CHINI KUM, MONEY GO

Reversing liberalisation to counter the bogey of a Chinese takeover of India hurts one entity: India

Panicky restrictions look defensible in the short run and ridiculous in the longer run. This is true of the government decision to scrutinise and curb Chinese investment to prevent ‘opportunistic takeovers of Indian companies due to the current Covid-19 pandemic’.

Most of my life, Indian politicians were paranoid about India being taken over by the US through foreign direct investment (FDI). Protesting globalists like me were called idiots or traitors wanting a return of the East India Company, which came to India purportedly for trading and then took over India. Politicians and intellectuals warned that foreign investment was a vehicle for eventual political takeover and must be minimised.

However, Asian tiger economies welcomed western investment and prospered without becoming puppets, while India remained poor. Singapore and Hong Kong became richer (in per-capita income) than their former colonial master Britain. Yet, fear of foreign investment remained deeply rooted in India till the reforms of 1991 that gradually opened the economy and proved the old notions to be nonsense.

The pandemic has now produced a similar paranoia about China, with as little justification. India’s transition to a miracle economy in the 2000s, growing at 8% annually, owed something to hugely increased inflows of FDI and foreign portfolio investment (FPI) into its stock markets. In those days, Indian companies were quoted at far cheaper valuations than today.

Did that mean Indian companies got taken over at unfair bargain prices? No, foreign investors certainly increased their holdings of blue chips, especially companies like HDFC Bank and ICICI Bank, and collectivelybecame their largest shareholders. But this did not mean foreign takeover of the banks in question or India.

Almost all the Fortune 500 (largest 500 companies in the world) companies now have some operations in India, including Microsoft, Amazon, Vodafone, General Motors, Ford, Shell, General Electric, Hyundai, Volkswagen, Suzuki, Hindustan Unilever, Gillette and Nestlé. They dominate several consumer goods, and completely dominate the production of cars. Has that threatened Indian security and made it a puppet? Nonsense.

China has now become a significant, though still modest, foreign investor. As of December 2019, China’s cumulative investment in India exceeded $8 billion. That is too puny to worry about. In the last decade, China has become technologically world-class and financially powerful, but is nowhere near as strong as US companies, and nowhere near as dominant as US companies were in the 1960s and 1970s. Just as many countries prospered using US investment and technology, so, too, should they prosper with Chinese investment and technology today.

Eighteen of India’s 23 unicorns (startups with over $1 billion value) have some investment from Chinese companies. More is badly needed today since the Covid-induced recession threatens to kill many unicorns. These include OYO, Paytm, BYJU’s, MakeMyTrip and Swiggy. If Chinese investment can save them from collapse, hurrah. So what if one or two are taken over by Chinese white knights? Why will that be more problematic than Suzuki and Hyundai’s dominance in autos, Gillette’s in razor blades, Nestlé’s in noodles, or Hindustan Unilever’s in detergents and shampoos?

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?

The government says other countries, including the US and Germany, also worry about Chinese takeovers of strategically important companies in a depressed stock market. Now, India can certainly make a list of strategically important companies and ban their takeover by foreigners, Chinese or otherwise. The US refused to let a Chinese company acquire one of its top chipmakers, Fairchild. It has banned the use of Huawei’s 5G equipment in broadband networks. But it has no blanket scrutiny of every Chinese investment, as India is proposing.

As for ‘opportunistic takeovers’ in a depressed stock market, who can ever confidently know when falling stock markets are bargains? ‘Never catch a falling knife’ is an old stock market saying. Walmart bought Flipkart’s majority stake for a whopping $16 billion and must deeply regret overpaying today. If US and European investors with the greatest savvy and money power do not view Indian companies as cheap bargains, why think the Chinese know better? In any case, why conflate depressed stock markets with national security?

India today is in dire straits and desperately needs additional investment from every possible source. Reportedly, over $40 billion has flowed out of Indian equity and debt markets since the Covid-19 pandemic began. India seeks additional funds from abroad, and the Reserve Bank of India (RBI) has liberalised foreign investment in bonds to attract inflows.

Everybody agrees that all developing countries need large sums and debt forgiveness from the International Monetary Fund (IMF), World Bank and other global agencies. This is needed to counter the pandemic-induced recession, which the IMF says will be much worse than the 2008 financial crisis, and the worst since the Great Depression of the 1930s. India must woo all foreign investors, including the Chinese. By all means place strategic Indian companies off bounds for takeovers. But welcome everything else.

What do you think?