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View: Dining with the dragon

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By Madan Sabnavis

The recent decision taken by the government to allow FDI from countries adjoining our borders through the prior approval route rather than the automatic route needs to be seen against a perspective. First, the rule does not bar such investment but only says that such proposals should be approved by the government which really means that they will be studied closely before being permitted. This is against the normal practice of having automatic approval where the transaction has to be reported to the RBI once finalized. The second is that this is a concern everywhere in the world because these are unusual times.

FDI in India is classified under three lists: banned, prior approval, and automatic routes. The limits are very liberal for most sectors where over 51% is allowed, and even in case of prior approval it is only ensured that there is an orderly way in which investment is undertaken with commitment to remain in the country. More often than not it is a formality.

The new rule which becomes country specific is definitely novel as it brings in proposals from a fixed set of nations and the allusion is clearly to China as the other nations like Pakistan, Afghanistan, Nepal, Bhutan and Bangladesh have limited exposures in India. China is clearly the nation which has deep pockets and would be seeking to expand on its investments globally at a time when other investors may be restricted by domestic recessionary tendencies. China is also the country which has officially recovered from the pandemic where it originated and would be in a better position to leverage the situation when other nations are in a state of lockdown.

While India has taken a region-specific approach, it does not bar such investment but only makes it mandatory to be examined in detail before taking a decision and hence it would be incorrect to conclude that there is a ban on such investment. It must be realized that the pandemic has brought down the markets across the globe with share valuation falling sharply which makes them attractive for potential investors. This is one reason why several European nations have already invoked policies of taking a closer look at the FDI flows as there is a real threat of takeover of companies by foreigners. While from an investor perspective this would be a good opportunity it may be interpreted as being opportunistic by the host nation as such takeovers could be considered to be hostile.

India’s concern is real because China has been involved in dumping of steel in the past and the same allegation has been made by other countries when it comes to automobiles and electronics. Given China’s superior economic position today amidst good valuations from an investors’ standpoint, leveraging the same makes business sense. However, precedents of dumping in the past would militate against such activity as almost all countries are wary of this possibility. From a company perspective this would also be a vulnerable situation where business has been affected due to the shutdown leading to lower valuation which makes it susceptible to takeovers. As economic conditions are not normal, having certain checks on flow of FDI is always advisable.

The problem with China and investments from the country is that it is hard to distinguish between private and government investment given the close relationship that is there between the two. The government of India is definitely playing safe by asking for greater scrutiny before such investment is permitted, which is logical especially in this period where a substantial proportion of equity can be taken over by investors. This will actually hold for certain critical sectors like banking, telecom, non-financial services etc. There is no reason to believe that all or most investment proposals will be rejected. Insisting on prior approval is just a check that has been put in to ensure that the process is in order.

While this may be accused of being discriminatory by the pure WTO standards, countries need to ensure that critical segments are not taken over by what could be called hostile or opportunistic investors in these unusual times. It would be interesting to see if this new rule would be withdrawn or diluted over time. More likely it should be restored to normal once the pandemic is behind us and the markets back to realistic levels.

*The author is Chief Economist, CARE Ratings. This is part of a multi-article series written by economists and sectoral experts on the path India must take to survive the Covid crisis.

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