Waning foreign interest

FDI requires a more stable policy and regulatory framework including reforms

Waning foreign interest
The exit of one-fifth of foreign companies is undoubtedly a worry.

The fact that multinationals, especially in the manufacturing space like Ford, General Motors, Harley Davidson, among others, are reducing their exposure to the Indian market suggests a different narrative from the optimistic official statements of record foreign direct investment (FDI) inflows ever year. Although foreign company registrations were up by 11.4%—at 5,035 in December 2021—since March 2017, the number of active foreign companies has dropped by 1.5% over this period, according to Business Standard. What is striking is the sharp drop in the share of foreign manufacturing companies. While 17 such companies were registered in FY17, there were only two in FY22. Other corroborative evidence of diminishing foreign investor interest was provided last December by commerce minister Piyush Goyal, on the floor of Parliament. Between 2014 and November 2021, as many as 2,783 foreign companies with registered offices or subsidiaries in India closed down operations, out a total of 12,458 active foreign subsidiaries operating in the country. The exit of one-fifth of foreign companies is undoubtedly a worry. To be sure, there are various reasons for this, such as completion of business objectives and projects, restructuring by parent company, amalgamation, and other management decisions. But there is definitely cause for concern if foreign investors are choosing to exit rather than stay invested.

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The big question is why is there a significantly diminished preference among foreign investors for setting up operations in the country? Not so long ago, India was the world’s leading recipient of greenfield FDI, amounting to $63 billion and $62.3 billion in 2015 and 2016, after the reforms-friendly prime minister took office in 2014, with schemes like Make In India. The country was also one of the world’s fastest-growing large economies, at a clip of 8% and 8.3% in FY16 and FY17. Growth sharply decelerated thereafter to 6.8% in FY18 and 6.5% in FY19, 3.7% in FY20 and -6.6% in FY21. The initial flurry of investments levelled off as many big-ticket investment plans did not materialise or were shelved. Among the various factors responsible, land acquisition was the central one behind a big-ticket FDI steel project in Odisha being shelved seven years ago. After abandoning plans for greenfield steel factories in Odisha, Jharkhand and Karnataka, global steel giant ArcelorMittal, along with Nippon Steel, finally succeeded in establishing a footprint with a $6-billion bid to acquire Essar Steel.

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 a more stable policy and regulatory framework than the streamlining of procedures and digitisation of paperwork that have improved India’s ranking in World Bank’s Doing Business indicators (now discontinued). Reform to free up the land and labour markets and improving the environment to do business in the states is imperative. UNCTAD’s latest World Investment Report mentions that project finance deals under execution in India include the construction of a steel and cement plant worth $13.5 billion by ArcelorMittal-Nippon Steel. Such plans cannot fructify unless forest, environment and other clearances are speedily provided. All of which suggests that the current outlook on foreign investor interest is less upbeat than bullish official statements on FDI.

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