More than half of India’s 30 unicorn companies have received Chinese investment and Xiaomi is India’s leading smartphone brand. Photo: Xinhua
Alan Rosling
Alan Rosling

India’s misguided FDI rules threaten to cut off Chinese funds and worsen Covid-19 economic damage

  • India’s new curbs on foreign direct investment will hit its burgeoning digital economy in particular, and deter not just funds from mainland China but also from the regional financial centre of Hong Kong

India risks being one of the countries worst affected by the Covid-19 pandemic. Already, before the virus struck, its economy had slowed markedly to an estimated growth of roughly 5 per cent last year.

The national lockdown, extended to May 18, is having an appalling impact on millions of poor day-labourers and subsistence farmers. Ratings agency Moody’s Investors Service has cut its forecast for India’s economic growth this year to 2.5 per cent, and Fitch Ratings to 0.8 per cent, amid growing political pressure to lift the lockdown.
Threatening to make matters worse is India’s new policy on foreign direct investment, where investment from any country bordering India will be subject to prior official clearance. Since investments from Pakistan and Bangladesh are already controlled, this new measure appears to target China.

India desperately needs foreign investment to create jobs, support infrastructure development and introduce new technologies. Last year, India attracted US$49 billion in foreign direct investment, up 16 per cent despite its slowing economy. The origin of investment flows is tricky to establish but it is clear that Chinese investment flows into India have been growing and amount to some US$8 billion to date.

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping have attempted in recent years to boost business relations between their vast and fast-growing economies, which have long suffered from stunted economic ties. Bilateral trade last year amounted to only US$92.7 billion, and was heavily skewed in China’s favour.
The growing trade deficit and India’s refusal to join the Belt and Road Initiative have hobbled economic relations, just as the disputed border in the high Himalayas and China’s support of Pakistan have dogged strategic dialogue.
Investment by China’s technology giants and venture capital firms in India’s burgeoning digital economy appeared to offer hope for a new and more mature partnership. In 2015, Ant Financial led the way with a US$575 million investment in Paytm, India’s leading online payment provider.
Since then, more than half of India’s 30 unicorn companies have received Chinese investment. Xiaomi is India’s leading smartphone brand with 29 per cent of the market and TikTok leads digital downloads with more than 200 million subscribers in India.

The new restrictions on foreign direct investment, announced without prior consultation or debate, were presented as a measure to prevent “opportunistic takeovers/acquisitions of Indian companies due to the current Covid-19 pandemic”. The move came after much ill-informed media commentary in India about China’s responsibility for the outbreak.

There had also been speculation about an impending wave of Chinese takeovers of Indian companies, presumably taking advantage of more attractive market valuations; the benchmark Sensex index on the Bombay Stock Exchange had fallen by 17 per cent from March 1. Commentators pointed to the People’s Bank of China increasing its stake in Housing Development Finance Corporation (HDFC), India’s largest mortgage lender, from 0.8 per cent to 1.01 per cent.

Other countries have, in recent years, introduced regulations to control foreign corporate takeovers. In 2018, President Donald Trump tightened the Committee on Foreign Investment in the United States process in reviewing foreign acquisitions. Canada introduced the Investment Canada Act in 2017 to prevent takeovers not deemed to be of “net benefit to Canada”.

It’s all about the economy: why India and China need to stay friends

None of these so explicitly targets one specific country, and they regulate transfer of control in sensitive sectors. In contrast, India’s new regulation is a blanket requirement to apply for prior sanction regardless of sector, investment size or management influence.

There has been much criticism of India’s ill-considered move. China’s embassy in Delhi objected strongly, and India’s technology sector and venture capital community have expressed grave concern that minority investments in start-ups will be put off.
The policy also applies to investors from the financial centre of Hong Kong. Will CLP now need to secure prior permission to build a wind power plant in India? Or will Morningside Venture Capital have to secure permission to back new tech entrepreneurs in India?

Alan Rosling is an entrepreneur, adviser and commentator based in Hong Kong. He was previously an executive director of Tata Sons and co-founder of Kiran Energy

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This article appeared in the South China Morning Post print edition as: India’s FDI rules threaten Chinese funds