Context:

There are reports that New Delhi wants to block Chinese investors from buying shares in Life Insurance Corp. (LIC) which is due to go public, underscoring tensions between the two nations.

Relevance:

GS-III: Indian Economy (International trade), GS-II: International Relations (India and its Neighbors, India’s Foreign Policies)

Dimensions of the Article:

  1. About tightening the norms for FDI from neighbors (2020)
  2. What does the New Policy say?
  3. Why was this restriction on FDI from China necessary?
  4. More on China taking Control over Trade

 

About tightening the norms for FDI from neighbors (2020)

  • In May 2020, India mandated government approval for foreign direct investment (FDI) from countries with which it shares land borders.
  • The curbs aimed to shield Indian companies from predatory investments, particularly those from China—a big hint that policymakers in New Delhi have become ever more cautious of Beijing’s growing role in the Indian economy.

What does the New Policy say?

  • A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited.
  • However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route.
  • Pakistani investors face further restrictions in requiring government approval for FDI in defence, space and atomic energy sectors as well.
  • Investors from countries not covered by the new policy only have to inform the RBI after a transaction rather than asking for prior permission from the relevant government department.
  • The official statement added that a transfer of ownership of any existing or future FDI in an Indian entity to those in the restricted countries would also need government approval.
  • The decisions will become effective from the date of the Foreign Exchange Management Act notification.

Why was this restriction on FDI from China necessary?

  • India shares land borders with Pakistan, Afghanistan, China, Nepal, Bhutan, Bangladesh and Myanmar.
  • With many Indian businesses coming to a halt due to the lockdown imposed to contain the COVID-19 pandemic and valuations plummeting, a number of domestic firms may be vulnerable to “opportunistic takeovers or acquisitions” from foreign players.
  • Given the macro situation, it is a measure to protect vulnerable companies, with possibly low valuations, from unwelcome takeovers.

More on China taking Control over Trade

  • Over the past decade, China has replaced India as the major trading partner of several South Asian countries.
  • The share of India’s trade with Maldives was more than 3 times that of China’s in 2008. However, by 2018, China’s total trade with Maldives slightly exceeded that of India.
  • China’s trade with Bangladesh is at present about twice that of India.
  • China continues to lag India in its trade with Nepal and Sri Lanka, though the gap has shrunk.
  • China is now the largest overseas investor in the Maldives, Pakistan, and Sri Lanka.

What does China invest in?

  • Chinese investment is concentrated in hard infrastructure – power, roads, railways, bridges, ports and airports.
  • Nearly 80% of Chinese investments in South Asia have been in the energy and transport sectors.
  • China has also invested in the financial systems of these countries.

China and Debt Trapping

  • China is accused of extending excessive credit with the intention of extracting economic or political concessions when countries cannot honour their debts.
  • This raises fears that China’s credit to its South Asian partners, particularly via the Belt and Road Initiative (BRI), could be a strategic disadvantage for India.
  • Sri Lanka had to lease out its Hambantota Port to China for 99 years, after being unable to service its debt.
  • There is economic rationale for China in building alternative access to the Arabian sea to facilitate trade.

-Source: The Hindu

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