The recent developments indicate that China has censured India for purportedly contravening the World Trade Organization’s (WTO) “principle of non-discrimination”. This accusation follows India’s revision of its Foreign Direct Investment (FDI) policy, which now necessitates approval for firms in neighbouring countries intending to invest in Indian enterprises. This change in policy came in the wake of the People’s Bank of China (PBoC) raising its shareholding in Housing Development Finance Corporation (HDFC) to over 1% during the recent stock market plummet.
China’s Allegations Against India’s FDI Policy
China perceives this move as an additional barrier for investors from neighbouring countries, thereby violating the WTO’s principle of non-discrimination. China argues that India’s actions do not align with the consensus of G20 leaders and trade ministers who aim to facilitate free, fair, non-discriminatory, transparent, predictable, and stable trade and investment environments while maintaining open markets. The non-discrimination principle mandates that WTO members treat products from different trading partners equally, also known as the “most favoured-nation” or MFN status, and refrain from discriminating between domestic and foreign products.
India’s Justification For the New FDI Policy
India, however, maintains that this move is not about banning investments but merely changing the approval route for the same. It cites that numerous sectors in India are already subject to this approval route. India has also referred to countries like Germany, Australia, and Spain who have tightened their respective FDI policies to ward off hostile takeovers by overseas investors amidst the Covid-19 pandemic. Consequently, India’s move is seen as a preventive measure against the “opportunistic takeovers” of Indian firms affected by the ongoing outbreak and lockdown.
The Controversy Surrounding the Amendments
Notably, India’s updated policy regarding foreign investment does not extend to all countries, but only those sharing borders with India. As such, this results in different procedures for the same investments, contingent on the country of origin of the investing company.
Understanding Foreign Direct Investment (FDI)
FDI is an investment made by a party in one country into a business or corporation in another, with the intent of establishing a lasting interest. This “lasting interest” sets FDI apart from foreign portfolio investments, where investors passively hold securities from a foreign country. FDI can be made by expanding one’s business into a foreign country or by obtaining ownership of a company in another nation.
Overview of China’s FDI in India
China’s FDI in India has witnessed a fivefold increase since 2014, with cumulative investment exceeding $8 billion as of December 2019. A Brookings India paper estimates the total current and planned Chinese investment in India to be over $26 billion.
An Introduction to the World Trade Organisation (WTO)
The WTO serves as the sole global international organisation dealing with trade rules between nations. It was established following the Uruguay Round of General Agreement on Tariffs and Trade (GATT), conducted from 1987 to 1994, which culminated in the Marrakesh agreement. The WTO has 164 members, including the European Union, and 23 observer governments such as Iran, Iraq, Bhutan, Libya etc. It primarily functions to reduce trade barriers through negotiation and operates under the principle of non-discrimination.