Course correction

FDI fall shows need for reform and openness

For the past 10 years, the Union government has been quite sanguine about India’s position as a desirable investment destination. Backed by strong macro economic performance and positive statements from global investors, senior officials in New Delhi have been confident that nothing needs to change in attracting foreign direct investment (FDI).

Yet more recent numbers paint a sombre picture. Most recently, the data from the United Nations Conference on Trade and Development, or Unctad, has demonstrated that FDI into India fell 43 per cent in just one year, between 2022 and 2023. This figure is not an outlier. The data from Indian official sources also suggests that net FDI into India is at the lowest level since 2007.

Many may point to global factors as a reason for this. Perhaps it is the case that advanced markets are more attractive in an age of industrial policies and widespread subsidies. Perhaps Western companies are turning to onshoring to benefit from trillion-dollar legislation like the United States’ Inflation Reduction Act. But the data tends to puncture such comfortable narratives. It certainly does not support any defensiveness about the specific numbers for India. Indeed, Unctad itself points out that flows to other countries in South Asia broadly remained stable.

FDI flows to China reduced somewhat, leading to a broader decline of 9 per cent in East Asia; but Southeast Asia saw stable FDI as well. Global FDI flows fell only 2 per cent or so, indicating that there was no overall riskoff climate. And the stable flows to India’s neighbours and its peers in Southeast and East Asia demonstrate that what is visible here is an India-specific shock to FDI.

The new government has to take this seriously. It has long been argued that headline-grabbing announcements about investment intentions do not adequately reflect the reality as only a handful of those memorandums of understanding turn into projects on the ground. The government’s not so covert preference for domestic companies, its unwillingness to sign up to global value chains by negotiating new trade agreements, and the inability to push through administrative and judicial reform must all bear part of the blame for this crisis in investment.

It is worth noting that investment by the Indian private sector has in any case failed to recover to the levels seen before the financial crisis. Some of that gap could be filled by public-sector investment, and another part of it by foreign investment. But the former cannot be sustained indefinitely without running up the debt-GDP ratio. It is deeply worrying if the latter cannot be counted on, either.
 

Policy will have to change. Investor-friendly reform to tax laws, tax administration, and regulation will have to be fast-tracked. Trade policy will also have to change to take the geopolitical realities in its stride. It is not the case, clearly, that India’s market is so attractive that everyone wants to come here. Trade agreements, especially with the European Union and the United Kingdom, are overdue. There is a great deal the government can do to reverse this decline. These latest numbers should demonstrate that the time for complacency has passed.