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THE GIST of Editorial for UPSC Exams : 21 April 2020 (Tightened FDI rules (Financial Express))

Tightened FDI rules (Financial Express)

Mains Paper 3:Economy
Prelims level:People’s Bank of China
Mains level: Challenges for Indian economy from Chinese investment route

Context:

People’s Bank of China (PBC) buying a 1% stake in HDFC Bank, it is just as well that the government announced a policy “for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic”.

Leveraging China or not:

A 1% stake in HDFC Bank via the FPI route wouldn’t give PBC any leverage, but FPI rules allow for this to rise to 10%.
Combined with the possibility of other Chinese entities buying, this could give the Chinese government some serious leverage.
Indeed, with even more Indian assets likely to be auctioned off after the pandemic, the Centre would be wary of Chinese entities—especially given their government/military link—picking up too many assets for a song.
A recent Brookings India report notes how Chinese firms are investing in all manner of areas from mobile phones and construction equipment to real estate and automobiles, and increasingly, in startups. Over 800 Chinese firms operate in India right now.

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Chinese investment route in India:

It is difficult to get a fix on Chinese investment in India, since a lot could be coming via Singapore, or through funds where a certain beneficial interest could be Chinese; Sebi is supposed to be probing this.
India’s official data show that just 1.5-2% of FDI has come in from China and Hong Kong—$800 mn of the total $45 bn of fresh equity flows in FY19, and $6.5 bn of the $456 bn that has come in since April 2000.
A recent paper by Gateway House estimates China has invested $4 bn in Indian tech startups, resulting in18 of India’s top 30 unicorns having Chinese funding.
In addition, Chinese smartphone manufacturers already have a two-thirds share of India’s mobile phone market.
In 2018, Gateway House says, around half of the total app downloads on—iOS and Google—in India were apps with Chinese investments, such as SHAREit, TikTok, and UC Browser.
The Brookings paper, quoting the Chinese commerce ministry, puts the number at $6.4 bn in 2014-2017 (this includes Fosun’s $1.1 bn to buy Gland Pharma), and says this is an underestimate.
The big investments that come to mind are Alibaba’s $860 mn in Paytm, and $500 mn in Snapdeal, along with SoftBank and Foxconn; Tencent’s $400 mn in Ola, $700 mn in Flipkart, $175 mn in Hike Messenger, and $145 mn in Practo.
Chinese apps ask for 45% more permissions—access to contacts, cameras, microphones, etc—than those requested by the top 50 global apps, this is hardly relevant since none of these firms are based out of India.
The real issue is whether Chinese investors are insisting the firms share the data gathered with them; perhaps, that is something the authorities need to examine.

Steps need to be taken:

If India is to be more vigilant with Chinese investors, it must carve out no-go areas; without such rules, it will be impossible to ever clear Chinese investments in the startup world, which requires quick decisions on funding.
Future Chinese investment, for instance, can be kept out of the fintech space because it interacts with India’s banking system, out of biotech, defence (including drones), telecom (networks, not equipment), and such select areas, but may be allowed in the taxi business, in retail, food delivery, entertainment, etc.
Since China is one of the few countries that have the money to invest right now, if India’s startups aren’t to be starved of funds.
The government will have to ensure Indian investors get a level playing field versus global ones in terms of tax treatment, and other such facilities.
Indeed, till the operating environment in India gets less hostile, more startups will be incorporated in countries like Singapore; then, India can’t even hope to keep a check on Chinese investing in these firms.
At a macro level, if India wants to keep Chinese investment at non-threatening levels, it needs sweeping reforms.
Apart from the obvious reforms to make India more competitive, and fixing the government’s anti-industry bias, policymaking has to become a lot more coherent.
For instance, hope to attract Indian fintech players while, at the same time, abolishing MDR commissions these companies live off.
If price controls continue to hobble domestic pharmaceutical firms, they will have nowhere to turn to but to low-cost Chinese API, and if you keep squeezing telecom players, or don’t allow electricity boards and power producers to get paid adequately, they, too, will turn to low-cost Chinese suppliers.

Conclusion:

The only way to keep Chinese firms from developing a chokehold here is to allow local firms, as well as those from the US, Europe, and Japan to do well; India’s current policies, it so happens, are tailor-made for mainly Chinese firms to do well.

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Prelims Questions:

Q.1)With reference to the ‘Chitra Acrylosorb Secretion Solidification System’, consider the following statements:
1. It is a highly efficient superabsorbent material for liquid respiratory and other body fluid solidification and disinfection for the safe management of infected respiratory secretions.
2. AcryloSorb can absorb liquids at least 20 times more than its dry weight and also contains a decontaminant for in situ disinfection.
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2