Tuesday, June 22, 2021

India Retains Its Place Among Top Ten In FDI

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India has gained by 16 per cent in terms of Foreign Direct Investment (FDI) inflow, from $42 billion to $49 billion in 2019, holding its position amongst top 10 FDI inflow-host countries. The recent report titled “Investment Trend Monitor” by UNCTAD (United Nations Conference on Trade and Development) stated. The report states that, this surge in India is when the global foreign direct investment remained flat in 2019, at $1.39 trillion, a decline of 1% from $1.41 trillion.  India tops in FDI, when both the United States and China saw a flat FDI with zero-growth of capital in-flows.

The South Asian region recorded a 10% increase in FDI to $60 billion, with India holding more than 80% of it. The majority went to services industries, including information technology. Our neighbours, Bangladesh and Pakistan faced a decline in FDI of 6% and 20%, respectively, to $3.4 billion and $1.9 billion.

The political upheaval across the globe had an evident impact on the flow of FDI: with United Kingdom facing a decline of 6% following the unfolding of Brexit and European Union also facing a reduction by 15% to $305 billion; with Brazil gaining 26% at the start of the privatization programme. The political economy is a crucial determinant for FDI inflows and the political events can definitely act as a disruption for foreign investment.

The transition of capital in-flows from portfolio investment to foreign direct investment (FDI) is better as FDI is more stable. The portfolio investment holds “hot” money which responds to the interest rate and can be volatile. It is heartening to note that India’s Foreign Exchange Reserves has also dilated at an all-time Exchange Reserves, starting the year with an increase of $65.1294 billion since January 4, 2019. This is roughly equivalent to the Foreign Exchange Reserves of Australia, Finland, and Iceland combined. Foreign Exchange comprise of 4 components – FCAs (Foreign Currency Assets), Gold, SDR (Special Drawing Rights), and RTP (Reserve Positions in IMF). The developing economies continue to absorb more than half of global FDI flows and half of the top largest receipts, namely – China, Singapore, Brazil, Hong Kong, China, and India, at an estimated $695 billion. The United States held its top position with a 1% decline at $251 billion.

Considering the regional variation, Africa, Latin America and the Caribbean economies were the net gainers, with an increase of 3 and 16 percent respectively, North America was flat with zero growth in FDI. Asia and Europe at the aggregate level, were the net losers, with a decline of 6 and 4 percent, respectively. Considering the development perspective, the transition economies gained the most at 65%, while developing economies were flat, and developed economies faced a decline of 6%.

The UN report also emphasises that the cross-border M&As (Mergers and Acquisitions) decrease by 40% in 2019 to $490 billion, the lowest level since 2014. The fall in global cross-border M&As sales was most rooted in the service sector with a decline of 56%, to $207 billion, followed by manufacturing with a decrease by 19% to $249 billion and the primary sector, with a decline of 14%, to $34 billion.

The UN report also emphasises a positive observation, saying that “FDI flows are still expected to rise moderately in 2020, as current projections show the global economy to improve”.

This positive news on FDI in India came at a moment when International Monetary Fund (IMF) Chief Economist Gita Gopinath expressed concerns on India’s economic slowdown. The impact of surge in foreign direct investment on economic growth is an empirical question and needs to be analysed in the long run. The Government of India’s on-going structural reforms in the fiscal and financial sector is crucial for economic growth and macro-economic stability.

Script: Dr. Lekha S Chakraborty, Professor, National Institute of Public Finance and Policy

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