDFC lost about one-third of its share price - falling to a 52-week low of Rs1,473 as on March 31, 2020 - under the effect of the pandemic. Alarmed by this, on April 17, 2020, the central government announced a change in the existing FDI policy in order to curb opportunistic takeovers and acquisitions of Indian companies due to the current Covid-19 pandemic. Though the policy did not target any country in particular, everyone understood that the focus was on China. India proactively amended her FDI policy in a bid to protect her sensitive sectors like banking, digital infrastructure, e-commerce, electronics, bio-pharmaceuticals from China’s predatory purchasing of low valuation assets. But it is of great concern that this protectionist move might backfire and jeopardise FDI inflows - both during and in a post Covid-19 phase.
India recorded a massive jump (to the tune of 18%) – the highest in four years - in total foreign direct investment inflows into India which is around $73.46 billion for the 2019-20 financial year, as per the data released by the Department for Promotion of Industry and Internal Trade (DPIIT). The sectors that attracted the most foreign inflows during 2019-20 included services ($7.85 billion), computer software and hardware ($7.67 billion), telecom ($4.44 billion), trading ($4.57 billion) and automobiles ($2.82 billion). Singapore has emerging as the largest equity FDI source. But FDI inflows for the 2020-21 fiscal is expected to face the Covid-19 test.
Standing at such a juncture, this blanket protection of Indian companies along the lines of the global trends of deglobalisation goes down well with the domestic audience as a populist measure. However, the move seems to have been rushed. If we look at the FDI patterns in India over the last two decades, a cumulative $456.91 billion in FDI has been received with roughly 70% of it coming from five countries, namely Mauritius (31%), Singapore (21%), Japan (7.2%), the Netherlands (6.7%), and the United States (6.1%). FDI inflows from China increased only in the last five years, amounting to $1.81 billion (mainly in automobile and electronics). But still the proportion of China’s FDI in India during the same period is very negligible, standing at 0.5% - making it hard to comprehend why such selective targeting has been brought about.
In the last two years, Chinese companies have invested roughly around $3.3 billion in 2018 and $3.4 billion in 2019 in a majority of greenfield projects in the domain of energy, telecom, metals, tech and real estate. The Indian chemical and the pharmaceutical industries will be hard hit which imports roughly around $32.4 billion worth of intermediate raw materials from China. As reports suggest, Shanghai Automotive owned MG Motor and Great Wall Motors are on track with their India plans, while Changan and Chery are also looking for opportunities to set up a manufacturing base in India. In the domain of India’s technological start-ups, of 30 unicorns valued at $1 billion or above, 18 have funding from Chinese sources and out of these 18, 10 are loss-making ventures. The likes of Paytm, Zomato and Snapdeal have grown fast with backing from Alibaba andits affiliate Ant Financial. Chinese internet giant Tencent Holdings has invested heavily in education tech firms BYJU, Swiggy, OLA, OYO and more. Also, Tencent’s majority stake in Dream11, India’s first billion-dollar gaming company, is under severe threat under these new measures. A stop in Chinese inflows would be a body blow for these outfits. At a time when Indian corporates are reeling under a severe liquidity crunch due to rising non-performing assets and banks are not too keen to lend, banning Chinese investments doesn’t augur well.
India has given the world a glimpse of its desperation for foreign investments while at the same time, expressed a fear of foreign acquisition. These contradictory strands are being exposed in an obvious manner. Moreover, it is a double-edged sword. The pool of capital coming from the US and Europe will dry out under the effects of the pandemic. At such a time, the government is turning off the tap from China, fearing takeover threats. The need of the hour for the Indian economy, which is tottering under the twin shocks of crippled growth and the pandemic induced shutdown, is to refill consumer demand by creating adequate employment opportunities. This can be possible through a capital infusion in the private sector. At a time when the finances of the government are stressed and bank lending is nearly muted, the selective prohibition of foreign capital is not desirable.