India’s legal provisions for handling FDI and international trade on national security grounds

Source: The post India’s legal provisions for handling FDI and international trade on national security grounds has been created, based on the article “How to deal with the national security risk from FDI and trade” published in “Indian Express” on 27th September is 2024

UPSC Syllabus Topic: GS Paper-3 – Security

Context: The article discusses India’s lack of a clear legal framework to handle foreign direct investment (FDI) and international trade on national security grounds. It emphasizes the need for a dedicated law, similar to global practices, to address such security risks.

For detailed information on Need of Specific Law for National Security Screening of Inward FDI read this article here

What are India’s legal provisions for handling foreign direct investment (FDI) and international trade on national security grounds?

1. Press Note 3 (PN3) Regulation: In April 2020, India implemented PN3 under the Foreign Exchange Management Act (FEMA) to regulate FDI from neighboring countries, particularly aimed at controlling Chinese investments during the COVID-19 pandemic. PN3 requires government approval for investments from land-bordering countries.
2. Comparison with Other Nations: Countries like Canada and Australia have specific laws that directly address national security risks from FDI. For example, Canada’s Investment Act which allows for screening and action against foreign investments that threaten national security.
3. Legal Vacuum: India lacks a dedicated law for FDI related to national security, using FEMA and the Customs Tariff Act as stop-gap measures. This has exposed India to potential challenges in international courts.
4. International Practices: India’s international investment agreements, like the 2015 Model Bilateral Investment Treaty, separate provisions for national security from other economic concerns, underlining the absence of a comprehensive domestic law.

Has This Legal Vacuum Impacted International Trade?

1. In 2019, following the Pulwama terror attack, India used Section 8A(1) of the Customs Tariff Act to impose a 200% duty on Pakistani imports. This act is generally for economic emergencies, not security threats.
2. Such measures, not rooted in a clear national security framework, could be challenged in international courts.
3. India’s reliance on general laws like FEMA and the Customs Tariff Act, instead of dedicated security legislation, highlights a critical gap that could affect its standing and effectiveness in international trade disputes.

Question for practice:

Examine how the absence of a dedicated national security law for FDI in India has impacted the country’s ability to regulate foreign investments and international trade.