Despite being the world’s most populous country, India’s GDP at current prices in 2023-24 has been estimated at only worth $3.52 trillion. In contrast, neighbouring China’s GDP in 2023 was Yuan 126.06 trillion, equivalent to US$17.89 trillion. India’s current economic growth trend shows a major departure from Prime Minister Narendra Modi’s earlier target of hitting a $5-trillion GDP mark at the end of the current financial year. India needs a double-digit annual economic growth for several years to deal with its poverty and unemployment.

The country requires large investments to pump up production in almost all sectors of its economy. A handful of domestic industrial investors with surplus funds simply cannot meet such requirements. The massive economic rise of China has been made possible by large FDI inflows to the country, year after year. In 2021, FDI inflows to China reached the peak of $344 billion. On the other hand, investments by Chinese multinational companies (MNCs) to other countries came of age in 2023. Outbound greenfield FDI from China was over $140 billion, setting up a new record.

This is after a decline of outbound Chinese mergers and acquisitions as western governments stepped up scrutiny of proposed Chinese M&A deals. China is expanding into new markets in strategic sectors such as clean energy and electric vehicles. Latest reports suggest that India’s fast expanding Adani group, a major recipient of the government’s production linked incentive (PLI) scheme, selected as many as eight Chinese companies to help its ambitious solar manufacturing project. China-linked MG Motors in Gujarat is driving electric vehicles production and sales in India.

Incidentally, the United States, the world’s largest economy, continues to be a top receiver of FDI, which totalled $341 billion in 2023. The FDI inflows to the US reached record highs in 2015 and 2016, at $484 billion and $480 billion, respectively. Lately the FDI inflows have considerably shrunk in the US. Among the Top-20 host economies, the largest absolute drops in FDI inflows were registered in France, Australia, China, the US and India.

The data released by the India government’s Department for Promotion of Industry and Internal Trade (DPIIT) listed that FDIs fell to a five-year low in 2023-24 due to external factors such as high interest rates in advanced economies and the limited absorptive capacity in various sectors in the country. Ironically, the only sector which seems to be booming in India is the stock trade. Stock gamblers have been campaigning for lower interest rates despite high consumer inflation to see further spurt in listed scrip prices. It is a matter of great concern that the Reserve Bank and the government may fall for such campaigns.

While foreign direct investment in equity and debt in the primary market remains somewhat miniscule compared to other major economies, foreign portfolio investment (FPI) continues to play hide and seek to turn India’s stock market highly vibrant as also volatile, making it a punters’ paradise. Most of the foreign punters started pulling out of the market early this year fearing the possibility of an unstable government at the Centre after the Lok Sabha (lower house) election. However, the Bharatiya Janata Party-led National Democratic Alliance’s return to power started bringing these overseas portfolio investors back. After two months of net outflows before the Lok Sabha election, they turned buyers last month. In June, they infused around Rs. 26,500 crore in buying stocks and nearly Rs.15,000 crore in debt instruments. Last week, the country’s stock market benchmarks – the 30-share Sensex and Nifty-50 – witnessed massive gains setting new records.

Few are concerned about the poor state of FDI inflows in India. Till now, very few OECD countries, barring the US, the UK and Germany, are direct investors in India. Investments are largely routed through countries such as Mauritius and Singapore. Mauritius accounted for 25 percent of the total FDI inflows in India between April 2000 and March 2024, followed closely by Singapore (24 percent) and the US (10 percent). During the last fiscal, FDI equity inflows in India dropped from all major investing countries, including Mauritius, Singapore, the US, the UK, the UAE, Cayman Islands, Germany and Cyprus. It is believed that a lot of FDI investors are actually Indian entities abroad routing investments through shell companies in small countries.

It is time that the government takes measures to make FDI equity inflows highly attractive and open as it did for foreign investments in the semiconductor sector, last year. The country’s forthcoming national budget for 2024-25 should hinder all hindrances to FDI equity inflows in India. The big nations are ready to come to India to invest in the country and reap benefits for both India and their foreign investors. However, some invisible domestic interests seemed to be standing in the way ever since the UNCTAD investor surveys pointed to a strong interest in India as a FDI destination. Years ago, an A.T. Kearney survey had also placed India as “the second most attractive destination for FDI.” Unfortunately, this is yet to be translated into action through the required government actions and focus on policy reforms, removing the infrastructure and regulatory barriers. (IPA Service)