Foreign direct investment environment in India has undergone a sea change since the inception of economic reforms in 1991. Positive changes can be attributed particularly to the evolving policy framework. The government now acts as a ?facilitator? of private investment, creating an enabling environment. It bridges gaps in critical infrastructure to encourage investment and acts as a ?partner? to the private sector in ?public-private partnerships? (PPP). Also, it has been widely accepted that FDI flows to India will accelerate over time, given the economy?s positive medium- to longer-term prospects. The performance so far has been encouraging.
According to the AT Kearney 2007 report on the FDI Confidence Index, India continues to rank as the second-most attractive FDI destination?with China as number one and the US as number three. It was in 2005 that India displaced the US to gain the number two position, which it has held since then. FDI inflows in 2006 touched $19.6 billion. In 2007, they stood at $23 billion, showing a growth of 43.2% over 2006. This is a positive sign, and even the ratio of India?s FDI flows to China?s inflows has been consistently increasing since 2000. (See Figure 1) In the context of the present global economic crisis, it is to be expected that financial flows to developing economies are vulnerable to a slowdown. However, according to an UNCTAD press release dated February 19 this year, FDI inflows to developing countries have remained positive for 2008 at around 4%, having increased from $499 billion in 2007 to an estimated $518 billion in 2008. But the fall in FDI inflows to the developing world is expected to be more widespread in 2009, as the worst impact of the crisis will get transmitted to these countries only by the end of this year. All the host countries would be making extra efforts to attract the reduced quantum of resources. India is expected to continue to fare better because of a) huge domestic demand and b) investor friendly policies, with the government having set a revised target of $30 billion FDI for 2008-09.
Investment outlook
The initial numbers on FDI flows for the year have been surprisingly positive. Though ?hot money? (portfolio funds) had withdrawn sharply during 2008-09, FDI flows remained strong through the year. Sustaining the recent momentum itself has been a significant pointer to the investment needs of the economy.
In spite of the global meltdown, total FDI inflows into India stood at $33.4 billion in 2008. The country posted a 45% growth in FDI, with $23.3 billion between April-December 2008. However, the flows are in lumps. FDI inflow for this February alone was $1.5 billion, which was lower than the January achievement of $2.7 billion?a sharp drop of 73%. Though the overall flow has been satisfactory, it is necessary to keep the general environment positive so that overall investments, and not just FDI, pick up.
Government initiatives
A paradigm shift has been observed in this February?s FDI press release by the department of industrial policy and promotion. The government has modified guidelines for calculating foreign investment, and the transfer of ownership or control of Indian companies to non-resident entities. This is an attempt to create investor-friendly and credible regulations that would facilitate greater foreign capital inflows and send positive signals in a difficult economic scenario. The amendment focuses on sensitive sectors such as retail, telecom, banking, media, aviation, defence and insurance, which previously had high foreign investment barriers.
FDI cap in Indian telecom is no longer 74% but 98%. FDI up to 100% is now allowed under the automatic route in all sectors except some, such as gambling, lottery, atomic energy, multi-brand retail, real estate trading, and agriculture. No environmental clearances are required for projects with investments less than Rs 1 billion. Policy amendments also introduce the concept of controls and ownership. An Indian company that is backed by foreign investments but ultimately controlled and owned by Indians can invest without the FDI cap. However, the government has not offered any details on new FDI caps in sectors like media, banking, etc.
Apart from the above measures, the corporate sector?s reasonable performance and a positive growth rate of 6-7% of GDP also demonstrate the Indian economy?s resilience before foreign investors . For those who have survived the crisis at home and are still looking to invest, India is the only attractive option after China because of its huge domestic market offering stable investments.
Even though India is unlikely to achieve even the truncated FDI target of $30 billion in 2008-09, it has already seen an inflow expansion in the midst of a difficult global environment. With the government planning further FDI liberalisation measures across a range of sectors (such as insurance, media and aviation) and investors showing continued interest, FDI into India is expected to further accelerate in the coming months.
?The author is fellow, National Council of Applied Economic Research, New Delhi. Email : gnataraj@ncaer.org