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Dealing with the National Security Risks from FDI and Trade
Context:
The debate surrounding Chinese foreign direct investment (FDI) into India hinges on two major aspects: the economic benefits it brings versus the security risks it may pose.
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- Beyond these discussions, a critical question remains unanswered: does India have a comprehensive legislative framework to manage FDI and international trade from the perspective of national security?
- Unfortunately, the answer is no, despite the growing debate over security concerns.
Current Legal Landscape in India
India’s existing framework for regulating FDI lacks explicit provisions for dealing with national security risks, relying instead on general laws governing foreign exchange.
- FEMA’s Role: India’s Foreign Exchange Management Act (FEMA), enacted to manage foreign exchange markets, plays a crucial role in screening FDI.
- FEMA, however, was not designed to deal with national security risks linked to FDI. Despite this, FEMA has been used to regulate FDI under specific circumstances, such as during the COVID-19 pandemic.
- Press Note 3 (PN3): In April 2020, amid fears of opportunistic takeovers during the pandemic, India introduced Press Note 3 (PN3), which subjects FDI from countries sharing land borders with India (primarily targeting China) to government approval.
- While the measure aimed to curb Chinese influence, it lacked direct reference to national security.
- PN3 is enforced through FEMA, but FEMA itself does not contain national security-related clauses, pointing to a legal gap.
Comparative Analysis with Other Countries
The liberal democracies, which have dedicated legal frameworks to address national security risks from foreign investment:
- Canada’s Investment Act: Canada’s Investment Act, particularly Section 25, empowers the government to screen inward FDI and take action if any investment is deemed “injurious to national security.”
- Australia’s Foreign Investment Review Board: Australia’s approach ensures that sensitive sectors, such as technology and critical infrastructure, are shielded from potentially harmful foreign influence.
The Need for a Dedicated Law in India
India’s reliance on laws like FEMA and the Customs Tariff Act to address security concerns reveals a significant gap in the country’s legislative framework. A comprehensive, dedicated law would offer multiple benefits:
- A Comprehensive Framework: A dedicated legal framework would enable India to explicitly address national security risks associated with FDI and international trade, ensuring that these concerns are handled systematically rather than through piecemeal regulations.
- Alignment with International Standards: Aligning with international standards would not only help India protect its interests but also strengthen its standing in global economic forums.
- Protection of Strategic Industries: A specific law would allow India to better protect critical sectors such as defence, telecommunications, and infrastructure from foreign influence that may pose a threat to national security.
Case Studies Highlighting the Risks
Two notable instances illustrate the risks posed by the absence of a dedicated law:
- Pulwama Attack Response: After the Pulwama terror attack in February 2019, India increased customs duties on Pakistani imports to 200%. While the action was based on national security concerns, it relied on Section 8A(1) of the Customs Tariff Act, a law meant for economic emergencies. This underscored the lack of a dedicated law to deal with security threats.
- Chinese Investments Scrutiny: The introduction of PN3 in 2020 to curb Chinese investments exemplified India’s struggle to regulate foreign investments based on national security. By using FEMA, a foreign exchange management law, to screen FDI, India highlighted the legal vacuum in its framework.
Way Forward
- Drafting a Dedicated Law: India needs to enact a law specifically designed to address national security risks from FDI and international trade.
- Strategic Sector Safeguards: This law should provide clear guidelines on screening investments in sensitive sectors such as defence, technology, and critical infrastructure.
- Regular Reviews: Establish a mechanism for periodic reviews of FDI based on evolving security risks.
- International Cooperation: Align India’s FDI policies with global best practices to ensure transparency and maintain international investor confidence.