India is right to impose barriers on China. But there is a price tag

The pandemic has seen great power rivalry only worsen and economic factors — infrastructure, technology and finance — move to the heart of geopolitics. India must walk a fine line. At its present state of development, it needs to expand its overseas economic engagements, even while remaining sensitive to its external security needs.

India has followed a half-a-dozen countries in placing restrictions on foreign investment because of the pandemic-stricken condition of its domestic firms. The automatic route is now closed to investors from India’s land neighbours. This new regulation has clearly only one target: China. New Delhi is only the latest country to fear that a recovering China will take advantage of the rock-bottom valuations of firms of national importance. India has long had barriers to Chinese holdings in critical infrastructure and technologically sensitive firms. Expanding investment screening to all sectors is an almost natural progression. The HDFC Bank share purchases by China’s central bank was only a trigger.

A purely arbitrary method of deciding what types of investment is allowed would be a setback to India’s decades-long attempt to be more attractive to investors from all countries. (HTPHOTO)

However, New Delhi should not be under any illusion. Foreign capital remains crucial to the country’s economic success, and will be doubly important as India tries to revive its economy. Making it more difficult for China will carry a price tag. China has been the fastest-growing source of foreign investment in the last five years. And Chinese investors have shown a remarkable degree of risk appetite and now have a substantial presence in over half of India’s unicorns. A purely arbitrary method of deciding what types of investment is allowed would be a setback to India’s decades-long attempt to be more attractive to investors from all countries. As the screening process matures, the department of promotion of industry and internal trade should work out a clear process and precise regulations to decide what is an acceptable investment. The issue of off-shore fund investments and who is the ultimate “beneficial owner” from an investment is trickier, though it should be recognised these are used because India remains a difficult business environment.