Context: The editorial discusses India’s lack of a comprehensive legal framework to address national security risks associated with foreign direct investment (FDI) and international trade. Despite the growing influx of FDI, especially from China, India lacks robust legislation to screen investments on security grounds. The article compares India’s legal shortcomings with measures taken by other countries, like Canada and Australia, especially during the COVID-19 pandemic.
Relevance: General Studies Paper 2 (Governance) and General Studies Paper 3 (Economic Development)
Mains Question: Examine the need for a dedicated legal framework to address national security concerns related to foreign direct investment (FDI) in India. Discuss global best practices in this regard. (250 words)
- The Issue:
India faces a gap in legal mechanisms to screen FDI on national security grounds. While FDI brings economic benefits, it also carries potential security risks, particularly when it comes from countries with which India has tense relations, like China. - Pandemic and Press Note 3 (PN3):
In April 2020, during the pandemic, India issued Press Note 3, requiring government approval for FDI from countries sharing land borders with India, primarily targeting Chinese investments. However, this note did not address security risks but focused on economic concerns like opportunistic takeovers of Indian companies weakened by the pandemic. - Comparison with Other Nations:
Countries like Canada and Australia enacted specific legal provisions to limit Chinese FDI during the pandemic due to security risks. For example, Canada’s Investment Act allows screening of FDI that could harm national security. - India’s Legal Gaps:
India lacks explicit provisions to screen FDI for national security concerns. The Foreign Exchange Management Act (FEMA), India’s key FDI regulation, primarily deals with managing foreign exchange and lacks provisions for national security screening. - Global Trade and Security Risks:
The legal vacuum is not limited to FDI. India also lacks comprehensive legal frameworks to deal with trade issues that may pose security risks. Post-Pulwama, India denounced certain WTO obligations, but these actions remain reactive rather than part of a strategic legal framework. - Recommendations:
India needs to develop a law that explicitly addresses FDI and trade-related national security risks. This could include screening mechanisms like those in other nations and clearer definitions of what constitutes a national security risk. India could also adopt global best practices and tailor them to its specific geopolitical concerns.
Latest Data and Numbers:
- In 2020, India restricted FDI from neighbouring countries, affecting mainly Chinese investments.
- Global FDI inflows in India amounted to around $83 billion in 2021, with increasing scrutiny needed for security risks.
Conclusion:
India’s current legal framework is insufficient to address national security risks from FDI and trade. As foreign investment continues to grow, particularly from adversarial nations, India must develop specific legal provisions to safeguard its national interests. Adopting a dedicated law would align India with global practices and ensure that economic growth does not compromise national security.
India should take proactive steps to establish a legal structure addressing national security in FDI and trade, especially in a rapidly globalizing world.
