The pickup in the economy and the optimistic medium-term projections made recently have largely concealed some important issues, like the unexpected and sharp fall in FDI flows. The most recent numbers for the April-October period show that FDI inflows have dipped by more than a quarter to $14.9 billion as against the $19.9 billion in the corresponding period of the previous year.
This is surprising for two reasons. One is that, the slowdown is a sharp reversion of the previous trends when inflows picked up even during the global crisis, with numbers moving up from $34.8 billion in 2007-08 to $35.2 billion in 2008-09 and further to $37.2 billion in 2009-10. The second and the more important reason for concern is that the fall in India?s FDI inflows in the current year is in sharp contrast to the global trends, which indicate that the FDI inflows to developing countries are expected to go up smartly by as much as 17% in 2010.
But India?s FDI numbers for the first 10 months of the calendar year 2010 show that inflows have fallen by as much as a quarter, despite the buoyant global expectations. And to make matters worse, a global comparison shows that the Indian trends are rather unique as most of the other Bric countries have registered a much better performance. In fact, an international comparison for the first half of 2010 shows that while FDI inflows to China have gone up by 8%, those to Russia have remained stable and those to Brazil have fallen by a marginal 8%, India has been worst hit, with FDI inflows falling by as much as 39%.
But what is more worrisome is that the fall in FDI inflows to India has not only been sharp but also almost entirely unexpected. For instance, the World Investment Report 2010, brought out by Unctad earlier this year, has pointed out that FDI inflows into India and China had started picking up as early as mid-2009 and will gain speed as the region plays a leading role in the global economic recovery. And this is also corroborated by the monthly numbers, which show that the FDI inflows have peaked at $3.5 billion in July 2009. However, this trend was quickly reversed with the inflows steadily falling in the more recent months and touching a low of $ 1.4 billion by October 2010. In sharp contrast, the FDI inflows into China, which fell sharply during the recession, have continued to steadily climb up, registering positive growth in each of the last three months.
And the fall in India?s FDI has not only caught international observers by surprise but also the Indian experts, including those at the Economic Advisory Council to the Prime Minister, which in its Economic Outlook for 2010-11 brought out in July pointed out that the FDI flows into India will surge up by as much as 58% to touch $50 billion. Only the mid-year review brought out by the ministry of finance took note of the deceleration in FDI flows during the first quarter of the year and pointed out that the trend was mainly on account of the lower flows into construction, real estate, business and financial services.
A fallout of the shrinking FDI flows has been its strong negative impact on the structure of external sector fund flows. In fact, the numbers for the first half of the year show that the fall in FDI funding in the commercial sector from Rs 75,215 crore in 2009-10 to Rs 41,739 crore in 2010-11 has been accompanied by a sharp increase in external sector borrowings. While short-term credit procured from abroad went up from a negative Rs 7,137 crore in 2009-10 to Rs 25,455 crore in 2010-11, the funding through ECBs and FCCBs shot up from Rs 3,991 crore to Rs 25,525 crore during the period. The increasing shift to debt flows during a period of rising current account deficits is unsustainable and indeed worrisome on any count.
But what is more alarming than the increase in debt creating flows is the slack policy response. Though it is now apparent that the consolidated FDI policy brought out recently has certainly not helped improve matters, no credible efforts have been made to tackle issues. Especially damaging are stalled FDI projects like that of Posco, which is the largest single FDI proposal so far, and the increasing resistance to procuring land for industrial use where the legislation to ease availability is yet to make much headway. So, it is certainly time now that a strategy to reverse FDI trends got the top priority that it deserves.
?p.raghavan@expressindia.com