India has more to do to attract FDI inflow

India has more to do to attract FDI inflow

About 44 per cent of FDI, of a total of $500 billion, over the last two decades has come under the Modi government's watch. But given the global competition to attract companies looking for alternatives to China, it will still have to do a lot of heavy lifting to make India the world's factory.

more than $222 billion of the cumulative $500-billion inflow has come under Modi's watch.

India crossed a major milestone in its goal to emerge as a hub for foreign investment flows when cumulative foreign direct investment (FDI) inflows during the April 2000-September 2020 period crossed the $500-billion mark, according to figures released by the Department for Promotion of Industry and Internal Trade. Much of the credit for this must go the Narendra Modi government's sustained efforts to make India an investment-friendly destination. About 44 per cent of this massive FDI inflow has come in the last five years alone - coinciding with Modi's ascension to power in New Delhi. Read more: FDI in defence set to make a big bang In 2015-16, Modi's second year in office, FDI inflows into India soared 35 per cent to $40 billion. In the following four years, the figure was $43.5 billion, $44.85 billion, $44.37 billion and $50 billion, respectively. That means more than $222 billion of the cumulative $500-billion inflow has come under Modi's watch.

Manufacturing is on in full swing. Between April and August 2020, total foreign direct investors poured in $35 billion into the country.
Manufacturing is on in full swing. Between April and August 2020, total foreign direct investors poured in $35 billion into the country.

$100-bn annual FDI target looks within reach

The figure during the current year can dwarf all earlier records and take India to, or within reach of, its target of attracting $100 billion FDI inflows per annum. During the first five months of the current fiscal, i.e. Between April and August 2020, total foreign direct investors poured in $35 billion into the country. A large part of this investment flowed into Reliance Jio and Reliance Retail, controlled by Asia's richest man Mukesh Ambani.

Slew of reforms

India has stepped up efforts to attract FDI inflows, especially from companies that are looking to diversify their supply chains away from China.
India has stepped up efforts to attract FDI inflows, especially from companies that are looking to diversify their supply chains away from China.

Since the onset of the US-China trade war and more so after the Covid-19 outbreak forced the Modi government to impose the world's most stringent lockdown, India has stepped up efforts to attract FDI inflows, especially from companies that are looking to diversify their supply chains away from China.

Prior to this, India had cut its corporate tax rates to 22 per cent for existing companies and 17 per cent for new manufacturing companies. This has made Indian tax rates comparable to the lowest among peer nations in the Indo-pacific region.

More to read:

Then, the government has liberalised India's archaic labour laws and combined 44 different legislations into four codes to improve the ease of doing business in the country.

It has also eased foreign investment norms in hitherto restricted sectors such as coal mining, minerals, atomic energy, space and a host of other industries.

The recently unveiled production-linked incentive (PLI) scheme has succeeded in attracting big name global firms such as Apple (through its contract manufacturers Foxconn, Pegatron and Wistron) and Samsung to move some of their manufacturing from China (and Vietnam and Malaysia) to India in 10 other sectors as well.

PLI scheme could be a game changer

Then, the recently unveiled production-linked incentive (PLI) scheme has succeeded in attracting big name global firms such as Apple (through its contract manufacturers Foxconn, Pegatron and Wistron) and Samsung to move some of their manufacturing from China (and Vietnam and Malaysia) to India.

This is expected to generate 50,000 fresh jobs by March 2021 and lead to exports of $100 billion over the next five years.

Now, this scheme has been extended to 10 other sectors such as batteries, food products, automobiles and auto components, textiles, pharmaceuticals and telecom gear, among others.

This step is expected to lead to a further spurt in FDI inflows in the coming quarters.

Reality check: Brazil attracted more FDI

However, despite this stellar performance, especially over the last six years, many experts feel India is still punching below its weight on FDI inflows. To put things in perspective, Brazil attracted FDI flows of $75 billion in 2019, about 50 per cent more than India that year.

Then, many studies have pointed out that FDI flows have not generated as many jobs as are needed. That's because there is strong skew away from the manufacturing sector, which has the capacity to generate massive amounts of employment for semi-skilled labour.

FDI into India has mostly flowed into specific industries and real estate is one of them. Ministry of Commerce data shows that at least 40% on all FDI has gone into services sector, computer hardware and software, e-commerce, real estate and trading.
FDI into India has mostly flowed into specific industries and real estate is one of them. Ministry of Commerce data shows that at least 40% on all FDI has gone into services sector, computer hardware and software, e-commerce, real estate and trading.

Skew in favour of services, trading, real estate

During the period under consideration, most foreign investments have gone into the services sector, computer hardware and software, e-commerce, real estate and trading. Ministry of Commerce figures show that 40 per cent of all FDI has gone into these sectors.

Still more to read:

“India has not been able to realise its potential as an FDI destination over the last three decades despite successive liberalisation of sectoral caps and projecting the attractiveness of its domestic market,” says a draft paper for presentation at the 13th All India China Studies Conference (AICC) to be held on January 28-30, 2021.

Suggestions to make India more attractive for foreign investors:

One of the methods to facilitate more FDI inflow into the country would be to adopt a robust technology policy focused on FDI to incentivise absorption of technology and localise research and development.
One of the methods to facilitate more FDI inflow into the country would be to adopt a robust technology policy focused on FDI to incentivise absorption of technology and localise research and development.

* A national FDI policy to reduce overlaps between industrial policies of states and provide clarity to foreign investors about national priorities

* Developing more parameters to judge the benefits of FDI such as technology, gaps in supply chains, export potential, ability to reduce imports, companies moving away from China, etc.

* A government-led SEZ policy that establishes and promotes specific locations for manufacturing units in relevant sectors rather than the present voluntary registration system

* SME-focussed incentives to draw niche players in industries that do not require economies of scale; and

* A robust technology policy focused on FDI to incentivise absorption of technology and localise research and development.”

These steps, and others already adopted by the government along with those in the works will increase India's attractiveness as a leading global FDI destination.

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