Anticipating the Unintended #30: The Name’s Bond…Corporate Bond

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PolicyWTF: ‘The strong do what they can and the weak suffer what they must’

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

Economic nationalism is back and India is not to be left behind. The Ministry of Commerce & Industry reversed India’s FDI policy on 17th April, making it mandatory for all FDI coming in from countries that ‘share a land border with India’ to seek government approval. This policy applies to all sectors, meaning that even the next Bengaluru EdTech startup raising funds from a Chinese investor now needs the government’s aashirwaad.

Let’s look at the best form of the arguments given in favour of this reversal first. One, this will ‘curb opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic’. Two, Chinese investing firms have close links with the party-state. And three, if CFIUS (The Committee on Foreign Investment in the United States) in the US can block Chinese investments and if the UK can halt the boardroom takeover of Imagination Technologies by a Chinese investment firm, what’s wrong if India does the same?

Now let’s look at why this is a policyWTF. India’s economy is facing a severe demand + supply shock. Of particular concern is the unavailability of domestic capital for long-term projects such as infrastructure (one of the reasons for this is covered in the India Policy Watch section below). Without long-term investment, India cannot achieve sustained economic growth. And without sustained economic growth, India’s geopolitical options get majorly constrained. An economically strong India becomes an ideal counterweight to China for the US and also an ideal market for excess Chinese capital. In contrast, a weak economy will eventually be forced to throw its economy open to the highest bidder at any point of time (ask Pakistan). Given this key national interest, making it difficult for Chinese investments to find their way into India is extremely counterproductive.

It is true that there are no Chinese walls separating the investors from the party-state. And it would make sense if India were to block the takeover of a few strategic industries by Chinese firms. And India’s FDI policy is already equipped for this. To put an additional entry barrier for all sectors will turn away investors when India needs them most.

The general equilibrium effects of this policy will be as follows. One, investment from China into Indian startups will reduce. Two, more and more Indians will enlist their companies in more favourable locations such as Singapore. Three, unscrupulous Chinese companies with party-state links will still invest in India through shell companies in other countries.

Finally, let’s look at the argument that we should follow the stance that the US and the UK have adopted. This isomorphic mimicry makes little sense for India. The capital requirements of a 2000$ per capita income economy and a 64,000$ per capita economy will obviously be very different and so will our trade-offs.

The central foreign policy challenge for India is to keep itself open to all investments — including the Chinese ones — to build economic strength while simultaneously preventing the creation of a world order in which China replaces the US as the foremost superpower. Letting go of either of these objectives will perhaps be India’s biggest foreign policyWTF.

Some excellent articles on this topic:

  1. Swaminathan Aiyar makes the point that it’s really the other way around — it’s actually the foreign companies that take enormous risks when they invest in India.
  2. Swaminathan Aiyar, is again, at his best when he says ‘Apparently, alarm bells started ringing when Chinese investment in HDFC went up from 0.8% to 1%. In the name of Ram, Allah, Christ or Marx, how can you call that a security threat?’
  3. Sunil Jain writes ‘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.’

Read the full edition here.