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COVID-19 and FDI Policy

  • IASbaba
  • April 24, 2020
  • 0
UPSC Articles
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ECONOMY/ GOVERNANCE

Topic: General Studies 2 & 3:

  • Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 
  • Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 

COVID-19 and FDI Policy

Context: India amended its FDI policy to put a blanket ban on investments through the automatic route by entities from countries that share a border with India.

India’s FDI policy

  • foreign direct investment (FDI) is an investment in the form of a controlling ownership in a business in one country by an entity based in another country.
  • India’s FDI policy allows foreign investment in certain sectors under the automatic route. 
  • 100% FDI is permitted under the automatic route in manufacturing, oil and gas, greenfield airports, construction, railway infrastructure etc. 
  • In other sectors, FDI is allowed under the automatic route upto a certain threshold, say 26% or 49%.

Most FDI flows into India are under the automatic route, which means companies only need to inform authorities after the investment is made

Critical Analysis of the action taken by government:

  1. Provides safety net for Indian Companies: Economic slowdown due to COVID-19 has led to decreased valuation of firms making it vulnerable to hostile takeover by other
  2. Aimed at China: To ward off opportunistic takeover of Indian Companies by China
  3. Prevents Misuse: The ban also extends to entities where Chinese citizens have “beneficial ownership” to ensure that the restrictions are not circumvented by routing investments via Hong Kong, Singapore or other countries.
  4. Following Global trend: similar barriers erected by other countries like Germany, Italy, Spain etc. to block predatory capital from China. 
  5. Doesn’t Extend to all countries: Government does not want to be seen as having turned protectionist and insular. 
  6. Change in government’s strategy: In recent years India courted investments from China to counter the widening trade deficit with it.
  7. Fear of Chinese domination: The Chinese have already restarted manufacturing when the rest of the world still grappling with coronavirus thus giving them several months’ advantage
  8. The action signals India’s intent of not separating commerce and security in dealing with China
  9. Increasing divergence with China: India opposed China’s Belt and Road Initiative and walked out of the RCEP negotiations citing the trade imbalance with China.

Conclusion

Even though foreign investments are needed for country’s growth prospects but that should come at the cost of our National Security interests.

Connecting the dots:

  • Difference between FDI and FII
  • G20, FATF and WTO – that deal with foreign flows of funds

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