Google, Facebook, Walmart, Samsung, Foxconn, and Silver Lake have been just a handful of the firms that made big ticket bets on India in 2020.
Due to this, even though India experienced one of the world’s sharpest economic contractions, it also saw the fastest growth in Foreign Direct Investment (FDI) inflows among all the major economies in 2020.
GS-III: Indian Economy (External Sector, Economic Growth and Development)
What are the reasons for the increase in Foreign Direct Investment (FDI) inflows into India during the COVID-19 Pandemic? Discuss the potential of the Indian market and how it can be leveraged to increase FDIs. (10 Marks)
Dimensions of the Article:
- What is Foreign direct investment (FDI)?
- About India’s FDI inflows in 2020
- Reasons for the Increase in FDI inflows towards the end of 2020
- Adapting to the Indian market
- Indian Opportunity
What is Foreign direct investment (FDI)?
- It is an investment from a party in one country into a business or corporation in another country with the intention of establishing a lasting interest.
- Lasting interest differentiates FDI from foreign portfolio investments, where investors passively hold securities from a foreign country.
- Foreign direct investment can be made by expanding one’s business into a foreign country or by becoming the owner of a company in another country.
About India’s FDI inflows in 2020
- India has attracted highest ever foreign direct investment (FDI) inflows at over $65 billion during the first nine months of financial year 2020-21.
- Compared to the same period in 2019, the FDI inflows flows were 22 per cent higher during April-December 2020.
- Total inflows registered a year-on-year growth of 24 per cent in December compared to December 2019.
- FDI inflows have constantly grown since August 2020 on a yearly basis; it recorded a substantial growth of more than 80% in the month of November 2020.
- It was an unexpected outcome that India could emerge as a leading destination for FDI.
- However, it needs to be taken into account that India’s latest FDI totals still lags behind the highest tallies in other markets such as China and Brazil. Also, a significant share of India’s FDI inflows arose from foreign investments directed solely at Reliance Jio.
Reasons for the Increase in FDI inflows towards the end of 2020
- In 2020, schemes like production-linked incentive (PLI) scheme for electronics manufacturing, have been notified to attract foreign investments.
- In 2019, the Central Government amended FDI Policy 2017, to permit 100% FDI under automatic route in coal mining activities.
- Further, the government permitted 26% FDI in digital sector which has particularly high return capabilities in India as favourable demographics, substantial mobile and internet penetration, massive consumption along with technology uptake provides great market opportunity for a foreign investor.
- FDI in manufacturing was already under the 100% automatic route, however in 2019, the government clarified that investments in Indian entities engaged in contract manufacturing is also permitted under the 100% automatic route provided it is undertaken through a legitimate contract.
- In March 2020, Government permitted non-resident Indians (NRIs) to acquire up to 100% stake in Air India, and such moves have resulted in foreign investors indicating interest in the government’s moves to allow private train operations and bid out airports.
Adapting to the Indian market
- India remains a complex and challenging place to do business even after 30 years since its economy was liberalised.
- Frequent shifts in the policy landscape and persistent market access barriers are standard complaints levied against India by the business community.
- “Aatmanirbhar Bharat”, “Make in India” and similar push to build a “self-reliant” India has also rattled investors and smaller companies that lack the resources to navigate on-the-ground hurdles.
- However, leading corporate investors recognise that doing business in India or any emerging market for that matter comes with inherent risks but that adaptation in approach is critical to success.
- Most importantly, they have the vision to understand that these are risks worth taking given the scale of the “Indian Opportunity”.
- What India offers through its nearly 1.4 billion people and their growing purchasing power is uniquely valuable for multinationals with global ambitions. No other country outside of China has a market that houses nearly one in six people on the planet and a rising middle class of 600 million.
- Rising U.S.-China competition is redefining the global landscape for investment and manufacturing, forcing multinationals to rethink their footprints and production hubs.
- Countries such as Vietnam have capitalised on this opportunity to great effect, but India is finally getting serious about attracting large-scale production and exports.
- Cheap mobile data have powered a revolution across India’s digital economy and connected an estimated 700 million Indians to the Internet.
- Domestic Indian companies have also demonstrated their ability to innovate and deliver high quality services at scale, and the partnerships and FDI flows linking multinationals and Indian tech firms will continue to unlock shared market opportunities for years to come.
Resilience shown during the Pandemic
- India has managed the pandemic better than many of its western peers and restored economic activity even before implementing a mass vaccination programme.
- These are remarkable developments, and yet they speak to India’s underlying resilience even in the face of historic challenges.
- Successful companies unlock opportunities in the Indian market by placing shared value creation at the heart of their business strategy.
- This is because unlocking opportunities in the Indian market cannot take the form of a one-way wealth transfer, and companies should not expect a warm welcome without continuously demonstrating their commitment to India.
Companies will have to
- Build enduring partnerships and lasting relationships,
- Invest in Indian talent,
- Align products with Indian tastes, and
- Tackle the hardest problems faced by Indians.
For leading companies with global ambitions and a willingness to make big bets, the rewards of investing in the Indian market are substantial and well worth pursuing.
-Source: The Hindu