India is one of the shining economies in the Asia-Pacific region with a marked uptrend in economic growth that contrasts sharply with the economic reality in other countries in the G-20 and in the OECD. One of the main driver's of India's economic growth is an increase in direct foreign investments in the country. The Indian government has been encouraging foreign investors to own larger stakes in Indian firms and it has raised the limits on foreign investments in some key sectors of the economy such as defense and pharmaceuticals. This piece seeks to examine the impact of FDI in India economic growth with a view to drawing insights on the economic prospects of the country going forward.
A trip down memory lane on FDI in India
Foreign direct investments in the Indian economy has been increasing at an accelerated pace since Narendra Modi
became Prime Minister in 2014. After Modi's first year in office, Foreign Direct Investments had made a 49% cap in insurance, e-commerce, health insurance, and defense. One of the main drivers for FDI growth in the country were the elimination of retrospective taxes that had stifled manufacturing in the country.
By 2015, India became a destination point for foreign investors who became attracted to the improvements in the ease of doing business in the country. The Indian economy outperformed the Chinese economy in attracting the largest volume of foreign investments. FDI Intelligence reports that India attracted about $63 billion in FDI to beat China's $56.6B.
The FDI Intelligence researchers observe that “India replaced China as the top destination for FDI by capital investment following a year of high-value project announcements, specifically across the coal, oil and natural gas and renewable energy sectors.”
In 2016, India had to beat formidable competition from bigger economies such as China when it claimed the title of 'the most open economy in the world.' Prime Minister Modi noted that regulatory changes are making India "the most open economy in the world for FDI." Modi also noted that the changes and reforms would provide "major impetus to employment and job creation." The United Nations
reported that foreign direct investments in India has jumped by as much as 26% in the first half for 2016.
Could changes in the economic landscape attract more FDI into India?
Forex rates is one of the factors that could affect the volume of FDI that a country attracts. When a country's currency starts appreciating to show strength, foreign direct investments tend to increase because foreign investors see a strong currency as a sign of improving economic trends. In contrast, a weak currency or a sudden devaluation of a country's currency can cause foreign investors to lose faith in the economic prospects of the country.
If foreign investors lose faith, they become jittery and their fears could trigger a capital flight out of the country. Latest news reports in the Forex market indicate that the India Rupee
is becoming stronger in the forex markets. Forex analysts have forecasted that the Pound will fall lower against the Rupee in the coming months as the GBP/INR exchange rate drops to 83.22 from 85.23 at the start of the year.
Craig Anderson, an analyst at InternationalMoneyTransfers
observes that " individuals, corporate, and governments interested in having business dealings in India could get better rates on international money transfers if the Rupee continues to find strength against rival currencies." The Indian economy is on a uptrend as GDP data for Q4 2016 shows an unexpected upside despite the recent demonetization efforts by the government. Economic data revealed that India's GDP recorded a growth of 7.0% to beat the economists' consensus estimate of 6.5%.
The OECD also suggests that India might start seeing an increase in the inflow of foreign direct investments because of its strong economic growth. The OECD observes that “India has been a star performer in gloomy times. We do not have many cases of 7 per cent growth… It is a top reformer among all the G-20 countries.”