Home / Politics / Policy /  Why FDI inflows to India are slowing down

India’s dream run in attracting record foreign direct investments (FDI) over the past two years seems to have come to a halt in 2016. Data on FDI flows recently released by the Organization for Economic Co-operation and Development (OECD) shows that FDI flows have slowed to most emerging markets including India this year.

As the chart below shows, after growing rapidly in 2014 and 2015, FDI flows to India have declined 21% in the first six months of 2016 over the year-ago period. Data from the Reserve Bank of India (RBI) for the April-August period also shows a decline compared to the year-ago period. While gross foreign investments rose marginally, net FDI investments fell by 9% to $14.8 billion over the year-ago period because of equity divestments by foreign investors, according to the disaggregated data on FDI flows published by RBI.

The recent trend in India has been broadly in line with other major emerging market economies, which have witnessed a visible slowdown in their FDI inflows.

Given the uneven nature of FDI investments, it is useful to consider longer-run trends to analyse the direction and magnitude of FDI flows. As the recent OECD report on FDI flows points out, any analysis of FDI flows data is liable to be “complicated by the high volatility of the flows which are often affected by a few very large deals during a specific quarter".

Considering four-year averages since the early 1990s, we observe that FDI inflows into India, China, Russia and South Africa have fallen on average in the last four years (2012-15), compared to the previous four years (2008-11), after adjusting for GDP size. Among the major emerging market economies, only Indonesia and Brazil appear to have witnessed a rise in FDI inflows as a share of their respective gross domestic product (GDP) over the past four years. The Brics group—as a whole—has seen its FDI-to-GDP ratio drop in this period, as the chart below shows.

One silver lining for emerging markets including India is that announcements of greenfield foreign investments in emerging markets have not slowed down significantly yet. New project announcements in the first half of 2016 for India was only marginally lower than the year-ago period, as per an October report of fDi Intelligence, a data division of the Financial Times. India attracted the highest such intended investments, beating China for the second year in a row. There are two caveats to be kept in mind while looking at such statistics though. Firstly, not all project announcements materialize. Secondly, the fDi Intelligence unit tracks only greenfield investments: it does not consider equity stakes in brownfield projects or divestments of the kind which have led to a decline in net FDI inflows to India this year.

So, what does the future hold? Will all the project announcements materialize and will foreign investments be more forthcoming in emerging markets including India in the years ahead, or will the FDI share in these economies continue to fall? Future FDI flows will likely depend on two crucial factors: global growth prospects, and the openness of emerging economies to new investments.

The rise in FDI flows to emerging markets such as India over the past two decades has largely been driven by the prospects of rapid economic growth and the attraction of an expanding market for goods and services. The past decade in particular has seen a rapid convergence in per capita growth rates of developing and advanced economies, as the International Monetary Fund (IMF) pointed out in its October World Economic Outlook report. However, the Fund warned that the coming decade may not be as rosy for these economies.

“Looking ahead, the per capita growth differential for most emerging market and developing economies relative to the advanced economies is projected to stay well below that of the past decade, and the pace of convergence will become more uneven," the IMF said.

If the uncertain growth outlook is one factor that will weigh on the minds of investors, the other key factor is the burden of restrictive regulations in many of these economies including India that make it difficult to invest and trade, as the chart below shows.

While India’s global ranking in ease of doing business hasn’t improved much despite recent reforms, its high score in the OECD regulatory restrictiveness index should also be a cause for concern. The index, which focuses on restrictions such as screening and approval requirements for FDI, restrictions on foreign key personnel, restrictions on repatriation of profits and capital etc., shows that India is not really rolling out the red carpet for foreign investors.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Recommended For You
Edit Profile
Get alerts on WhatsApp
Set Preferences My ReadsFeedbackRedeem a Gift CardLogout