The FDI problem

Indian economy appears to be less attractive to foreign investors

The Indian economy appears to be losing attractiveness to foreign investors. This is the most reasonable conclusion from figures released recently by the Department for Promotion of Industry and Internal Trade (DPITT). The figures show that, between April and December of 2018, foreign direct investment (FDI) in India fell to $33.5 billion, as compared to nearly $36 billion over the equivalent quarters of 2017. These figures have been released with a long and mysterious delay, in spite of the fact that the Reserve Bank of India (RBI) has regularly been passing along the required data to the DPIIT. It is unclear why the figures are being rationed in this manner.

 
That these figures consist of a reality check for the government cannot be denied. The initial years of the National Democratic Alliance government were good for FDI, reflecting enthusiasm for the economy’s prospects after some years of policy paralysis under its predecessor. The government took credit for that momentum. If that trend has reversed, it must own up to an equivalent responsibility. The RBI figures suggest that inward FDI grew by just 3 per cent in 2017-18 as compared to 25 per cent in 2014-15, the financial year during which this government took office. Other, unofficial indicators also back up the theory of a presumed loss of confidence in the Indian economy. India fell three places in the latest 2018 AT Kearney FDI Confidence Index, dropping out of the top 10 destinations for the first time since 2015.

 
What could explain this slowdown? It is true that global FDI in 2018 fell by 19 per cent, according to the United Nations Conference on Trade and Development (UNCTAD), some of it driven by the repatriation of earnings by multinational companies registered in the United States. But India’s peer countries were not doing so poorly. Southeast Asia, for example, saw an increase in FDI inflows of 11 per cent, to $145 billion — three times what all of South Asia put together received. So a more India-specific explanation than an overall decline in FDI will be required. The government has some explaining to do. For most observers, in the absence of an explanation from the authorities, the implication will be that concerns about sovereign risk in India have not gone down. The first draft of the e-commerce policy, which singled out e-commerce operators with foreign investment for harsh regulation that would hurt both investors and consumers, is an example of policy-driven sovereign risk that dis-incentivises FDI flows. Many big investments have already been made in e-commerce in India, and now the government has changed the rules of the game — exactly the sort of behaviour that investors rightly deplore. The second draft released on Saturday didn’t move the needle much on this aspect. It is also likely that, notwithstanding the government talking about increases in India’s position on the World Bank’s Ease of Doing Business index, too little has changed on the ground in terms of investor-friendliness. It is up to the next government to not squander any goodwill from the investment community, so as to ensure that FDI flows are high and sustained.