The latest Reserve Bank of India (RBI) numbers on foreign direct investments into the country—indicating that gross inflows fell for the first time in nine years by 16% to $71 billion in FY 23—suggest a different narrative from optimistic official statements of record inflows every year. This may appear to be a one-year blip as India still remains a leading destination for FDI despite adverse global headwinds. The government, for its part, seeks big-ticket investments in infrastructure to transition to a $5-trillion economy and also attract investors in mobile telephony, semi-conductors, electric vehicles etc who want to de-risk their exposure to the dragon due to Sino-US tensions. The ground for concern, however, is the factor that accounts for the fall in gross inflows, notably the record level of repatriation and disinvestments. After taking these into account, direct investments plunged even sharper by 26 % to $41.6-billion last fiscal. Repatriation and disinvestments have burgeoned three-fold to $29 billion in FY 23. When they spiked, direct investments declined by 6%, 6.6% and 1.9% in FY 17, FY 18 and FY 21. This is not good news as it indicates waning foreign investor interest, that they are reducing their exposure and even exiting the Indian market. A corroboration of this is the closure of a fifth of foreign companies with offices or subsidiaries between 2014 and November 2021, according union commerce minister Piyush Goyal’s statement on the floor of Parliament in December 2021.
The big question is why all of this is happening. A plausible explanation could be the fading appeal of greenfield investments. Not so long ago, India was the world’s leading recipient of greenfield FDI, amounting to $62.5 billion and $61.9 billion in 2015 and 2016, according to UNCTAD’s World Investment Reports—especially after the reforms-friendly Narendra Modi-led NDA regime took office in 2014. The country was also one of the world’s fastest-growing large economies, expanding at a clip of 8% and 8.3% in FY 16 and FY 17. Growth is an elixir for business. This surge of investment proposals hit a downtrend thereafter to $15.7 b illion in 2021, a period when India’s growth also decelerated from FY17. Many big-ticket greenfield announcements—exemplified by Chinese investors for industrial parks, automobile and steel projects—did not materialise or were shelved due to difficulties in doing business in the various states, regulatory uncertainty and land acquisition. Ford ramped up capacities, but soon left the Indian market, following General Motors, Harley Davidson and MAN trucks. The sharp decline in greenfield investments, along with high levels of repatriations and disinvestments underlie the several dips in FDI over the last nine years.
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As there is definitely a cause of concern if foreign investors are choosing to opt out rather than stay invested, what can be done to address their diminishing interest? If foreign capital is to contribute more to the India growth story, it is necessary to incentivise a much larger proportion of FDI inflows towards the building of greenfield factories, industrial parks, and other infrastructure. Such investments depend on reforms and a more stable policy and regulatory framework. Moody’s, the rating agency, has said that the bureaucracy could slow approval processes in obtaining licences and setting up businesses. Unless this improves, India’s attractiveness as a leading destination for FDI will reduce, reflected in growing repatriation and disinvestments.