Alan Rosling

India’s misguided FDI rules threaten to cut off Chinese funds and worsen Covid-19 economic damage

India’s new curbs on foreign direct investment will hit its burgeoning digital economy in particular, and deter not just funds from mainland China but also from the regional financial centre of Hong Kong

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Alan Rosling

Published: 8:00pm, 3 May 2020Updated: 9:05pm, 3 May 2020

India risks being one of the countries worst affected by the Covid-19 pandemic. Already, before the virus struck, its economy had slowed markedly to an estimated growth of roughly 5 per cent last year.

The national lockdown, extended to May 18, is having an appalling impact on millions of poor day-labourers and subsistence farmers. Ratings agency Moody’s Investors Service has cut its forecast for India’s economic growth this year to 2.5 per cent, and Fitch Ratings to 0.8 per cent, amid growing political pressure to lift the lockdown.

Threatening to make matters worse is India’s new policy on foreign direct investment, where investment from any country bordering India will be subject to prior official clearance. Since investments from Pakistan and Bangladesh are already controlled, this new measure appears to target China.

India desperately needs foreign investment to create jobs, support infrastructure development and introduce new technologies. Last year, India attracted US$49 billion in foreign direct investment, up 16 per cent despite its slowing economy. The origin of investment flows is tricky to establish but it is clear that Chinese investment flows into India have been growing and amount to some US$8 billion to date.

Indian Prime Minister Narendra Modi and Chinese President Xi Jinping have attempted in recent years to boost business relations between their vast and fast-growing economies, which have long suffered from stunted economic ties. Bilateral trade last year amounted to only US$92.7 billion, and was heavily skewed in China’s favour.

The growing trade deficit and India’s refusal to join the Belt and Road Initiative have hobbled economic relations, just as the disputed border in the high Himalayas and China’s support of Pakistan have dogged strategic dialogue.