India’s GDP grew by 7.6 per cent in the second quarter (July-September) of the year, a positive sign of economic growth. However, the steepest declines in foreign direct investment (FDI) are a matter of concern, especially considering India’s recent emergence as a promising investment destination and a viable alternative to China. This decline is particularly worrying as it is happening despite positive projections of India’s growth by the International Monetary Fund (IMF) and the World Bank.
According to the latest report by the Department for Promotion of Industry and Internal Trade (DPIIT), FDI inflows have slowed down drastically. The decline in FDI inflows has been steep, and the situation has only worsened, with a further decline of -24 per cent in April-September 2023. The current FDI inflows stand at $20.48 billion, down from $26.91 billion over the same period last year. Even the overall FDI inflows in 2022-23 witnessed a 16 per cent decline, standing at $71.3 billion from $84.8 billion in 2021-22.
The steepest declines in FDI have been in crucial sectors such as computer software and hardware, automobile, infrastructure construction activities, and metallurgical industries. For instance, inflows in computer software and hardware fell from $14.4 billion in 2021-22 to $9.3 billion in 2022-23, in the automobile industry from $6.9 billion to $1.9 billion, in infrastructure construction activities from $3.2 billion to $1.7 billion, and in metallurgical industries from $2.2 billion to $219 million.
The slowdown in foreign direct investment in India is a cause for concern, as multinational corporations (MNCs) are finding Vietnam, Indonesia, and other competitors more attractive. This is a clear indication that the ‘China plus one’ strategy of MNCs is not working for India. During January-September of this year, FDI in Vietnam increased by approximately 8 per cent compared to the same period last year, reaching about $18 billion. In the case of Indonesia, FDI flows stood at around $10 billion during January-September of this year, similar to the levels seen last year.
The factors that influence capital flows into countries include the global and domestic macroeconomic environment, the domestic policy and regulatory environment, and political stability. Since India is expected to benefit greatly from the ‘China plus one’ strategy, policymakers must pay closer attention to these FDI trends.
It is well known that FDI flows are more likely to gravitate towards countries with broader and deeper trade agreements. Lower tariffs and other benefits negotiated through free trade agreements (FTAs) incentivise foreign investment. Therefore, the decline in FDI flows to India may reflect this. A deeper assessment of the country’s prospects is needed to address this issue.
India is genuinely the alternative to China for companies looking to diversify if it is the “one” in China plus one strategy if the government’s PLI scheme is a powerful enough incentive to draw in investments, and if the solid foundations of India’s growth forecasts are taken into account, then MNC investor should be long on India. Any concerns regarding an uncertain business environment, an uneven playing field, or the fear of arbitrary changes to the rules of the game must not deter investors from investing in India.
More states should be in the ambit of FDI
The scope of FDI must be expanded to more Indian states. FDI has been concentrated in only a few states due to their location and favourable business environment. Maharashtra, Karnataka, and Gujarat have together attracted a staggering 69 per cent of the FDI inflows into the country, with Maharashtra being the top recipient. However, it is disappointing to note that Punjab ranks a lowly 12th in attracting FDI, with a cumulative investment of a meagre Rs 7,693 crore in the past four years, which is a paltry 0.49 per cent of the total inflows of Rs. 15.08 lakh crore from October 2019 to September 2023. In contrast, the neighbouring state of Haryana has been more successful, ranking sixth with FDI equity inflows of Rs 67,502 crore, accounting for a substantial 4.17 per cent of the total inflows during the same period.
Punjab’s successive governments have been striving to attract investments, particularly from foreign investors, but they have been facing major hurdles such as location disadvantage, poor connectivity, and frequent protests. The existing industry in Punjab has also been complaining about disruptions in their operations and movements due to the aforementioned issues. Haryana is way ahead in this regard with a significant advantage due to its proximity to Delhi-NCR and superior connectivity.
It is high time that Punjab takes firm steps to improve its position in attracting FDI, as its highest ranking was only ninth in 2020-21, when it attracted FDI equity investment of Rs 4,719.45 crore, primarily in food processing, auto components, engineering goods, and textiles. The declining trend in FDI inflows to Punjab since then is a cause for concern. Therefore, the state must create a more conducive environment for businesses and investors, and promote its potential in various sectors, to attract more FDI and boost its economy.
Disadvantage
Despite signing and negotiating bilateral free trade agreements, India has failed to secure a trade agreement with the European Union or become part of the Regional Comprehensive Economic Partnership (RCEP) countries including China, Indonesia, Japan, and South Korea for free trade agreements. The trade agreement between the 10 member states of ASEAN and their free trade agreement partners — Australia, China, Japan, New Zealand, and Korea — has deepened economic integration between these countries, which are at the heart of manufacturing supply chains. As a result, India’s exclusion from such agreements and the supply chains that run through these regions puts it at a significant disadvantage in this manufacturing ecosystem.
Way forward
FDIs have a far greater potential to facilitate the growth of the Indian economy than Foreign Portfolio Investment (FPI). However, India needs to take swift and assertive action to speed up structural reforms, root out corruption, and reduce red tape in bureaucracy to strengthen its position as the most attractive investment destination for FDI.
India has adopted a negative list approach in its FDI policy, which outlines only those sectors and activities where foreign investment is regulated. Sectors not mentioned in the document are open to obtaining 100 per cent FDI under the automatic method. The liberal and attractive policy regime for investors, combined with a favourable business climate and reduced regulatory framework, have resulted in higher FDI inflows. But this alone is not enough. India needs to complement this with a sound trade policy that boosts exports, encourages inclusive development, and incentivises R&D to make our manufacturing ecosystem globally competitive, thereby fetching FDI at a large scale.
The author is Vice-Chairman of Sonalika Group, Vice-Chairman (Cabinet Minister rank) of the Punjab Economic Policy and Planning Board, Chairman of ASSOCHAM Northern Region Development Council and Chairman of Tractor and Mechanization Association (TMA). Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.