FDI spikes in April, but keep your fingers crossed

Robust numbers on foreign direct investment (FDI) inflows in April bring some cheer for India, but it is too soon to celebrate. Larger trends like scams, inflation and procedural delays that Firstpost has pointed out in the past as reasons for lower FDI in 2010-11 could continue to determine trends this year as well.

After an extremely disappointing year for FDI flows last year, 2011-12 started out on a good note with 43 percent growth in April to $3.2 billion.

If India continues to receive as much FDI over the next 11 months, the decline in flows seen during the previous year would have been negated. In fact, we would be back to the high of $37-38 billion each year seen in 2008-09 and 2009-10 That said, however, one month’s numbers do not reflect a trend. It is still a wait-and-watch game for India.

In fact, over the calendar year 2011, FDI flows are somewhat muted in comparison with 2010. At $6.5 billion, they are down 9 percent in dollar terms from $7.2 billion last year. While this decline is much lesser than the overall decline of 28 percent for 2010-11 from the previous year, it does suggest that we could be jumping the gun by projecting a trend from one month’s figures alone.

Particularly so, since, we have not reached a resolution on the many issues that were stumbling blocks to FDI growth in 2010-11. For instance, investors were reportedly wary in an environment of corruption scandals, and we can only keep our fingers crossed for the future there.

Inflation and growth are likely to remain a tightrope for policy makers, with the former showing no signs of cooling off and the latter starting to soften. There is also no clarity yet on when the long pending FDI caps on sectors like multi-brand retail and defence will be lifted.

There is little change observable in the rest of the latest FDI data released by the Department of Industrial Policy and Promotion (DIPP), which details cumulative figures starting April 2000 up to now.

The ‘Services sector’, ‘Computer Software and Hardware’ and Telecom were the biggest attractions for foreign investors.

Mauritius, Singapore and USA remain the top investors in the country, with shares of 42 percent, 10 percent and 7 percent, respectively.

Given the recent talk about changing the double-tax treaty with Mauritius, there could be another blip on this score if anything substantial is changed to affect sentiment.