Though the finance ministry was chuffed enough by the Financial Times report on India vaulting up the global investment leagues to forward the story to reporters—according to FT, India topped the global investment tables in the first half of 2015, $3 billion ahead of China and $4 billion ahead of the US—it is important to be a bit cautious about the celebrations. To be sure, topping the league is important, more so when combined with India jumping 16 places in the World Economic Forum’s Global Competitiveness Index, suggesting a link between the two. But it is important to keep in mind the top status is largely due to other countries looking worse. Between 2013 and 2014, for instance, FDI into the US fell from $231 billion to $92 billion—the FT data for other countries is also quite different from the UNCTAD data since, for 2014, FT says the US got just $51 billion while the UNCTAD talks of $92 billion.
While the FT data for the first half of 2015 is broadly similar to RBI data—the financial daily says India got $31 billion while RBI puts the number at $28 billion—the data does not match for 2014. According to FT, India’s FDI levels have jumped dramatically, from $12 billion in the first half of 2014 to $31 billion in the first half of 2015—RBI data also suggests a hike, but a much lower one, from $21 billion to $28 billion.
Most important, while sharp increase in FDI is welcome—that coming into e-commerce ventures alone runs into a few billion dollars this year—what matters from a growth point of view is overall investment. Not only is FDI not the driver of overall investment in the country, there have been several occasions when FDI and overall investment levels have digressed quite significantly. Between FY06 and FY07, for instance, FDI flows jumped 2.5 times but gross capital formation rose just 22%; in FY08, FDI rose 52% while gross capital formation rose 23% and, in FY13, FDI fell 26% while gross capital formation rose 7%. In overall terms, gross capital formation has fallen from 38% of GDP in FY08 to a mere 28.7% in FY15—it is this that explains the collapse in GDP growth. While there are no early estimates as to how capital formation will look in FY16, ratings agency Crisil’s projections don’t show any early revival—for its sample of 22 large sectors, Crisil is looking at a 2% contraction in FY16 and only a mild recovery in FY17 when it is looking at a 7% increase, a number which means a further reduction in the investment-GDP ratio. Nor is that particularly surprising since capacity utilisation levels remain as low as 65-70% in sectors like automobiles and cement, or given how leveraged India Inc is and how cash-strapped banks are. All of which means that, while the government can take a small bow over the FT data, it has a long haul ahead in cleaning up the investment environment—this means freeing up gas prices, getting states to repay loans of bankrupt SEBs, giving telecom companies more spectrum, clearing stuck projects, and a lot more. Domestic investment has to lead the way, not foreign investment—in FY15, keep in mind, FDI was under 8% of total investment in the country.