Why should an economy that is a showcase for the globe on the high growth and low inflation and some truly strong fundamentals have to grapple with the challenge of net capital outflows? Several economists have noted this about India as a factor contributing to the slide in the rupee against the dollar too.
Hailing the measures announced in the economic survey and finding most related to attracting capital inflows into the country as “the need of the hour” much would still depend on what is done to cut down the red tape and simplify the cumbersome procedures. For instance, the freedom that would be granted to the task force members who are out to promote the India story to the global companies and the freedom given to them to invite these investors.
While agreeing with many of the measures announced in the survey for attracting foreign capital, Dinesh Khara, former chairman, State Bank of India and member, Insurance advisory committee, Insurance Regulatory and Development Authority of India (IRDAI) does see reason to back these with simpler and agile procedures. “If FDI has to be attracted, we need to create enough attractions for foreign investors.” In this, he reminds, “there is already competition from many East Asian countries like Taiwan, Indonesia and Thailand and we need to either equal of better in what we offer as compared to them in terms of ease of doing business.”
The economic survey discusses this in detail while offering the way forward. It says: “Going forward, the challenge is to sustain FDI inflows in an environment of heightened global volatility, which underscores the need for a multi-pronged strategy that strengthens the investment climate by addressing both structural and cyclical factors that determine capital flows.”
With clarity on the key solution in “mobilising new investment through policy stability, aggressive investor engagement, and scaling proven state-level models nationwide,” the economic survey illustrates the approach to attracting capital inflows.
In some ways, taking forward the point raised by Dr Duvvuri Subbarao, economist and former governor of the Reserve Bank of India (link to the article: https://www.financialexpress.com/business/news/fm-must-call-for-fiscal-responsibility-on-direct-benefit-transfers-dr-d-subbarao/4122848/), the just released economic survey says: “As foreign investors prioritise predictability and sustainability in policies, every policy change in the country must pass the necessity test to meet both these parameters. Further enhancements are required on the regulatory environment front, as well as improvements in logistics and workforce development.”
Task force
The take this forward, the survey moots a creation of “a task force to engage top global companies and promote India’s advantages – stability, macroeconomic strength, sustained growth and market size – could boost FDI, especially in targeted sectors.”
In tune with the point raised by Dr C Rangarajan, the veteran economist and former RBI governor that there is little economic rationale to the capital outflows and that the foreign investors were only reacting to delays in the US-India trade negotiations, the economic survey says: “Proactive diplomacy, highlighting these strengths, can help offset tariff challenges. Efforts to improve the investment environment by simplifying processes and procedures to attract FDI will need to be kept up.”
To give a perspective, the survey says, “the World Bank’s Logistics Performance Index, for example, placed India at 38th position in 2023. While on the one hand, these gaps indicate how far India is from achieving the world’s best in terms of logistics, they also open doors to vast improvement opportunities that could yield substantial returns in terms of FDI. The momentum created by improvements in the investment climate, streamlined regulations, and reduced bureaucratic procedures, thereby enhancing the ease of doing business, must be sustained and accelerated.”
Further, “India’s credit rating upgrades can be leveraged for additional momentum, as foreign investment and sovereign ratings demonstrate a strong historical correlation globally.”
Trade deals
Referring to the efforts taken by India to sign crucial trade deals, the economic survey points to the binding commitment of USD 100 billion in investment under the India-European Free Trade Association (EFTA) Trade and Economic Partnership Agreement (TEPA) that it says “bodes well for India’s FDI inflows, provided these agreements are effectively implemented. This along with the signing of the India-UK Comprehensive Economic and Trade Agreement, have the potential to increase FDI inflows.”
Despite the role of trade and investment agreements as enablers, the survey reiterates “a pressing need for action across departments and agencies to streamline India’s trade policy and secure a greater role in GVCs (Global Value Chains). Companies harvest profits from established operations in India while hesitating to commit fresh capital amid global uncertainty.”
All the measures that the 687 page document scripted by chief economic advisor Dr Anantha Nageswaran, many seem to believe that the uncertain environment is certainly a challenge. In fact, Dr Rangarajan therefore while generally agreeing with the growth numbers projected in the economic survey of between 6.8 per cent and 7.2 per cent, feels, given all the uncertainty that prevail, it may be reasonable to expect the GDP numbers to be in the 6.5 per cent to 6.8 per cent.
Many however hope the tide could turn if India and the United States were to sign a trade agreement soon.