Modi is striving to isolate China with his new FDI policies but he’s not the only one.

  • + The economic crisis has left many domestic firms vulnerable.
  • + Chinese investors are seeking to buy shares of such companies.
  • + Modi’s new FDI policies could hinder future Chinese investments. 
India’s Prime Minister Narendra Modi is seen at the G20 summit in Hamburg, Germany July 7, 2017. REUTERS/Wolfgang Rattay; The Indian Express

It’s been a tough few weeks for Modi. As the COVID-19 outbreak continues to spread across India and the lockdown gets extended, Modi now also has to deal with the domestic economic crisis. For him, economic hardships have come in two forms, one on the domestic front and another on the international one.

In the past few months, many Indians, including me, have realised that India still has a stark income inequality and the pandemic has only exacerbated the situation for the lower-income groups. The Modi government also knows that without addressing the needs of these groups, it will also be impossible to curb the outbreak. But looking at the international sphere, Modi has become far more active – implementing economic policies to protect Indian firms. Due to the blatant contrast in the domestic and international policies, I’ll be focusing on the latter for this blog. 

Just like many countries, Indian firms too, have faced a major blow due to the pandemic. With the prices of shares dwindling, many firms have become more susceptible to acquisitions or takeovers by larger corporations. For Modi, the biggest worry stems from China and its investors. The Modi government became alarmed when HDFC, one of India’s leading banks, announced that the People’s Bank of China now held more than 1 per cent shares in the former. 

Indians were not surprised when the Modi government announced an amendment in the FDI (Foreign Direct Investment) policy which now states that: “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.” India has seven neighbouring countries but only one country has an economy large enough to direct exorbitant amounts of FDI – China. Previously, only FDI from Pakistan and Bangladesh had to be approved by the government. Although this policy does mention all the neighbouring countries, the country that would be most affected by it is China. Moreover, the policy also implies that FDI from these 7 countries cannot flow through other channels or countries either. 

This has obviously angered the Chinese government since it has gone on to say that India is violating the WTO rules as well as the G20 consensus as China perceives the policy to be discriminatory in nature. However, it seems that Modi is not willing to mend, especially during this economic recession when Indian firms have become more vulnerable. This is not the first we’ve seen of Modi’s ‘protectionist’ economic policies and it is probably not the last. 

We also observed this in late 2019 when India backed out of the Regional Comprehensive Economic Partnership (RCEP), a trade pact comprising 15 countries, most of which were Asian. The trade pact, advocated by China, worried Modi that the service workers and farmers would not be protected and the trade deficits could worsen. China has offered India to join the pact when it feels like but it seems like this will not happen anytime soon.

Modi had also announced certain restrictions for e-commerce companies in India in February 2020 where Amazon and Walmart (which owns Flipkart, an Indian company) felt a major blow (a similar policy had been implemented in 2018 as well). The new policy aims at protecting the smaller Indian e-commerce companies by restricting discounts on goods to boost domestic competition. Yet, the policy could hurt the domestic consumers as well as foreign investments since the latter relies on stable economic policies. 

So what’s going to be the impact of the FDI policy? For now, China will be the most impacted as it loses one of its largest country customers. China has been deemed as ‘opportunistic’ and ‘predatory’ by many Indian officials. Yet, a significant proportion of Indian economic growth had been attributed to Chinese investments. This also means that India will look more towards the West for investments as a form of ‘compensation’: We’ve already seen this in motion as Facebook bought a 9.9% in Reliance Jio, an Indian telecom company, a few days ago, making the former the largest minority shareholder in Reliance Jio. Facebook aims to use WhatsApp and JioMart (a business initiative by Reliance) to promote small businesses; they estimate that 60 million small companies will benefit from this move. Yet, the FDI policy will also disrupt 18 out of the 23 Unicorns in India as well as the mobile phone and automobile sectors that are largely financed by Chinese investors. 

While such a policy is more evident for me as an Indian, this ‘protectionist’ trend has been growing all over the world as well. Of course, Trump’s trade war with Xi Jinping started a few years ago. But many European countries have also become wary of Chinese investments amidst the pandemic and the global economic crisis. India is just one case amongst many countries where the firms have become more vulnerable.

While on one side, we see China using its ‘facemask diplomacy’ to build diplomatic ties with the EU, it can also be observed that the Western states haven’t fully warmed up to China yet. It is still being contemplated whether China is the ‘hero’ or the ‘perpetrator’ of all our current problems. Will the COVID-19 pandemic completely taint China’s reputation or will it lead to a global Chinese takeover? Well, you’ll have to check our blog out for regular updates!

Ishwari Sawant

Team Member of Research & Analysis