Economic Highlights
New
Delhi, 10 July 2023
FDI Flow In Farmland
DEA CAUTIONS, FPI JITTERY
By Shivaji Sarkar
These
are interesting times, trying times and growth times. But these have pauses.
India’s FDI in greenfield projects rise to $49.3 billion. India cannot rest on
laurels, says the Union Finance Ministry.And the end of sops has sent jitters
down the foreign portfolio investors (FPI), reveals a tax authorities meet at
the sidelines of G20 meeting in Paris.Quite a scenario, indeed.
The
World Investment Report of UNCTAD has come with good news that FPI in
greenfield projects have increased by $5 billion investments in 2022 from a
previous of $ 44 billion. Apart from a sharp increase in foreign investments in
greenfield—or new—projects in India, the report also noted the country was the
second-largest recipient of international project finance in the world in 2022.
Looks good. But is it really so?
Greenfield
projects occupy those areas of land that have minimal to no structure. So,
there are no expenditures associated with the clearance of farmlands at the
greenfield sites. In short, these are farmlands close to cities and have many
strings attached. Farmers have reason to feel concerned as say in the Jewar
area of Bulandshahr/Greater Noida in Uttar Pradesh.
The Department
of Economic Affairs (DEA) of the Finance Ministry has issued a significant
caution in the pre-poll year. In its Annual Review 2023, it says despite
growth, resilience in urban demand conditions with higher auto sales, fuel
consumption and UPI transactions and rural demand on path to recovery, the pace
can be hit by increasing geo-political stress, volatility in global systems,
sharp correction in global stock markets, deep impact of El Nino, modest trade
activity and lower FDI inflows owing to frail global demand.
“In
2022, emerging market economies (EMEs) remained subdued and volatile as
geopolitical uncertainties rose. Global slowdown in investment flows to EMEs led
to India’s net FDI inflows dipping in FY 23”, the report says. Despite this it
says the GDP growth continued to remain around 7.2 percent. The current account
deficit, it adds unlikely to improve muchwould be sustainable if only “it is
financed by normal capital flows”.
Those
investment blues have given sharp jitters to the foreign portfolio investors as
the Indian and French tax authorities meet in Paris. It has set off alarm bells
among FPIs based in France. During course of the meeting on double taxation
avoidance agreement between India and France has led to apprehension among
foreign funds that India may soon renegotiate the treaty to eliminate capital
gains tax exemption.
Currently,
France and The Netherlands have major exemption on capital gains as per
treaties with India for share sales. This comes ahead of Prime Minister
Narendra Modi’s visit to Paris in the coming week. In 2017, India renegotiated
similar tax treaties with Singapore and Mauritius, ending capital gains
exemptions. Similar provisions with Cyprus were also removed.
Consequently,
many foreign banks and large funds shifted their India equity trades away from
Mauritius and Singapore to France, which is the tenth largest source of FPI
funds to India. It holds Rs 1.2 lakh crore securities in Indian market as on
May 31. If this happens, the FPI flows would shift elsewhere and the exposure
to Indian markets may get reduced.
The
UNCTAD report also notes that the inflows into India in 2022 were, however,
significantly lower than what was seen in 2020 during the
Covid-19 pandemic, during which $64 billion of FDI entered the country.
Still
Indian stock markets are zooming to new highs but on the weekend on July 7,
Nifty 50 fell for the first time since it has been rising with the HDFC merger.
The US rate hikes have weighed on global equities. The Nifty fell by 0.85
percent to 19331 and BSE Sensex lost 0.77percent at 65280. This in itself may
not be an exact indicator, but the US rate rise will have an impact on fund
flows to India on many counts.
It has
been observed whenever funds flow moves back to the US, the dollar becomes
expensive, gold prices fall and capital flow to the US increases at the cost of
particularly the developing world. The rupee may fall again. The caution of the
Finance Ministry may not be so cursory as many would like to believe. This
looks strange despite the growth statistics not being so dismal. If nothing
ails it calls for retrospection as to why a $3 trillion economy wavers. There
is a perception strengthened by the Reserve Bank of India that the prices are
not softening to the extent it is required. It remains RBI’s concern because
rising prices erode the purchasing capacity and lead to a thaw in the growth
process.
It is
also an indicator that rising capital expenses largely on constructions and
rebuilding of structures is not boosting the economy to the desired levels. It
has made steel, cement and other essentials expensive, but it calls for a study
whether the benefits are percolating down.
TheseFinance
Ministry observations could be challenged as well if the GST collections at Rs
1.61 lakh crore are taken into account. It means financial and economic
activity has grown. But why it’s not seen in manufacturing and other
activities. The Purchasing managers Index also shows improvement. Still the
economic happiness is not a general trend. But it is said that all that GST
collects may not be exact. There are reports of leakage. Or it may be that the
refunds that are to be made for GST are also shown as collections. It is a flaw
in the system. The monthly figures do not exactly reflect the refunds that GST
makes for tax payments.
The
greenfield invests that UNCTAD mentions also are not that easy. It is bound in
chains of rules and takes time to get released.This requires deeper look into the
Finance Ministry assessments. Its apprehensions are grave. Its pessimism on the
international scenario calls for caution. Though it has not spoken of debt
burden but that too remains high.
A streak
of hope larks in the project capital flows as the World Investment Report says.
It is a silver lining that India has to weigh against the geo-political crisis.
Despite India taking a lead in world affairs, it has to trudge cautiously to
put the economy on fast track overcoming the hurdles.---INFA
(Copyright, India News & Feature Alliance)
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