FDI stumbles, too | Business Standard Editorials–05.07.2018

Recent reports have confirmed that all is not well when it comes to foreign investment in India. Foreign direct investment (FDI) in particular — prized over other forms of capital flows because it directly adds to the productive base and is long-term and patient in nature, unlike the “hot money” of portfolio investment — is slowing. The growth rate of FDI hit a five-year low in 2017-18, according to recent data from the Department of Industrial Policy and Promotion (DIPP). It grew by only 3 per cent, to $44.85 billion – although this year saw the big-ticket purchase of Essar by Rosneft, for $13 billion. This trend is confirmed in a report from the United Nations Commission on Trade and Development, or UNCTAD. According to a recent report from the agency, FDI to India actually fell in the calendar year 2017, from $44 billion the previous year to $40 billion. Meanwhile, UNCTAD says that outward FDI from India more than doubled.

The current government has often talked up its efforts to make India more investment-friendly and has noted that its success in raising FDI is one of the indicators of that success. But this achievement seems to have been reversed. Indeed, not just are foreigners less likely to bet on the Indian economy in 2018, but Indian companies and holders of capital are even less enthusiastic, as the numbers for outward FDI show. Nor can the government point to global factors as being exclusively responsible for this trend. UNCTAD says that while global FDI is indeed falling, that trend is actually a function of concerns about developed economies and a decline in big cross-border mergers and acquisitions, also in developed economies. Flows to developing countries as a whole have stayed steady; indeed many have seen investment growth. China, for example, has seen its FDI increase in 2017 to $136 billion. The prime minister has insisted several times that India is the most open economy in the world. Yet it is struggling to sustainably increase FDI to the levels that fuelled China’s growth in the 1990s and 2000s.

This is another clear indicator that the government has given up too soon on deep structural reforms. There is no scope for any Indian government to abandon the path of reforms, particularly to factor markets such as land and labour, at this point in India’s development. While the government’s focus on the ease of doing business has been praiseworthy — India has registered a sharp improvement in Doing Business rankings — yet it needs to be translated into real effort on the ground and not just on improving rankings. In addition, even if sectoral caps on FDI have been raised in various sectors, the processes for foreign investors need to be made less cumbersome. The abolition of the Foreign Investment Promotion Board was supposed to simplify processes, but that does not appear to have been the effect. Finally, India must cease to be arrogant about the economy’s ability to attract capital. It must be more respectful, for example, of international arbitration. Without a large and sustained increase in foreign investment, transforming the Indian economy and creating jobs for the millions entering the workforce will be impossible.

via FDI stumbles, too | Business Standard Editorials

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