Has India’s FDI Push Plateaued?
Industrial buildings stand beyond solar panels at an industrial complex in Rajasthan, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Has India’s FDI Push Plateaued?

Soon after the Narendra Modi-government came to power in 2014, it laid down an intent to push-up foreign direct investment in the economy. The much-marketed ‘Make In India’ programme and an accompanying change in rules intended to improve the ease of doing business in India was a part of that push.

The changes appeared to yield results initially.

FDI flows jumped 34 percent to $40 billion in 2015-16. But that came against the backdrop of a 38 percent jump in global FDI flows to $1.76 trillion in calendar year 2015, according to data from the UN Conference On Trade And Development.

In the years since, as global FDI flows into emerging markets have plateaued, so have flows into India.

In 2018-19, India received FDI equity flows of $44.4 billion, showed data released by the Department of Industrial Policy and Promotion this week. FDI flows fell for the first time in six years. Since FY16, FDI equity flows have remained range-bound between $40-45 billion.

Equity inflows constituted nearly 70 percent of all FDI inflows into India. Total FDI inflows comprise FDI in equity, reinvested earnings and other capital inflows.

A new FDI policy coming in drives up inflows, said Madan Sabnavis, chief economist at CARE ratings explaining the jump in FDI flows in 2015-16. “Even though sectors which saw reforms did not see higher inflows, foreign investor sentiments improved, driving up FDI. Subsequently, moderation set in because of both, demand and supply conditions, said Sabnavis.

Share Of FDI Flows

Even in terms of share of global flows into emerging economies, India’s share has remained stagnant for the last few years.

While the country features in the list of top 10 FDI recipients, its share of FDI flows was at just about 6 percent of flows into emerging markets in 2018. This is marginally higher than the 5.1 percent share of emerging market flows in 2014, shows data from UNCTAD. While there is a marginal difference in the data reported by UNCTAD and the Indian government, the discrepancy is not material.

As a share of total global FDI flows, India accounts for 3.6 percent.

The investment ecosystem in India is still in the midst of an improvement, said Radhika Rao, economist at DBS Bank. While India’s move up in the ease-of-doing business rankings is commendable, key changes around taxation, registration and operations are still work-in-progress, Rao said.

Concurrently a broader overhaul is also awaited – this circles back to better physical infrastructure, competitive tax rates, clear contractual/legal framework, and lower hurdles to acquire land/factors of production etc., which helps global players gain visibility on operational costs, business viability and profitability.
Radhika Rao, Economist, DBS

Sectors Attracting FDI Flows

The services and computer hardware and software sectors have been consistent attractions for foreign investors. Together, these two segments continue to draw a large chunk of flows.

In the manufacturing sector, four key industries drew in $5.7 billion in FDI flows in FY19, shows data from the DIPP. This is similar to the quantum of foreign investment attracted by these sectors in FY15. The telecom sector, which consists of both, equipment and services, drew $2.9 billion in FY19, compared to $2.7 billion in FY15.

Presently, there are limited avenues to attract FDI inflows, said Sabnavis. “There is no expansion in the non-services sectors with several cases in the NCLT. Among other sectors, banks and financial institutions are still cleaning their books and with new laws in the U.S., potential for growth is limited in IT,” Sabnavis added.

A Brighter Outlook?

Some believe that the re-election of a majority Bharatiya Janata Party government will help reignite foreign direct investment.

With likely policy continuity and political stability, FDI investors may be more confident now, said a research note by UBS Global Research dated May 24, 2019. Likely land and labour reforms will drive the overall narrative for investor sentiment, the report said.

Along with improved sentiments post elections, the low growth and interest rate regimes in advanced economies and India’s economic prospects could also help in drawing in foreign inflows, added a CARE Ratings report following the general election verdict.

Rao added that India can also turn the prevailing environment of trade tensions between the U.S. and China to its benefit and provide an alternative destination for producers looking to shift their operations.

“For this to translate into material flows, India’s ease of doing business needs to improve across the economy, coupled with better physical infrastructure, trained workforce and competitive tax rates which will help global players to gain visibility on operational costs, viability and profitability,” Rao said.

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