Reports have confirmed that all forms of Foreign Investment in India (including the priced FDI) are slowing down.
This is despite the positivity in the global economy and the government’s strong rhetoric in this domain.
What is the state of FDI flows?
What - Foreign direct investment (FDI) is prized over other forms of capital flows because it directly adds to the productive base of the country.
As a long-term and patient monetary stream, it is contrasted against the “hot money” that comes as portfolio investments, which is more temporary.
Data - According to recent data from the “Department of Industrial Policy and Promotion” (DIPP), growth rate of FDI hit a 5-year low in 2017-18.
It grew by only 3%, to $44.85 billion this year, which is despite the big-ticket purchase of Essar by Rosneft, for $13 billion.
This trend was also confirmed in a report from the “United Nations Commission on Trade and Development” (UNCTAD).
According to UNCTAD, FDI to India actually fell in the calendar year 2017, from $44 billion the previous year to $40 billion.
But on the contrast, UNCTAD notes that outward FDI from India more than doubled during the same period.
How does this trend contrast against Modi government’s rhetoric?
The current government has been loudly trumpeting its efforts to make India more investment-friendly and prides its pro-business credentials.
But statistics suggest that not just foreigners, but even Indian investors are less likely to invest in India presently, as indicated by outward FDI flows.
More specifically, while FDI flows have declined overall internationally, the developing world at large has largely been able to retain its investment flows.
As some developing countries have even seen considerable spikes in FDI flows, the government can’t state external factors for India’s FDI trends.
Interestingly, India’s standing in World Bank’s “Ease of Doing Business” ranking has been steadily raising, but it isn’t being reflected on the ground.
This may be because the government is focusing on merely tailoring its policies to improve rankings without actually improving business friendliness.
The government seems to have given up too soon on “deep structural reforms” that it enthusiastically embraced at the start of its tenure.
What is the way ahead?
There is no scope for any Indian government to abandon reforms at this point in India’s development due to the complex market scenario at play.
Structural - The percentage of permissible FDI has been raised in various sectors, but the processes for investors to enter India remains cumbersome.
The abolition of the Foreign Investment Promotion Board (FIPB) was intended to simplify processes by removing a bottleneck.
But the direct ministerial approval regime that is now operational doesn’t seem to be having the desired results.
Changing Wind - The impressive 6% plus GDP growth in the previous decade had made India one of the most sought after investment destination.
But the past record seems have made our policy makers arrogant regarding the potency of India’s economy to attract investments.
Considering the current situation, India would do good to give up arrogance and be more respectful of investor concerns (like dispute resolution).
It is important to note that, a sustained increase in foreign investments is vital for generating jobs for the millions entering the workforce every year.
