The FDI problem

Shrinkage reveals questions about future of Indian growth

The data released by the Department for Promotion of Industry and Internal Trade (DPIIT) reveals some worrying news about foreign direct investment (FDI) in India. According to the DPIIT, foreign direct investment in equity has in fact declined in 2018-19, for the first time in six years. The decline is not great — only 1 per cent or so, from $44.85 billion to $44.36 billion, but it is nevertheless significant. This data on FDI flows has not always been released on time, in spite of the Reserve Bank of India passing on the required figures to the DPIIT in a timely fashion. The government was relying on FDI inflows in order to demonstrate the strength and potential of the Indian economy. It was also hoped that FDI would fuel manufacturing investment and jobs in an India that has otherwise, apparently, been plagued with jobless growth. The FDI performance of India over the last few years has also not been inspiring in terms of the destination of investment. In 2018, India dropped out of the top 10 destinations for FDI on the AT Kearney FDI Confidence Index for the first time since 2015. This came at a time when other comparable economies were doing relatively well — Southeast Asian economies saw FDI increase in 2018 by 11 per cent.

 

The nature of FDI even prior to the fall in 2018 was not entirely satisfactory. Too little of it was going into greenfield investment that increases productive capacity and the potential for jobs, which is the sort of FDI India requires. The government, which had been taking credit for robust FDI flows as a sign of its good management of the Indian economy, must also now take responsibility for its failure to sustain this momentum. Some rethinking of recent poor policy moves is in order. In particular, it appears that India must address questions about sovereign risk. Too many recent moves affecting foreign investors have been arbitrary in appearance, or seem to favour domestic interests over those of foreign investors. Such policy changes serve as a serious disincentive for foreign investment, and can explain the weakness of the FDI data. One such error was the draft e-commerce policy. Those who had invested in this fast-growing sector from abroad could justly complain that the rules of the game, which in any case gave them relatively harsh treatment, were then changed under their feet. Policy U-turn and arbitrariness must be replaced by consistency and investor-friendly institutions that work swiftly to redress such perceived unfairness. Inconsistencies that allow some companies — such as Apple and Ikea — more friendly treatment must also be addressed. Rules should be the same for all investors — and those rules should be, in addition, clear and transparent.

 

India is in any case suffering from a drought in private investment. Part of the reason for this was stressed balance sheets of Indian corporates and overcapacity in crucial sectors. There were hopes that this could be made up for by adequate foreign direct investment. If the FDI tap is also drying up, then it is an open question where the capital to fuel Indian growth will come from. Unless the government changes its attitude to FDI, India will face even more severe headwinds for growth.