A Better Way To Protect Indian Economy From China — Building A National Security Review Regime For Screening Investments

by Gaurav Sansanwal - May 9, 2022 01:04 PM +05:30 IST
A Better Way To Protect Indian Economy From China — Building A National Security Review Regime For Screening InvestmentsIndian and Chinese national flags on the lamp posts at the Raisina hills in New Delhi (Xinhua)
  • India stands at the cusp of evolving a unique economic policy that not only diversifies its trading partners, but also signals to its competitors and adversaries — the intent to relentlessly protect and pursue its national interest.

Growing domestic and international recognition of China as a strategic competitor and potential adversary of India has necessitated a review of the economic ties between the two countries.

The fact that the leader of Indian National Congress (INC) in Lok Sabha, Adhir Ranjan Chowdhury, has quoted the country as India’s “key strategic adversary” during the Parliamentary debate on the Ukraine crisis — speaks to the role that Chinese aggression at the border has played in building bipartisan domestic consensus around the formulation of a new balancing strategy.

From ‘Potential Threat Number One’ To ‘Key Strategic Adversary’

That the remark has gone largely unnoticed, a far cry from the ire that former defence minister George Fernandes received in 1998 for calling China, India’s “potential threat number one” — demonstrates changed geopolitical realities.

While there has been widespread recognition of India’s economic dependency on China, evidenced by an ever increasing trade deficit — the legal framework governing its strategic economic response is yet to be structured.

Indai First: Addressing The ‘China Challenge’

India’s geo-economic response to China has so far centred around two strategies.

One, there has been an effort to formulate an economic policy that seeks to reduce dependency in key sectors by undertaking both import substitution that seeks to achieve “indigenisation” as well as increased “investment liberalisation” that seeks to diversify India’s trading partners.

Two, there has been a simultaneous effort to put in place outright bans on the functioning of some Chinese apps, as well as in the participation of Chinese firms in highway construction projects, and 5G telecom trials; and a temporary pandemic-induced bar on opportunistic takeovers.

Arguably, while some progress has been achieved in building a proactive indigenisation policy in furtherance of the Prime Minister Narendra Modi’s Atmanirbhar Bharat (self-reliant India) vision, the policy framework for reviewing Chinese investments in India is less clear.

Given that most advanced and emerging economies (including our partners in QUAD) have legislated frameworks governing national security review of foreign investments, there is a need to fill the policy gap in India by considering the relevant technical, economic, legal and geopolitical dimensions.

Building A Legal Framework To Review Foreign Investment: The Technical Argument

The first argument in favour of building a national security review regime relates to the importance of having a technically sound, time-bound and comprehensive framework to review investments.

Given the underlying complexities of holding patterns and market transactions, there is a need to have specialised decision-making expertise to understand the eventual impact of a particular transaction, from a national security standpoint.

A perusal of the applicable frameworks in economies such as the US, European Union, the UK, Australia, New Zealand, Russia, and China suggests there are gains to be made by having a transparent regime in place.

This is because “balancing” the negative effects of a transaction requires a clear understanding of policy options that are not limited to an outright ban.

In her book, Balancing Power without Weapons, Ashley Thomas Lenihan draws a useful distinction between two broad forms of interventions seen across multiple jurisdictions. One, balancing may be unbounded in nature — involving a “block” or direct “ban” on the proposed investment.

Alternatively, however, balancing may be bounded in nature — which may involve taking steps to mitigate the adverse impact of the concerned deal by modifying the same. This categorisation is instructive in as much as it provides a base template for the review process. The absence of a coherent review process was particularly pronounced in a recent case discussed below.

‘Free Fire’ In The Line Of Fire

Reports estimate that a total of 321 apps have been banned by the government of India since 2020. This includes the 54 Chinese apps that were recently banned by the Ministry of Electronics and Information by issuing a “take-down” notification to “app stores” under Section 69A of the Information Technology Act, 2000, which deals with the power to regulate content moderated by digital intermediaries.

One of the banned apps was the Singapore-based Sea Ltd’s 'Free Fire'. While the nature of national security impact is not publicly known, reports suggest some concern around the fact that the app was founded by persons of Chinese origin, and further that Chinese tech firm Tencent holds 18.7 per cent stake in the said app. The news of the ban crashed Sea’s stock on the New York Stock Exchange by a dramatic 19 per cent, wiping its market value by over $16 billion in a single day.

This blind-sided Singapore, forcing the country to seek a diplomatic clarification. While the nature of national security calculus with respect to this particular deal is not known, it can be argued that having a specialised inter-governmental task force armed with a clear mandate could have helped better ‘manage’ the adverse consequences of the deal, without making the ban appear so sudden and seemingly unsubstantiated.

This is especially true given the fact that reports suggest that Tencent held less than 10 per cent voting rights in the Singaporean firm, and therefore, mitigation efforts centred around further limiting its participation may have been worth considering.

The Economic Argument

Given that India’s success in benefitting from the ‘decoupling’ trend rests on its ability to guarantee investment certainty and business predictability, there are net gains to be made by formulating a transparent, stable and predictable policy framework.

By determining the nature and level of economic activity that would necessitate a national security review and making the review process time-bound, India can provide greater clarity to its investors.

This can be done by determining a list of sectors, investment wherein may trigger a national security review. There may be a further need to demarcate economically significant large investments that may be mandatorily filed for a time-bound review process, as opposed to the smaller investments in the sector which may be allowed with the flexibility to review in the future, should some national security concerns arise.

The Legal Argument

The legal rationale for codifying a national security review process can be assessed by considering two related issues.

Firstly, there is an opportunity to build a legal firewall around review decisions. By encapsulating the legislative intent in a new statute, the decision-making process can be better protected from a prospective judicial review.

In this regard, it is important to consider how in the backdrop of the COVID-19 pandemic, India put in place a temporary screening mechanism to prevent opportunistic takeovers of Indian firms by Chinese investors, by issuing a notification under the Foreign Exchange Management Act, 1999 (FEMA).

Given that the object of FEMA is to regulate ‘foreign exchange’ with the objective of promoting “orderly development and maintenance of foreign exchange market in India”, a ban on a particular takeover on national security grounds may be considered out of its mandate, by courts.

Secondly, India is mandated to evolve a transparent regulatory framework that does not undertake discriminatory measures, under a plethora of bilateral trade agreements, and international treaties such as the World Trade Organization (WTO).

Harmonising existing rules in a transparent law and adopting global best practices pertaining to national security reviews will ensure that India does not violate its international commitments.

The Geopolitical Argument

While much has been written about the larger ‘de-globalisation’ trend accentuated by the emerging great power competition between the US and China, as also the COVID-19 pandemic — it may be useful, instead, to think about the evolving global trade environment as an era of ‘re-globalisation’.

Contrary to expectations, the momentum is still in favour of trade agreements, and only the form and nature of alliances has changed. According to WTO, the number of executed regional trade agreements continues to be on rise and a total of 354 remain in force. India’s decision to ink a trade pact with its now QUAD partner, Australia, can be seen in a similar vein. The recent move toward 'de-dollarisation' by China and Russia further points to the crystallisation of two loosely structured blocs.

It is crucial, therefore, that India’s economic ties are situated between the need to balance its desire to emerge as a preferred investment destination, and the strategic choice to reduce dependency on its emerging adversary.

As a country that has always looked to convert prevailing crises into growth opportunities, India stands at the cusp of evolving a unique economic policy that not only diversifies its trading partners, but also signals to its competitors and adversaries — the intent to relentlessly protect and pursue its national interest.

Gaurav Sansanwal is a lawyer who is presently a graduate student at Georgetown University’s School of Foreign Service. He can be reached on Twitter at @GSansanwal.
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