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Is India Losing Sheen for Investors?

Context:

India experienced a 7.6% growth in its GDP during the second quarter (July-September) of the year, signalling a positive trend in economic expansion. However, the substantial decrease in foreign direct investment (FDI) raises concerns, particularly given India’s recent emergence as an attractive investment destination and a credible alternative to China.

Relevance:

GS-2

Government Policies & Interventions

GS-3

  • Liberalization
  • Growth & Development

Mains Question:

The slowdown in foreign direct investment in India is a cause for concern, as multinational corporations are finding other competitors more attractive. Analyse and suggest and way forward strategy to deal with this issue.

About FDI:

  • Foreign Direct Investment (FDI) refers to an investment carried out by a company or individual in one nation to acquire business interests situated in another country. FDI enables an investor to acquire a direct stake in a foreign country’s business operations.
  • There are various methods through which investors can engage in FDI, including establishing a subsidiary in another country, acquiring or merging with an existing foreign company, or forming a joint venture partnership with a foreign counterpart.
  • Beyond its role as a crucial driver of economic growth, FDI has emerged as a significant non-debt financial resource contributing to the economic development of India.
  • It differs from Foreign Portfolio Investment (FPI), where the foreign entity simply purchases stocks and bonds of a company, providing the investor with no control over the business.

Statistics on FDI:

  • As per the latest report from the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows have sharply decelerated, with a further decline of -24% recorded in April-September 2023.
  • The current FDI inflow stands at $20.48 billion, down from $26.91 billion in the same period last year.
  • The overall FDI inflows for 2022-23 witnessed a 16% decrease, totaling $71.3 billion compared to $84.8 billion in 2021-22.
  • Key sectors like computer software and hardware, automobile, infrastructure construction activities, and metallurgical industries have experienced significant drops in FDI.
  • For example, computer software and hardware inflows decreased from $14.4 billion in 2021-22 to $9.3 billion in 2022-23, and the automobile industry saw a decline from $6.9 billion to $1.9 billion.

Concerns Associated with the Slowdown in FDI:

  • This decline is alarming, especially considering optimistic growth projections by the International Monetary Fund (IMF) and The World Bank.
  • The slowdown in FDI is concerning, especially as multinational corporations (MNCs) show a preference for other nations like Vietnam and Indonesia, indicating a potential flaw in the “China plus one” strategy for India.
  • FDI in Vietnam increased by approximately 8% during January-September, reaching about $18 billion, while Indonesia maintained FDI flows at around $10 billion during the same period.
  • India’s exclusion from major trade agreements, like the European Union and RCEP, puts it at a disadvantage in the global manufacturing ecosystem.

Way Forward:

  • It is crucial to note that FDI tends to favor countries with comprehensive trade agreements, and the decline in FDI to India may reflect the need for a deeper assessment of the country’s prospects.
  • Various factors influence capital flows, including the global and domestic macroeconomic environment, policy and regulatory conditions, and political stability. Given India’s potential under the “China plus one” strategy, policymakers must closely monitor these FDI trends.
  • Despite being a viable alternative to China, concerns about an uncertain business environment or arbitrary rule changes must be addressed to attract MNC investments.
  • Expanding the scope of FDI to more Indian states is recommended, as currently, Maharashtra, Karnataka, and Gujarat attract a significant portion of FDI.
  • Addressing hurdles faced by states like Punjab, such as location disadvantage and poor connectivity, is essential to distribute FDI more evenly and boost economic growth.
  • To enhance the attractiveness for FDI, India must accelerate structural reforms, combat corruption, reduce bureaucratic red tape, and adopt a comprehensive trade policy that promotes exports, inclusive development, and research and development.

Conclusion:

While India holds great potential as an investment destination, swift and assertive actions are needed to address the challenges and create an environment conducive to foreign direct investments.


March 2024
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