Sluggish growth in overseas investment: A cause for worry

By Raunak Bhiwal

According to data released by the Department of Industrial Policy and Promotion, overseas investments into India grew by a meagre 0.24% of the US $35.94 billion for the period April-December 2017. In the corresponding period in 2016, the investment was US $35.84 billion. In rupee terms, the foreign direct investment fell by 4% to INR 2.31 lakh crore in 2017, due to the strengthening of the rupee.

Government’s efforts

The current government has focused on attracting foreign cash flows. Over the years, the government has come up with a slew of measures to make India a potential investment hotspot. Since 2013-14, the FDIs have increased from the US $36 billion to approximately US $60 billion. Even the current budget contained clauses which make investing in certain sectors in India easier. The set of reforms came on the backdrop of the WEF (World Economic Forum) in Davos, where the Narendra Modi-led delegation piqued the interest of foreign investors. It can be noted that 2017 saw market giving stellar returns, with Nifty and BSE Sensex reaching record highs. What further strengthened India’s case for investments was its climb in the ranks of the ease of doing business. However, the growth in FDIs was still timid.

Dissecting the slowdown

Of the US $35.84 billion of investments, Singapore (US $9.2 billion), Mauritius (US $13.3 billion), the Netherlands (US $ 2.3 billion), and  Japan invested the most. The service sector in the same period saw FDI inflows drop by 41%. The sectors which attracted the maximum FDI during April-December were telecommunication ( US $6.1 billion), computer software and hardware ( US $5.15 billion), services (the US $4.62 billion), and construction (US $2.5 billion). Pharmaceuticals also saw an increase in investment.

According to United Nations Conference on Trade and Development’s Investment Trend Monitor, global FDI fell by 16% to US $1.56 trillion in the calendar year 2017—a reason cited for the fall in the investment in India. India stood at 10th in the list of host economies for FDI inflows in 2017. The list saw the US, China, and Hong Kong leading the fray.

Why is it Important?

The government’s mantra of “Red Carpet, not Red Tape” stems from the fact that a strong inflow of foreign investments will strengthen the balance of payments. It is a non-debt source of revenue. FDIs can act as a catalyst for technology transfers. FDI is different from hot money, which stays in a country for a short period. FDIs remain for long and provide stability.

However, the current account deficit in December for the September quarter 2017 was 1.2% of the GDP; double of the previous quarter. However, caution is needed to assess this information. FDI inflows, when compared to previous years, are still at the crest of the tide.

Moving ahead

The budget of 2018 entailed liberalised norms for investing in single-brand retail and aviation. This move will have a positive impact on foreign investment players like IKEA and Amazon, who have been closely looking at such updates.

India is still the beacon of growth in the world. It is one of the fastest-growing economies, possessing the ability to invite foreign inflows. The revival of the developed economies will lead to some shift of investment in the larger economies. However, the rapid growth in markets like India, Philippines, and China will keep on attracting investment.

Featured Image Source: Pexels