FY17 has seen gross FDI inflows reach $60 billion, the highest ever. According to the commerce ministry, this is a response to substantial easing of rules—87, to be precise, spread across 21 sectors—that has catapulted India into the topmost FDI destination globally. And if one were to add repatriations of $9.6 billion worth of Indian FDI abroad, the gross inflow of investment capital jumps to nearly $70 billion, or 3.1% of the GDP.
In itself, this is welcome, for there is little doubt that inflows of such magnitude would uplift the sagging private sector investment and boost domestic capital formation. The fairytale picture, however, is marred by a rising trend of repatriations, disinvestments, and outward FDI flows from India.
As the accompanying graphics show, repatriation/disinvestment from past inward-FDI into India shot up to $16.3 billion in FY17, a 53.1% increase over FY16. Direct investments abroad by Indian corporates also rose sharply to $17.5 billion in FY17, a rise of 32.4% over a year ago. Together, the gross investment outflows aggregate $33.8 billion, or 1.5% of GDP, only slightly less than half the gross inflows for the year. Net FDI at $35.9 billion therefore, is only 1.6% of GDP, which is lower than the 1.8% of GDP touched by net FDI flows in FY16.
Not surprising then, that despite the headline-grabbing FDI inflow numbers, one did not see the kick to private investment and capital formation in the national accounts perspective. The FDI story is therefore neither as straightforward, nor as rosy as the aggregate picture may depict. Even though average net-FDI inflow in the three years of NDA government, FY15 to FY17, work out 40 bps higher at 1.6% of GDP than the 1.2% of GDP in UPA-II’s last two years, one is not sure where the future trend is headed. While many would cite India’s various positives such as macroeconomic and political stability, effective governance, being the world’s fastest-growing market, discernible improvement in the business environment and several structural reforms to sustain FDI inflows into the future, there’s a crucial question arising from the other side of the mirror: why is FDI exiting the economy at a faster pace?
Let’s focus on corporate India’s investments abroad. Outbound-FDI had reached $16.7 billion in FY14, inviting criticism of policy paralysis in the UPA government. Such criticism, although not completely justified—overseas’ acquisitions provide access to technology and markets—had some merit. It is in this context that one needs to reflect on the increasing trend in outward-FDI, which peaked at $17.5 bn in FY17. What does it signify? Why are domestic firms disinclined to invest in India but taking out more and more capital abroad to buy assets in countries with supposedly lukewarm growth prospects?
This could be a combination of several factors: persistence of some degree of policy paralysis, unanticipated policy shocks, and overestimated demand—corporate have often struggled to make sense of the CSO’s new GDP estimates against the weakness of their sales revenues for several quarters and the persistent slack in capacities.
These concerns turn vexing in the light of a similar spike in exits of inward-FDI that peaked at $16.3 billion last year. Combine the two and the scale of outflows turns into a trend exodus that should worry policy makers! Why is global FDI returning from India at a time there is a boom in FDI inflows? Part of the exit could be repatriation of profits booked by private equity (PE) and venture capital (VC) funds in a buoyant capital market; others could be genuine divestments from failed businesses. While PE-VC exits are natural, the latter too is arguably no big deal.
After all, not all FDIs are expected to succeed. Some could be destined to fail, whatever be the reasons—Nokia and General Motors are recent examples. Indeed, it could even be argued that policies of the government and RBI have provided adequate space for exits so as to encourage multinational corporations, PE and VC funds to invest in India, so why fret about it!
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But the worry should be if too many have begun to fail and why. The reasons could be similar to what domestic corporates encounter or even more. Consider the instance of Nokia, which had its largest manufacturing unit in Tamil Nadu but had to close down because of taxation issues. Quite reverse is the case of General Motors, whose reading of the Indian market went terribly wrong. Or that of the French cement major, Lafarge India, which put all its capacity for divestment last year in an industry that is reportedly doing very well. Thus, the factors driving these exits could be diverse, but the aggregate, emerging trend can potentially spoil the FDI party.
Therefore, we should be looking at sectors in which the FDI exits are transpiring to get a hang of what exactly is troubling these investors. Unfortunately, the department of industrial policy and promotion (DIPP) provides no data on all these exits. Expectedly, it prefers to focus on FDI inflow statistics, which too are not exhaustive by sector.
The limited data still provides some clues nonetheless: the share of manufacturing FDI inflows continued declining – 14.7% in FY17 from its peak, 41% share in FY12, and raising doubts whether “Make-in-India” policy initiatives have been attractive enough. Big ticket FDI such as Foxconn and Intel obviously thought otherwise, as did POSCO and ArcelorMittal. More critical however is the question if it is manufacturing-FDI in exit mode? A KPMG review of PEs in February 2017 says exits gained traction in 2016, with manufacturing witnessing the maximum exits. And that should worry policy makers.
The government appears bullish because FDI seems pouring into the non-tradable services sector purely to exploit the domestic market. Such a trend could be difficult to sustain as capacity to absorb more volumes of this type of FDI capital will be capped by the growth in size of the domestic market. It should not underplay the disturbing trend emerging from these exits and the focus must shift to reversing the tide, which appears nascent at this point. But if the trend is allowed to persist, global manufacturing could even skip past India, undermining FDI in the times ahead.