Why FDI inflows to India are declining

By N Chandra Mohan

UNCTAD’s latest World Investment Report suggests a different narrative on foreign direct investment inflows into India in sharp contrast to optimistic official statements of record FDI inflows in 2021-22. The publication shows inflows dropping by 30% to $45 billion in 2021. A proximate cause is that big-ticket mergers and acquisitions (M&As) which boosted FDI flows in the recent past were not repeated. In 2020, for instance, cross-border M&As surged 83% to $27 billion in ICT, health, infrastructure and energy to boost overall FDI to $64 billion. During the following year, cross-border M&As were down by a massive 70% to $8 billion, which impacted overall flows to the country. Nevertheless, India remains among the top 10 global FDI recipients.

If interpreted properly, the message from India’s official FDI statistics — which rose by 2% to $84 billion in 2021-22 — is not very different from the WIR 2022 numbers. This is largely because they include equity inflows, reinvested earnings — which are largely responsible for the record numbers — and other capital. If like-to-like comparisons are restricted to equity inflows, official statistics show a decline of 1.4% to $58.8 billion last fiscal. However, gross FDI inflows also must factor in the record amount of repatriation and disinvestments by foreign investors, which surged to $27 billion in 2020-21 and $28.6 billion in 2021-22, according to Reserve Bank of India’s database. Deducting these from gross inflows constitute direct investments which were similar at $54.9 billion in both these years and lower than $56 billion registered in 2019-20.

So, the big question is why are FDI inflows into the country declining? The significantly diminished preference among foreign investors for setting up operations in the country is reflected in the downtrend in green-field investments. Not so long ago, India was the world’s leading recipient of green-field FDI, amounting to $63 billion and $62.3 billion in 2015 and 2016 after the reforms-friendly PM Narendra Modi 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 2015-16 and 2016-17. Growth sharply decelerated thereafter to 6.8% in 2017-18, 6.5% in 2018-19, 3.7% in 2019-20 and -6.6% in 2020-21. The initial flurry of investments leveled off as many big-ticket investment plans did not materialise or were shelved.

WIR 2022’s numbers reflect the rapidly waning foreign investor sentiment on green-field investments. From $54 billion in 2018, they plunged to $30 billion in 2019, $24 billion in 2020 and $15.7 billion in 2021. These estimates are also consistent with those of fDi Markets of the Financial Times Group and most certainly point to difficulties in doing business on the ground especially in the various states, regulatory uncertainty and land acquisition problems. For example, land acquisition was an important factor behind a big-ticket FDI steel project in Odisha being shelved 7 years ago.

After abandoning plans for green-field steel factories in Odisha, Jharkhand and Karnataka, the world’s largest steel manufacturer, ArcelorMittal, alongside Nippon Steel, finally succeeded in establishing a footprint with a $6 billion bid to acquire Essar Steel.

Other corroborative evidence of diminishing foreign investor interest was provided last December by Union 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 indeed a huge number. 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 the reasons also include uncertainties over the policy environment or regulatory hassles. There is definitely a cause of concern if foreign investors are choosing to exit rather than stay invested.

If foreign capital is to contribute to the India growth story, it is necessary to incentivise a much larger proportion of FDI inflows towards the building of green-field 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 (that has now been discontinued). Reform to free up the land and labour markets and improving the environment to do business in the states is imperative. It is interesting that WIR 2022 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 FDI is less upbeat than the bullish official statements of record inflows.

(The author is an economics and business commentator based in New Delhi. His views are personal)

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