Pandemic and FDI: Black Swan Event or Inflection Point


As economies world over initiate reboot in the backdrop of COVID-19, organizations and businesses will have to adapt to new market fundamentals and commercial disruptions. Besides dealing with logistical and physical environment challenges like workspace distancing, altered cash-flows and consumer demands are other disruptions to be factored in. Notwithstanding vaccine discovery and subsequent lead time in its distribution, the tailgate effects of COVID-19 will cause a dramatic drop in foreign direct investment (FDI) in 2020 and 2021, as projected by the United Nations Conference on Trade and Development (UNCTAD) in its latest Investment Trends Report, 2020.[1] The negative business impact in 2020 will see a further deterioration in 2021 with global FDI flows forecast to decrease by up to 40 per cent in 2020, from their 2019 value of $1.54 trillion and a further 5 to 10 per cent in 2021. This would bring global FDI below the $1 trillion mark for the first time since 2005 and a U-shaped economic recovery is likely in 2022 amid a highly uncertain outlook. Despite such a negative prognosis, the report identifies India as ‘most resilient’ in the South Asian region with economic growth and India’s large market continuing to attract market-seeking investments in the post-pandemic period.[2]

Black Swan Event or Inflection Point

Coined by Professor Nassim Taleb, who also happens to be a statistician and former options trader, a black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized as outlier events owing to their extreme rarity, severe impact, and their predictability in retrospect. Although an accurate quantitative impact of COVID-19 on the economy is a long way removed, it is clear that slowed capital expenditure and lower reinvested earnings by multinational enterprises might affect India’s FDI trends. However, with Indian corporates already reeling under a severe liquidity crunch due to rising non-performing assets and banks strained in their lending capacity, there arises a critical need for FDI in the Indian economy for refuelling consumer demand and generating adequate employment.

On the upside, India can stand to benefit from the corporate impulse of foreign firms wanting to shift operations out of China in the wake of, first, the US-China tariff wars and now, China being ground zero of this deadly pandemic and the lack of transparency shown by the political dispensation there. By aiding foreign firms in diversifying the risk to their supply chains and moving out of China, India offers them the best alternative in terms of land, manpower and a stable government. Granted that New Delhi has linearly India deregulated FDI rules for several sectors over the last few years, India’s recent policy amendment of restricting FDI under the automatic route from countries having land borders with it may be viewed as contentious. Seemingly a policy improvisation aimed particularly towards China, the move finds greater resonance with domestic audiences as a populist measure in the aftermath of the Sino-India geopolitical tensions following the Galwan Valley skirmish. However, in terms of sending out global cues at this tectonic juncture, such moves may evoke fears of ‘protectionism’ and increased ‘red-tapism’.[3] Hence, while being nimble-footed with the treatment of Chinese investments, India must, as far as practicable, ease FDI norms to emerge as a key player in global manufacturing and supply chains post COVID-19 and turn an inherent black swan event on its head to an economic inflection point.

Reverse Globalization and Round-Tripping

The recent self-reliant or ‘Atmanirbhar Bharat’ vision unveiled by the Indian Prime Minister is not, in fact, an isolated manoeuvre but is a prelude to larger macroeconomic reverse globalization. Organizations and regimes are already accelerating towards regional supply chains and systematic automation.[4] However, a developing economy comes with its own share of limitations in terms of internalizing supply chains. As identified in a recent PricewaterhouseCoopers (PwC) report, unstable cashflows and low reserves, coupled with a restricted ability to seek additional debt or equity financing, can create immense pressure on businesses to divert funds between entities for non-permissible or surreptitious purposes.[5]

This situation is even more exacerbated for start-ups, as Chinese investments have found greater favour in the Indian start-up ecosystem and now find themselves highly regulated. Such economic uncertainty and tight liquidity provide an impetus to fund diversion, round-tripping and evergreening of loans. On their part, the Reserve Bank of India (RBI) and Enforcement Directorate (ED), have already increased their scrutiny on companies that have received investments from their foreign subsidiaries or affiliates on the ground that such fund flows could indicate possible round-tripping.[6] With the next two years being crucial in terms of overcoming COVID-19 headwinds, many Indian start-ups could domicile outside India to avoid such magnified scrutiny, thereby hurting India’s image as a global investment destination at a time when it should be further enhanced.


[2] Id.






Shaleen Tiwari


Shaleen Tiwari is a 2016 B.A., LL.B. (Hons.) graduate from Hidayatullah National Law University, Raipur currently working as an Associate with Cyril Amarchand Mangaldas Mumbai. He can be reached at

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