Need to boost FDI flows

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Published: April 2, 2019 1:52:25 AM

Low FDI levels have led to BoP deficit for 3 straight quarters now.

There has been way too much tax terrorism—despite promises to the contrary—and the regulatory environment is far from friendly.

One of the key takeaways from the Balance of Payments (BoP) data for Q3FY19 is that capital flows, foreign direct investments (FDI) in particular, are slowing. Else, with the current account deficit (CAD) at just 2.5% of GDP, the BoP should not have been in a deficit of $4.3 billion. Indeed, the BoP has now been in deficit for the third-straight quarter primarily because fresh equity flows appear to have plateaued; in the nine months to December, they were $33.5 billion, down 7% y-o-y. The combined FDI inflows in FY16 and FY17 were a hefty $83.5 billion but in FY18, they were at about $45 billion. As a share of GDP, FDI flows have slipped from 2.54% in FY09 to 1.24% in the April-December 2018 period; the lowest in six years.

For a number of reasons—weakening global trade, fickle portfolio flows—India must attract FDI in bigger chunks if the external sector is not to be off kilter. While the NDA government has eased the investment rules across several sectors—defence, for instance—there hasn’t been much of an impact. Global defence manufacturers clearly want to have a controlling interest whether or not they’re bringing in state-of-the-art technology; they’re not content with 49%. Of course, FDI would flow in faster into defence if the quantum of defence orders placed by India was to see a big jump but, unfortunately, that hasn’t happened either. Indeed, while the Make in India programme has been a non-starter, the data reveals, manufacturing hasn’t been pulling in much FDI for several years now and it is services, telecommunications and e-commerce that have seen the chunky inflows.

While the FDI rules need to be eased further and areas such as multi-brand retail should be thrown open to foreign players, the government must simultaneously work to ensure global companies are able to operate in a good business environment. There has been way too much tax terrorism—despite promises to the contrary—and the regulatory environment is far from friendly.

A good example is the telecom industry where the rules have been skewed in favour of one player, nearly destroying the businesses of others. India should have seen many more drug majors setting up research labs and manufacturing units given the large pool of scientists and science graduates. But this sector pulled in less than $1 billion in each of the years FY16 and FY17, smaller than the $1.5 billion in FY15. Again, despite commanding one of the biggest markets globally for cars and an abundance of labour, FDI in automobiles fell to $1.6 billion in FY17 from $2.6 billion in the previous year. The government must desist from interfering in the e-commerce sector else flows into this space, too, will dry up.

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