The $31 bn question: Did India really see so much of FDI inflow in 2015?

India is certainly catching the attention of global investors, especially in the backdrop of a severe (and likely to be prolonged) global slowdown phase

Dinesh Unnikrishnan September 30, 2015 14:51:09 IST
The $31 bn question: Did India really see so much of FDI inflow in 2015?

In the January-June period, India has surpassed US and China as the biggest Foreign Direct Investment (FDI) destination, garnering $31 billion investments compared with $28 billion attracted by China and $27 billion by the US. In the first half of 2014, India had received $12 billion worth FDIs, thus more than doubling the kitty in this year first half.

These details are revealed in a report published by the UK-based Financial Times (FT), which, as the PTI report says, was circulated by the finance ministry to the media.

It’s not entirely clear how the FT arrived at the $31 billion figure. The paper’s compilation possibly includes the estimated investments and the domestic capital expenditure commitments by foreign companies operating in India. Even then, there is a huge difference between the data put out by the DIPP and the Reserve Bank of India (RBI) on FDI and what has been reported by FT.

The 31 bn question Did India really see so much of FDI inflow in 2015

Reuters

According to data on the Indian government’s DIPP website, the total FDI investments India received in January-June period of 2015 was $19.4 billion and in the whole of 2014, the country received $28.8 billion. In 2013, India received $22 billion FDI and $22.8 billion in 2012. According to the RBI data, India received $18.9 billion in the first half of 2015 and $26.4 in 2014 and $25.6 in 2013.

Nevertheless, if one believes that there is merit in the FT numbers, this is big good news for India. But, if indeed India has emerged as the top FDI destination, in terms of investments in green field projects (measured by estimated capital expenditure), a major reason for that is the ongoing slowdown that has gripped rest of the world, primarily China. Remember, in the whole of last year (2014), China received FDIs worth $75 billion, while US received $51 billion.

On the positive side, it would mean that the world is finding India as an important alternative, when others aren’t doing well, thanks to the strong economic fundamentals of the country and its huge untapped potential. This is indeed good news. The numbers are certainly a booster dose to the Narendra Modi-government, which is facing investor-pessimism.

Notably, according to the FT report, this comes at a time when FDI into emerging markets is showing a declining trend “with 97 of 154 countries typically classed as emerging markets experiencing declines in capital expenditure on greenfield investment projects in the first six months of this year compared with the same time period last year”.

Also, this comes close on the heels of a world economic forum report showing that India moved 16 positions up in the global competitiveness index to the 55th position on account of improvement in the country’s macroeconomic environment and a ‘slight’ improvement in the infrastructure sector.

If indeed the country has caught global investors’ attention, the next big question is can the country sustain the performance seen in the first half, going ahead also, especially when global economy comes out of the woods? It’s possible if the Modi government manages to use the current phase to set the economy on the high growth path and address the basic structural issues.

These include sorting out the problems in taxation, repairing the critically damaged banking sector and ensuring ease of doing business by facilitating enabling factors (land, water, electricity, necessary clearances etc) to begin a business in India. While global slowdown is a blessing in disguise for India, to cash in on the opportunity, the country needs to fast track its reform agenda, besides improving the infrastructure sector.

On Tuesday, the RBI made a big move by affecting more than 50 basis points (bps) rate cut, which will eventually help bring down the cost of money in the financial system, both in the bank lending market and in the money markets. Already, the country’s largest lender, State Bank of India, has taken the first move by announcing a 40 bps cut in its minimum lending rates, taking its base rate to 9.3 per cent now.

RBI governor Raghuram Rajan’s growth supportive move needs to be reciprocated by the government. Rajan had cautioned that the government too needs to do its part. “...Monetary policy has to be accommodative to the extent possible, given its inflation goals, while recognizing that continuing policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth,” Rajan said.

India is certainly catching the attention of global investors, especially in the backdrop of a severe (and likely to be prolonged) global slowdown phase. If India has already managed to attract foreign investments, it is good news for the country, which needs at least $ 1 trillion investments to develop its roads, railways, ports and airports under the current five-year plan.

(Kishor Kadam contributed to this story)

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