Rising FDI inflows

Due to lower repatriations and sales of equity by foreign companies and slowdown in India Inc’s outbound investments, net FDI inflows rose by 43.3% y-o-y to $13.8 billion. If portfolio investments are factored in, net foreign investment inflows were higher by 65% to $10 billion. Higher net capital inflows are a major positive as they can finance the current account deficit that is expected to widen further this fiscal due to elevated global oil prices.

This good news on FDI stems from an uptick in investments in services, including financial and information technology, which accounted for half of the total equity inflows this fiscal till June. In terms of globally announced green-field FDI projects, India was ranked third this fiscal till August. The Japanese are leading the charge with big-ticket investments. 4 billion in April and there are reports that it now seeks majority control entailing an additional investment of $10 billion.

A 32-member Japanese delegation led by the Japan Chamber of Commerce and Mitsubishi corporate advisor Ken Kobayashi recently met top Indian officials, pitching investments of $84-105 billion in manufacturing and infrastructure sectors. The rising gross FDI numbers must be sustained by reforms and ease of doing business. There is a need for structural land and labour reforms. India is perceived by foreign investors as a difficult place to do business on the ground as they have serious concerns regarding the complicated legal and tax system, difficult labour issues, inadequate infrastructure, poor contract enforcement, among others.

A non-adversarial and transparent regime that doesn’t resort to retrospective taxation will definitely send the right signals to prospective investors. The Japanese delegation sought faster clearances for projects, greater tax predictability—not concessions—and a larger pool of skilled manpower, according to a report in FE. An interesting suggestion that merits serious policy consideration is for infrastructure projects to be constructed in phases so that commercial operations begin much earlier, making larger projects financially sustainable, rather than waiting for full completion before commencing operations.

That said, a dose of realism is definitely warranted to temper bullishness on gross FDI. Attracting higher inflows is challenging in a world where America First sort of policies influence global investment trends that are already fragmenting along geopolitical lines, broadly into US-centric and Sino-centric blocs. Looking ahead, India’s FDI numbers may remain subdued despite a mad ongoing global rush for mega projects in data centres and semiconductors that are highly concentrated geographically.

India is not seen to have any AI plays at this stage although it is an early stage of adoption, he added. How India navigates the opportunities thrown up by global fragmentation clearly has a bearing on its prospects for higher FDI.