The National Democratic Alliance regime is optimistic of attracting $100 billion annually in foreign direct investments (FDI) as it is currently the world’s fastest-growing large economy with unmatched market growth opportunities in sunrise sectors such as semiconductors, electric vehicles, clean energy, electronics, and consumer goods where penetration levels in the country’s population are far lower than the global average. This aspirational target must be seen in the context of the annual average of $77 billion in gross inflows during the previous five years to FY24. In the current fiscal till August, they were up by 32% to $36 billion when compared to April-August FY24. Direct investments are much lower, averaging $47 billion during the last five years — and $15.3 billion in April-August this fiscal — if repatriations and disinvestments are factored in. The last-mentioned factor is not good news for India’s FDI objectives as it indicates waning foreign ibninvestor interest; that they are reducing their exposure and even exiting the market. All of this suggests a different narrative from the bullish official statements on the FDI front.
The question naturally is, why all of this is happening? A recent column in this newspaper by Vijay Kelkar and Pradeep S Mehta suggests that foreign investors have been “turned off” by changes in the dispute settlement system. A few years ago, the government suspended all bilateral investment treaties which had provisions for international arbitration and redrafted them with a proviso that domestic remedies must first be exhausted before approaching any international tribunal. The long delays in pursuing local remedies are reflected in the fact that $6 billion is tied up in installed projects and investments embroiled in disputes awaiting resolution. The judicial infrastructure is strained, leading to delays and higher litigation costs. There is a tendency of domestic courts to overturn foreign arbitral awards, which can deter potential investors. The good news in this regard is the government’s recent decision to ink bilateral investment treaties with trading partners like the UAE, which are slightly divergent from its redrafted text. This can serve as a template for free trade agreements with the UK and the European Union.
While Kelkar and Mehta highlight a judicial riddle behind India’s dampened FDI climate, the fact remains that inflows also depend upon commercial viability and other factors. Consider, for instance, the high-profile exits not so long-ago by Ford, General Motors, Harley Davidson, MAN Trucks, Holcim, Pfizer, Sanofi, and GSK who trimmed their manpower and operations. In autos, the offerings of US majors did not find favour among consumers. In other sectors, intense competition, rising costs, and concerns about the regulatory environment were important. Of late, the good news is that Ford has sought to re-enter using its plant in Tamil Nadu for exports. Harley Davidson has returned with a tie-up with Hero MotoCorp to assemble bikes in India, among others. L’affaire Ford exemplifies the concept that “easy exits incentivise enthusiastic entry” as the state government helped the US major to exit by resolving complex labour and land issues, which convinced it that the risks of doing business were low and chose to invest again in that state, as argued by Arvind Subramanian in the Financial Times. While India must put in place the best possible dispute resolution system, there is a need to further liberalise the policy regime for FDI, besides improving the conditions for doing business in the various states.