– By Rohit Arora
It’s an inescapable fact that the Indian economy is on a high growth trajectory. This is particularly true after a series of digital initiatives have formalised major segments of the economy, improving tax and regulatory compliance. Although there are many drivers to this economic success story, one that sometimes fails to attract attention is the contribution of foreign direct investments. Despite global geopolitical and macroeconomic headwinds in recent years, FDI inflows in India have managed to maintain steady momentum.
Given this scenario, the latest Fitch Ratings have affirmed the country’s long-term FX (forex) rating at ‘BBB’, indicating a stable outlook. Moreover, for the fiscal year ending March 2024, Fitch has forecast GDP growth of 6.9%, higher than its earlier projections of 6.0%.
However, the global ratings agency believes the government would find it challenging to meet its fiscal deficit target of 4.5% of GDP in FY2026. With the Centre setting a 5.1% fiscal deficit target for FY2025, lower than the earlier 5.8% in FY2024, the agency anticipates that the new government will stick to the fiscal roadmap outlined in the interim Budget. It also predicts the Indian economy will register 6.5% growth in FY2025, assisted by the 11% growth in the government capex.
Navigating Geopolitical Headwinds
Yet, 2023 saw a double-digit decline due to geopolitical uncertainties and tighter global liquidity. Fears of a global recession, protectionist measures in some regions and the economic downturn linked to the Russia-Ukraine war were some reasons for a drop in FDI inflows last year. Nevertheless, the drop in FDI was a global phenomenon because of the headwinds mentioned earlier.
Be that as it may, as India remains a preferred investment destination, FDI inflows are expected to rise in 2024. Besides, vibrant macroeconomic data, better industrial output and attractive PLI (production-linked incentive) schemes will draw foreign investors, more so because of the tighter interest rate regime and geopolitical uncertainties across the globe. The PLI scheme in food processing, pharma and medical appliances, among others, has begun to bear fruit and is attracting overseas FDI.
Furthermore, PLI schemes have been announced in 14 sectors to augment the nation’s manufacturing capabilities and exports. Supported by an overall allocation of Rs1.97 lakh crore, the scheme covers telecom, white goods, auto components and others.
India has also been opening its economy to investments with increases in FDI limits, removal of longstanding regulatory barriers, speedy development of infrastructure and an improvement in its business environment. Additionally, multiple measures to promote the ease of doing business, the availability of skilled and relatively inexpensive human resources, huge reserves of minerals and an increasingly liberal FDI policy are the other reasons for expecting higher FDI inflows in 2024.
As the India rising story has been noticed worldwide, global investors are displaying a growing interest in being part of the country’s ongoing growth journey, which is set to accelerate over the coming decade. The country’s emphasis on increasing capex for infrastructure development has caught the attention of foreign investors. From Rs 5.54 lakh crore in 2021-22, the capex was hiked to Rs 7.5 lakh crore, a rise of 35%. This was subsequently increased by 37.4%, reaching Rs10 lakh crore in 2023-24.3 Such capex hikes trigger a multiplier effect both on economic growth and employment generation.
Apart from the above, the improved health of banks, which are reporting lower NPAs compared to previous years, has also helped in fostering a positive investment cycle. With core inflation (CPI inflation, excluding food and fuel) falling to 3.8% in December 2023, this represents a four-year low4, having dipped below 4% for the first time since March 2020.
Some Challenges and Countermeasures
Notwithstanding the plus points, some risks and challenges may hinder FDI inflows. These include the uneven implementation of policy reforms, persisting weaknesses in the labour market where attempts at reforms have been stalled and the ongoing farmers’ agitation in North India.
With the Centre intent on boosting foreign inflows, more policy initiatives are anticipated to facilitate faster FDI. One way to do this is by expanding the basket of fields that allow FDI through the automatic route. FDI is primarily regulated by the DPIIT (Department of Promotion of Industry and International Trade), under the FEMA (Foreign Exchange Management Act) regime. Foreign inflows are permitted through two routes: the automatic route and with government approval.
In segments such as telecom, pharma, media and insurance, foreign entities require approval from the government. Conversely, it is allowed through the automatic route for most other segments. In fields such as gambling, betting, lottery, chit funds, real estate and manufacturing of tobacco-related products, FDI is prohibited. For government approval, foreign investors must obtain prior permission from the relevant ministry or the concerned department. Through the automatic route, foreign investors only need to inform the RBI after the investment is made.
As the Centre seeks to increase investments, the integration of digital lending technologies with FDI channels can streamline investment processes and enhance efficiency in capital allocation. Improving financial inclusion across the country could also aid in attracting more FDI since it expands the opportunities and domains for investment.
The digitalisation of payment, lending, retail and other services through initiatives such as UPI, ONDC, FASTag, GST, e-filings of ITR, etc. have also helped in boosting tax revenues and advancing financial inclusion goals. Similarly, since FDI is instrumental in shaping the economic landscape, faster inflows can be facilitated if laws and regulations are streamlined via digitalisation to attract greater inflows.
During the past decade, India has gone from being ranked among the five large fragile economies to one among the first five globally. Undoubtedly, the outlook for FDI inflows is most promising.
(Rohit Arora is the CEO and Co-founder at Biz2X.)
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