Rethinking FDI: Investment policy must evolve with changing realities

The Union Cabinet on Tuesday approved changes to rules governing investment from countries sharing land borders with India, otherwise called land-border countries (LBCs). This is a pragmatic decision. However, India’s regime of foreign direct investment (FDI) needs to evolve with the changing global economic and geopolitical environment. The Union government had restricted FDI from LBCs in 2020 through Press Note 3. It was then argued that the change attempted to curb opportunistic acquisitions of Indian companies during the crisis caused by the pandemic. As a result, entities from countries that shared land borders with India were allowed to invest only through the government route. One of the reasons for the policy change was to restrict investment from China due to border tensions. Once those tensions eased and the pandemic’s impact receded, Indian businesses started demanding a relaxation in restrictions. On its part, the government selectively allowed such investment from LBCs, particularly China. The success in developing an ecosystem for Apple Inc is a notable example. 

Given the changes in the economic environment over the past few years, the government has done well to review the policy. Investment from entities with non-controlling LBC beneficial ownership of up to 10 per cent will now be permitted through the automatic route, subject to the applicable sectoral cap and other conditions. Investment will also be subject to reporting relevant information and details to the Department for Promotion of Industry and Internal Trade. Further, entities from LBCs wishing to invest in specific sectors — such as capital goods, electronic components, electronic capital goods, and polysilicon — will have their proposals processed and decided within 60 days. The Committee of Secretaries, under the Cabinet secretary, is empowered to revise the list. The guidelines note that the majority holding and control of the investee entity must be with resident Indian citizens or Indian entities controlled by resident Indian citizens. 

The revised guidelines should help improve the ease of doing business and attract FDI. From a policy standpoint, it is not easy for any large country to exclude China, the world's second-largest economy, from its broader economic calculations. The decision also comes at an important juncture because India needs to attract FDI. Given the uncertainty in the global financial system, India is facing capital outflows and is running a deficit in the balance of payments. A sustained deficit on the capital account could significantly complicate external-sector management. 

However, given the geopolitical sensitivities, there is a need to review the overall FDI regime. There are genuine concerns about China, and several countries across the world are calibrating their relations with the country. In the present context, scrutinising investment coming from specific countries may not be enough. Despite the guidelines on beneficiary ownership, it may not always be possible to determine whether investment coming from, say, Singapore or European countries is not from entities controlled by Chinese capital. Again, one could argue why interests should be protected only against Chinese capital. What India needs is to identify a set of sectors it views as strategic and which a hostile country can use to undermine its interests. In other words, India needs to spot sectors in which it will develop its own capabilities or be in partnership with select trusted countries. The rest can be liberally opened up for foreign investment. India needs large doses of foreign investment to supplement domestic savings to achieve higher growth rates. But in a world that is becoming increasingly unpredictable by the day, it must also safeguard its strategic interests.