India is ready to face the music at the World Trade Organization (WTO) if China lodges a complaint against the former’s alleged “discriminatory” restrictions on Foreign Direct Investment (FDI) from the latter, a senior official has said.

“China can no doubt drag India to the WTO for discriminating against it in the area of investment rules. But as the WTO’s dispute settlement system has been rendered dysfunctional by the US at the moment, India does not face any real threat of immediate penalties,” said a government official.

Government filter

Beijing had reacted strongly to India’s decision to make it mandatory for all investments from China, and six other countries with which India shares a land border, to be routed through the government channel. The Centre has said the move is necessary to prevent hostile takeovers at a time when Covid-19 has made Indian entities vulnerable.

Since India’s FDI policy ordinarily allows foreign investments in a large number of sectors to flow in automatically, China said the additional scrutiny imposed on investments from just a handful of bordering countries violated the WTO’s principle of non-discrimination, and should be withdrawn.

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China may not be wrong when it says that the FDI restrictions are in violation of WTO rules, a Delhi-based trade expert told BusinessLine . “The principle of non-discrimination in GATT (General Agreement on Tariffs and Trade) stipulates that a member shall not discriminate between like products from different trading partners. Also, India cannot invoke the ‘security exception clause’ to justify the restrictions as it has clearly stated that the measures are to check hostile takeovers and, therefore, not for any security reasons,” the expert said.

Dysfunctional dispute mechanism

However, India need not worry about the WTO at the moment since the multilateral forum’s Appellate Body, its top-decision making body, is not functioning. “While the dysfunctional dispute mechanism at the WTO is of concern for India and all other members, in this particular matter, it suits us because we don’t have to worry about penalties,” the expert added.

The Department for Promotion of Industry and Internal Trade’s decision to come up with FDI restrictions followed submissions by investor groups to the Finance Ministry proposing that assets such as prime land, ports and power plants should be protected from predatory-buying by China, which has managed to protect its stock markets from crashing. They had sought proper scrutiny of all purchases of /investments in Indian assets by Chinese state-owned vehicles or Chinese proxy state vehicles.