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Impact of COVID-19 on FDI

Published Date: 09-Jun-2020 09:45 AM

COVID-19 and the resulting lockdown have caused almost a standstill of all the business activities not only in India but all across the world. It has created massive uncertainty in global capital flows.

Among all the issues that matter right now, FDI should not be forgotten. There are many questions raised about the post –coronavirus economy, such as how global investment flows will behave as the emergency clears. The Covid-19 crisis has already wiped off companies' valuations. It may be well in a country's best interest to put up temporary barriers on investments as a protective measure. With companies losing so much value, foreign acquisition bids may be possible at a bargain-basement price in key industries that need to remain in domestic hands.

Keeping this in mind, India has placed investment restrictions to curb opportunistic investments/takeovers of Indian companies. (i) All investments by entities incorporated in a "country which shares and the border with India or where the beneficial owner of investment into India is situated in or is a citizen of any such country" will require prior approval of the Government of India: and (ii) In the event of any transfer of ownership of any existing or future foreign direct investment (FDI) in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of (i) above, such change in beneficial ownership will also require prior government approval. The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal and Pakistan

This changes the FDI Policy in two fundamental respects: First, it expands the list of countries whose investors are no longer eligible to invest in India under the automatic route. Second, an investment in India – that would otherwise fall under the automatic route – now falls under the government route if it is from an entity whose "beneficial owner" is from such Bordering Country. These changes have far-reaching implications on the overall FDI regime.

However, this is likely to backfire India as there is a huge requirement of investments during the crisis time, as investing through the Government route discourages investors.

The Positive sides of FDI in India:

  • The Indian government has introduced Aatma Nirbhar Bharat Mission to promote domestic production and development of local brands, which creates a lot of scope for FDIs in India, provided the market seems attractive for FDIs.
  • The government has also opened up FDI through the automatic route in one of its key sectors, the Defense sector, from 49% to 74%, which is a positive aspect for FDIs.
  • Since there is a lot of reduction in the market value of stocks, foreign investors can acquire stocks at a lower value subject to the restrictions placed by the government.

However, India, being a developing country, is expected to attract lower FDI flows because the sectors that have been severely impacted by the Covid-19, including primary and manufacturing sectors account for a larger share of their FDI.

Conclusion:

In the longer term, the pandemic may lead companies to shift the geographic allocation of their foreign operation. For example, multinational enterprises may review and potentially shorten their GVCs to protect themselves from supply-chain disruptions; alternatively, they could seek geographic diversification to reduce exposure to location-specific shocks and reduce costs to be able to deal better with crises.

Many governments have taken stringent public health measures to limit the spread of the COVID-19 pandemic. These public health measures have caused severe economic disruptions that impact the foreign direct investment (FDI) decisions of firms. Governments have also taken significant economic policy actions to forestall, or cushion, the economic consequences of the public health crisis. The eventual impact on FDI flows will depend on the success of both these public health and economic policy responses.