Economic Highlight

New Delhi, 13 November 2015

India’s FDI Ease

BETTER DAYS FINALLY AHEAD?

By Shivaji Sarkar

India’s consumer market is drawing foreign direct investment (FDI) and is becoming a lucrative destination. In a shrinking world investment, India has been one of the four fastest growing destination countries for FDI in 2014 and is likely to surpass this in 2015.

Only three other countries have been found to be FDI favourites in 2014 – Japan, Vietnam and Malaysia, says the British newspaper Financial Times (FT) fDI report. The FDI into India grew by 47 per cent in 2014, with 641 projects. In 2015, Industry Ministry says, the figures are likely to touch $44 billion.

According to UNCTAD’s World Investment Report 2015, India ranks third among most prospective host economy for 2015-17 (after China and the US) in the world, as per a survey among Multi National Enterprises. India’s rank also improved to ninth among the top countries ranked by FDI inflows in 2014, compared to 15 in 2013. India is fifth in Asia also in investing abroad – $ 13 billion in 226 projects.

Not surprisingly the NDA government has taken a decision to ease the norms for 15 sectors on Diwali eve. Perhaps, a propitious decision for ensuring investments flow into the country. It is likely to boost funding in many sectors including airlines, real estate, teleports, DTH (now 100 per cent FDI), news and current affairs TV channels, FM radio companies (raised to 49 per cent), non-news TV channels (100 per cent), defence (49 per cent), construction (100 per cent), regional air transport (49 per cent), e-commerce single brand retail, private banks (74 per cent).

Prime Minister Narendra Modi tweeted that it would not only benefit the youth but reiterates the government’s commitments to ‘minimum government and maximum governance’ as most of these were put on automatic route, meaning no more cumbersome decisions would be required at the Cabinet committee level.

Finance Minister Aurn Jaitley too states that FDI is an additional resource required to boost the cycle of economic activity. In his view this would be a clear departure from the public expenditure driven growth of the past few months. The decision to liberalise FDI norms for 15 sectors would impact 32, he points out with much hope.

The single-brand retail companies have been allowed 100 per cent FDI, as also easier sourcing norms and this simply means they can even import “state-of-the-art” and “cutting edge technology” products. They can also now undertake e-commerce business, which was not allowed so far.

According to the Reserve Bank of India data, India received $18.9 billion in the first half of 2015 and $26.4 in 2014 and $25.6 in 2013. But FT fDI reports says India surpassed the US and China getting $ 31 billion FDI compared with China by $28 billion and the US $27 billion in 2014. The FT has possibly included estimates and domestic capital expenses by foreign companies operating in India.

India has emerged as the top FDI destination, in terms of investments in green field projects (measured by estimated capital expenditure), a major reason for that is the ongoing slowdown that has gripped rest of the world, primarily China.

The figures are significant as investments in 97 of 154 countries called emerging markets are experiencing declines in capital expenditure in such projects. Even Europe, Russia and Brazil are witnessing the steady decline. The ongoing slowdown in the rest of the world, including China, is possibly a reason that India has emerged as an important destination. This is definitely a positive sign for the Narendra Modi government.

The critics of the Government may not find it easy to counter Modi’s FDI numbers. They may come out with the alibi that domestic investment is suffering. This is not true, if the observation of India Brand Equity Fund (IBEF) is taken into account. It states: “Owing to higher infrastructure spending, increased fiscal devolution to States and continued reforms in fiscal and monetary policy, the Indian economic outlook has strengthened and growth is expected to accelerate in 2015-16”.

The total merger and acquisition (M&A) transaction value for the month of July 2015 was $6.7 billion involving a total of 156 transactions, which were higher in terms of volume (47 per cent) and value (17 per cent) than the same period last year. Energy and natural resources was the dominant sector, amounting to 38 per cent of the M&A transaction value, says IBEF. Also, private equity (PE) investments increased 16 per cent year-on-year to $ 2.2 billion, indicating the highest activity in 2015. The major investors were Coal India, Hindustan Zinc - Cairn India, Goldman Sachs-Nitesh Estates, Indian Oil, SAIL, Reliance Industries and BSNL. These investments are worth approximately of Rs 1 lakh crore.

The impact of these should reflect in the next few years resulting in job growth, overall production and heightened growth. A research study by Emkay Global says that the recent surge in FDI inflows may not give any boost to ambitious 'Make in India' campaign. It elaborates by noting that “Data suggests that FDI flows have centred on exploiting domestic consumption, rather than stimulating domestic manufacturing that is likely to have catalysed imports.”

Even the latest relaxation is likely to increase some exports of consumer goods as e-tailing is eased. This may actually be true. But it has also to be seen in the context of alluring investments as Indians gradually spend more. Manufacturing increases as demand rises. So far it was at a plateau. The Emkay study denotes a definite change in spending pattern indicating people’s better purchasing capacity – a key to growth that can boost manufacturing.

Global credit rating agency Fitch says that the latest FDI decision is to add to momentum. So says the International Monetary Fund (IMF), which says growth to rise to 7.3 per cent. All these are positive observations. Some steps of the Government on the price front can add pace to the achievements. Rising prices should not be seen as a natural phenomenon but be linked to governance. A stable price regime, a strength of the Atal Behari Vajpayee’s NDA-I, would add to purchasing power and help the country move faster.

The government is on the move. Some more steps would see changes in factory output. The country can hope that each addition to investment would be a shot in the arm. India needs to welcome the return of the consumer to the market. With some fine tuning better days can be ushered in.---INFA

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