The Covid-19 pandemic has exposed the intertwined nature of the global supply chain and hindered the over-all investment scenario. Unsurprisingly, the foreign direct investment (FDI) has been disrupted and the economic globalisation has been adversely impacted.
According to Global Investment Trends Monitor Report released by UNCTAD, the global FDI flows fell 49 per cent in the first half of 2020 compared to 2019. However, in comparison, the developed countries faced the biggest decline (i.e. decline of 75 per cent compared to 2019). The developing countries weathered the storm with a 16 per cent decline in FDI – much less than expected. Further, Asia exhibited the lowest decline in investment among developing regions.
In India, as per data released by DPIIT, the FDI inflow for the first quarter (Q1) of FY 2020-21 tumbled by 60% compared to Q1 of FY 2019-20 (i.e. USD 6,562 million in FY2020-21 compared to USD 16,330 million in FY2020-19).For Q1, at a state level, Karnataka attracted the highest FDI inflow followed by Maharashtra and Delhi.
However, as India steps into the third quarter of FY 2020-21, the situation appears to be steadily improving. To elaborate, as per the information provided by the ministry of commerce and industry in October 2020, for the first five months of FY 2020-21, the total FDI inflow has increased to around USD 35.73 billion, which stands 13 per cent higher than last fiscal figure. The investments from MNCs like Google, Amazon, various private equity firms and venture capital firms have led to a boost in FDI. Further, such an increase in FDI can be attributed to: (i) investment facilitation; (iii) ease of doing business; and (iii) steady reforms in the FDI Policy.
In this regard, it is essential to note that the government released the Consolidated FDI Policy of 2020 on October 28, 2020. Some essential changes in the FDI Policy 2020 (FDI Policy) are as follows:
The FDI Policy has incorporated provisions of Press Note 3 of April, 2020 under its Clause 3.1.1(a) – restricting an entity of a country, which shares land border with India to invest in India unless such investment is done under the government route. This is to prevent the opportunistic takeovers of entities that have been generally impacted as a result of Covid-19 pandemic. As there is no minimum threshold provided for such investments, it is evident that even a fraction of such investment will trigger government scrutiny.
Additionally, the FDI policy has introduced a 26 per cent cap on FDI in the digital news media broadcasting segment (i.e. uploading/ streaming of news and current affairs through digital media), which also requires government approval. As FDI cap already existed for print and broadcast news platforms, this change has created a level playing field for all mediums. However, the move has created significant buzz of ambiguity and discontentment with the change being compared to “license raj” form of restriction. Further, the 26 per cent cap is applicable on: (i) digital media entity; (ii) news agency; (iii) news aggregator. This has exposed a dire need of clarity on the scope of “news aggregator”. To elaborate, will social media platforms which aggregate news, amongst various other functions, qualify as a “news aggregator”? Further, scope of “news” is also unclear – will this cover politics or any information on specific sector? Digital media entities have been granted one year (i.e. October 15, 2021) to comply with the 26 per cent cap. On November 24, 2020, Huffpost India operations were shut down, becoming the first casualty of the new regulation.
The enforceability of such restrictions in today’s globally digital era is unclear and clarifications will be required to ensure that such restriction do not end up leveraging foreign news aggregators and hamper business growth in India.
Further, the Policy has also incorporated certain compliances for e-commerce entities, the implications of which are as follows:
Growth in FDI is a significant driving force for globalisation. With the presence of global supply chains, there is a need to facilitate a strong international cooperation in investment and trade policy. Having said that, to ensure the sustained growth in a post-pandemic world, dependence on FDI will not be sufficient. To ensure continuity in business, India needs to continually strengthen its self-reliance practices – Atmanirbhar Bharat – by supporting local firms and small businesses.
Contributed by: Pankaj Agarwal, Partner; Sagarika Chandel, Associate
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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