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India’s New FDI Norms Violate WTO: China

  • 21 Apr 2020
  • 4 min read

Recently, China has accused India of violating the World Trade Organization WTO’s “principle of non-discrimination” after the India tweaked its Foreign Direct Investment (FDI) policy to make its approval mandatory for firms in neighbouring countries to invest in Indian companies.

  • India tweaked its FDI policy, 2017 days after China’s central bank, the People’s Bank of China (PBoC), raised its shareholding in Housing Development Finance Corporation (HDFC) to over 1% during the recent stock market slump.

Key Points

  • China’s Stand: The additional barriers for investors from neighbouring countries violate WTO’s principle of non-discrimination, and go against the general trend of liberalization and facilitation of trade and investment.
    • India’s decision do not conform to the consensus of G20 leaders and trade ministers to realize a free, fair, non-discriminatory, transparent, predictable, and stable trade and investment environment, and to keep markets open.
    • The principle of non-discrimination stipulates that a member shall not discriminate between products from different trading partners (giving them equally “most favoured-nation” or MFN status); and between its own and foreign products.
  • India’s Stand: The amendments are not prohibiting investments, It has just changed the approval route for these investments. There are many sectors in India that are already subject to this approval route.
    • India said countries like Germany, Australia and Spain have also tightened their foreign investment policies to prevent hostile takeovers by overseas investors.
    • India’s move is seen as checking “opportunistic takeovers” of Indian firms hit by the ongoing Covid outbreak and lockdown.

Issues Involved

  • India’s new amendments to foreign investment do not apply to all countries but just those which share borders with India.
  • There will be different sets of procedures for the same set of investments based on which country the company is investing from.

Foreign direct investment (FDI)

  • It is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest.
  • Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.
  • Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.
  • China’s FDI in India
    • China’s FDI has grown five-fold since 2014 and, as of December 2019, its cumulative investment in India has exceeded $8 billion.
    • A Brookings India paper pegs the total current and planned Chinese investment in India as being over $26 billion.

World Trade Organization

  • The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.
  • The Uruguay Round of General Agreement on Tariffs and Trade (GATT), conducted from 1987 to 1994 culminated in the Marrakesh agreement, which established the WTO.
  • The WTO has 164 members (including European Union) and 23 observer governments (like Iran, Iraq, Bhutan, Libya etc).
  • The WTO’s global system lowers trade barriers through negotiation and operates under the principle of non-discrimination.

Source:IE

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