India Revises FDI Policies

Military and economic tensions between China and India are on the rise.

The Department for Promotion of Industry and Internal Trade of India recently revised its policies on Foreign Direct Investment (FDI), restricting funds coming from five countries that share a border with India—Afghanistan, China, Nepal, Bhutan, Myanmar. FDI from these five states is now allowed only through government approval; these same rules were already in force with respect to FDI from  two of India’s other neighbors: Pakistan and Bangladesh.

The revision was triggered by the People’s Bank of China’s increased purchase of shares in India’s Housing Development Finance Corporation. Some believed it signaled that China was attempting to take over liquidity-crunched firms amid the coronavirus pandemic.

China has said that India’s new rules violate the World Trade Organization’s principle of nondiscrimination, as investments from non-border states are still allowed through the automatic route.

India’s FDI revision isn’t discriminatory, argues Anjali Tandon, an associate professor at the  Institute for Studies in Industrial Development (ISID) in New Delhi. “The move is not a violation of any WTO commitments, as investment is neither covered under the GATT, TRIMS or GATS, which India has committed to.”

Developed countries already practice such restrictions, notes Tandon, pointing out the restriction is “aligned with similar moves initiated in countries such as Australia, Canada, Germany, Italy and Spain.”

India revised its FDI policy to protect ailing firms from foreign takeover, says Swati Verma, assistant professor at ISID. “This move was urgently called for to protect the domestic firms that are liquidity-starved and have faced significant declines in market value recently due to Covid-19 pandemic-related uncertainties. These firms, especially highly leveraged ones, are vulnerable to hostile takeovers in deteriorating economic situations and needed regulatory protection.”