India’s FDI (foreign direct investment) inflows have picked up consistently in the last three years and it is one of the top 10 destinations in the world, but these investments are still small compared to the economy and in the overall global scheme of things.
One measure, which was pointed out in these pages on Monday, was how FDI inflows were still less than 2% of gross domestic product for India compared with nearly 5% for the likes of Vietnam. A second measure is FDI stock, or the outstanding value of all FDIs that have happened so far.
In 2015, India’s total inward FDI stock was around $282 billion. To put that in perspective, in 2015 alone, China and Hong Kong pulled in $310 billion of FDI inflows. The combined FDI stock of these two nations is about $2.7 trillion, about 10 times that of India.
Among the BRICS grouping, Brazil follows China, while India is better off than South Africa and Russia, which seems to have suffered in recent years owing to falling commodity prices and economic sanctions.
However, even smaller nations such as Singapore and Mexico have been more attractive for foreign investors wishing to buy or build factories and offices. Singapore has an FDI stock of $978 billion and Mexico’s is at $420 billion.
That shows that India has a long way to go before it pats itself on the back for being a top investment destination. Also, as Unctad’s (United Nations Conference on Trade and Development’s) World Investment Report 2016 notes: “Singapore and Mauritius alone accounted for nearly three-fifths of total foreign equity investment in India, including rising connections with MNE (multinational entity) affiliates located in the former and round-tripping FDI through the latter."
On the flip side, the success of these smaller nations means that there is potential for India to get more investments. Monday’s liberalization of FDI rules and recent steps to make states more competitive should yield fruit in the long run.
Lastly, while FDI is no doubt an important aspect for India’s growth and security on the balance of payments front, it is not a necessary condition. Look at South Korea, which is a developed nation today. Its FDI stock is just 60% that of India’s.