By N Chandra Mohan,
The National Democratic Alliance (NDA) regime has reiterated its objective of attracting $100 billion in foreign direct investments (FDI) annually as its flagship “Make in India” programme completes 10 years. This aspirational target has, in fact, been a hardy perennial of the last five years, typically mentioned in the context of the government’s agenda in the first 100 days or first year of its second or third five-year terms. The government is optimistic as India 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.
The major challenge, however, is that investment and trade flows in the world economy are beginning to fragment along geopolitical lines, broadly into US-centric and Sino-centric blocs. According to a recent International Monetary Fund (IMF) study by Gita Gopinath, Pierre-Olivier Gourinchas, Andrea Presbitero, and Petia Topalova, investments and trade flows between these two distinct blocs have declined more than those within the blocs, especially since the onset of the war in Ukraine. How India leverages the opportunities thrown up by global fragmentation has a major bearing on its higher levels of ambition on FDI, especially from China. India’s policy choices in this regard are no doubt complicated by the continuing face-off on the Sino-Indian border since April 2020.
The $100 billion 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 fact, they were marginally lower by 0.6% in FY24, following a sharp decline of 16% to $71 billion in FY23 for the first time in nine years. The ground for concern is the factor that accounts for the fall in gross inflows, notably the record level of repatriation and disinvestments. Taking these into account, direct investments into the country plunged sharply by 37% to $26.5 billion in FY24 as repatriation and disinvestments burgeoned by 51.5% over FY23. However, during Q1 of FY25, gross inflows were up by 26% while repatriations and disinvestments rose by 15%, leading to higher direct investments.
All of this suggests a different narrative from optimistic official statements that India still remains a leading destination for FDI. Repatriations and disinvestments are not good news as they indicate waning foreign investor interest, that they are reducing their exposure, and even exiting the market. The question naturally is why all of this is happening? Not so long ago, there have been high-profile exits by multinational corporations (MNCs) like 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 some of these MNCs have sought to re-enter, like Ford. It now wants to use its plant in Tamil Nadu for exports. Harley Davidson has returned, tying up with Hero MotoCorp to assemble bikes in India. Carrefour had concerns regarding the conditions for FDI in multi-brand retail but now has a franchise partnership with Dubai’s Apparel Group. Shein’s app was banned in 2020 at the height of the India-China border stand-off, but it has re-entered through a licensing partnership with Reliance Retail. However, as there are no plans to amend Press Note 3, which mandates official approval for investments from countries with land borders with us such as China, the challenge of dealing with FDI from the dragon remains.
With the global economy fragmenting, India needs to take a call as a few emerging economies like Vietnam, Mexico, and Singapore are inserting themselves between these two blocs. These so-called connector countries are “rapidly gaining importance and serving as a bridge”, according to the IMF study. The dragon’s flows of investment and trade in such countries have increased dramatically since the US, Europe, and others began erecting trade barriers. The advantages for China are that its exports rerouted through these jurisdictions, which are members of mega free trade agreements, substitute for the declining share of its imports by the US and Europe. The mainland’s investments abroad in new projects amounted to $160 billion last year.
The upshot is that India must be agnostic about the sources of investments, as achieving the $100 billion target only through investments from the US-centric bloc is unlikely. US investments amounted to $5 billion in FY24 and were lower by 17% from the flows in FY23. Improvements in its FDI regime and ease of doing business are imperative. While the NDA regime liberalised FDI in its first term, progress has slowed. Of late, there are plans to further ease norms and set up an oversight mechanism for investments flowing in. Barriers exist in almost 40 industries and easing those, “barring a few ultra-sensitive sectors, would inject investor confidence”, argued Richard Rossow, chair of US-India policy studies at the Centre for Strategic and International Studies, quoted in the Financial Times.
N Chandra Mohan, The writer is an economics and business commentator based in New Delhi.
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