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Falling FDI

The recent figures of foreign direct investment (FDI), which for some strange/mysterious reasons were not released by the government for six months, despite the Reserve Bank regularly giving the data to the government, show that there has been a noticeable dip in FDI inflows into India, during the current FY. The FDI inflows during the April-December 2018 period were down by 7% and were amounting to USD 33.50 bn, as against USD 36 bn in the previous corresponding period. While the services sector was the largest recipient of FDI, other sectors such as computer software and telecom, witnessed a steep decline.

This is the first time during the Modi regime that FDI inflow has declined, but one could clearly see it coming. While the FDI jump in the first two years of the Modi rule was 22% and 35%, it fell to 9% and 3% in the next two years ie. in 2017 and 2018. This dip in FDI coincides with a recent report of AT Kearney, a global consulting firm, which says that India’s ranking in the global FDI Confidence Index has fallen by three notches and that for the first time since 2015, it does not appear in the top ten global investment destinations. In the emerging markets however, India is ranked second, in terms of FDI inflows.

The undisputed fact is that India needs foreign investment, to be able to record rapid economic growth and the foreign investors too need a large and lucrative market like India. India needs FDI, not just to ramp up its manufacturing base and exports, but to be able make up for the huge backlog of investment in the infrastructure sector, estimated to be about USD 1.50 trillion. Together with foreign investment come much needed jobs and technology. Over the years, successive governments in India, have been pursuing a pro FDI policy, such that in most sectors today, FDI is permitted upto 100% on an automatic basis, with no need for any prior approvals. The flagship program of the present government viz. Make in India, as also its constant efforts to improve India’s global rankings in ease of doing business, too have been directed towards attracting FDI, though with disappointing results.

 

It is time to review the reasons for this declining trend in FDI inflows into India. There are certain factors, which are beyond India’s control, which have pushed down investment into India. Perhaps due to the international trade wars unleashed by Trump and the interest rate hikes by USA, which have enhanced its attraction as an investment destination, global FDI fell by 19% in 2018, which would also reflect on the inflows into India. But then the FDI inflows into Southeast Asia, during this period increased by 11%. Moreover, with a huge domestic market and a young population with unmet aspirations, India should not be affected by any global FDI movements and trends, since on a standalone basis, it is a giant attractive market/destination.

 

The fact is that there are numerous domestic factors that have acted as a deterrent to foreign investors and on top of which is the government which itself poses sovereign risk. With uncertainties in policy, as seen in the recent U turn of the government in the FDI regulations, related to e-commerce, that too after tons of foreign investment has come into the country on the basis of those guidelines, as also the harassment/uncertainty caused due to the taxing of share capital/premiums, popularly called angel tax, the foreign investors do remain confused fence sitters. To add to their concerns are the poor corporate earnings in India, banking sector woes and the unresolved NPA crisis, continued overhang of over capacity in many sectors new and new regulations that add to the cost of compliance and the uncertainties of an election year. The fact is that even the domestic investment has not taken off in India; for want of investor confidence those concerns are bound to impact foreign investors too.

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