The fact that India is attracting record levels of foreign investment is an understandable source of pride. Between the market size, investment reforms, and economic growth rates, India has the right mix of openness and opportunity. However, the patterns of foreign investment into India are still poorly understood: Where does it come from? Where is it going? What are the main sectors? To make matters more difficult, the Indian government puts out numbers that, while technically true, lead researchers in wrong directions – and limit the government’s ability to effectively target fresh foreign investment.
India’s foreign investment environment has been on a steady path of liberalisation and reform for over twenty years. While the Modi government’s recent claims of having one of the world’s most open investment regimes is not true (legal services, retail, insurance, pensions, newspapers, more), there are no restrictions on most forms of manufacturing, infrastructure development, oil and gas, technology services, and other critical sectors. The Modi government has steadily liberalised the sectors with remaining controls, making over thirty positive changes to the foreign investment environment in four years. Some of these changes are more cosmetic, but some are expected to yield meaningful new investments.
In addition to trumpeting its foreign investment reforms, the Modi government has also lauded the fact that India stands as the largest destination for foreign investment among emerging markets. While below the levels that China, Brazil, or Russia attracted at their respective peaks, India is pulling in $40 billion to $50 billion in FDI annually.
But the reforms and the numbers give only a small sense of the real deal flows.
We do not have credible data on the country source of these inflows. We do not know which Indian states are attracting FDI.
And we have only broad information as to the specific sectors attracting FDI. Lacking this information prevents a real strategy for attracting fresh investment.
Every quarter India’s Department of Industrial Policy and Promotion releases the most recent statistics on India’s foreign direct investment inflows. It includes the monthly and annual totals, some historical information, the national source of that FDI, and sector-specific information. This ‘national source’ data places the U.S. as the sixth-largest source of FDI inflows. Mauritius and Singapore rank first and second, respectively. While the U.S. may not be first, there is no conceivable way that Mauritius and Singapore (combined population of around 7 million) account for 51 percent of total FDI into India in the last 17 years.
Mauritius and Singapore have preferential tax treaties with India, so many foreign investors set up a Mauritian entity to make the investments into India, warping the totals.
To develop our own ranking of the country sources of FDI, we used publicly-released filings with the Foreign Investment Promotion Board. While more transparent than the ‘Automatic Route’ for foreign direct investment through the Reserve Bank of India, only about one-quarter of all foreign investment was routed through the FIPB during the studied period, 2013-15. But without more data on Automatic Route filings, it is impossible to know the sources of foreign investment with real precision.
A second area of critical weakness is knowing to which states and metropolitan areas the foreign investment inflows are landing. Here again, the Government of India does publish data based on the place of applying to the RBI to permit the inflows (also included in the DIPP FDI reports, noted above).
But an investor may submit documentation in Mumbai, where it will be counted – yet the actual investment could be in another state.
Indian data on the sectors into which FDI is flowing is a bit better. The DIPP FDI note breaks out FDI inflows into sixty-two different sectors, breaking down total inflows into these sectors over the last seventeen years. Yet the top three categories for FDI inflows, which comprise around 33 percent of all inflows since 2000, each contain important sub-sectors that are not separately noted.
- Services: $64 billion in FDI, 17.42 percent of total. The services category covers a very diverse set of sectors including financial services, banking, insurance, non-financial/business services, outsourcing, research and development, courier, technology testing analysis.
- Telecommunications: $30 billion in FDI, 8.18 percent of total. Includes both telecommunications manufacturing as well as services. While related, these two sectors are quite different.
- Computer Software and Hardware: $29.8 billion in FDI, 8.11 percent of total. Includes information technology services, as well as IT hardware manufacturing. Two very different sectors.
The Modi government will have very little insight as to whether its attempt to attract investment in specific sectors is successful without detailed data, nor whether the central government’s attempt to spur states into creating more favorable business environments has a link to foreign investment inflows. Perhaps the government has better internal data, but these are the same numbers Indian officials typically use in presentations when going on international road shows.
Many sectors rely on the development of an ecosystem, such as automobile assemblers and their suppliers. Prime Minister Modi has personally engaged in economic diplomacy with key countries such as the United States and Japan, yet has little information to show whether these visits have led to increases in investment from targeted nations.
Good data helps policymakers make smart decisions. The Modi government has taken pains to generate foreign investment, using a mix of reform and personal diplomacy. The government should take time and assess how to create better tracking systems, and use that information to further target economic diplomacy going forward.
Richard Rossow is the Wadhwani Chair in U.S. India Policy Studies at The Center for Strategic and International Studies in Washington D.C.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.