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 (Photo: Bloomberg)
(Photo: Bloomberg)

A reality check on India’s ease of business rankings

  • A United Nations report showed that India is among world's top twenty economies in terms of foreign investment
  • With political stability back, the focus now is on the Union Budget this week

Mumbai: Ever since India gained in rankings for ease of doing business, it has been referred to as a preferred investment destination.

Notwithstanding the recent slowdown in the economy, the steady inflation and exchange rate has managed to attract investment.

A United Nations report last week showed that the country is among top twenty economies in the world in terms of foreign investment.

But there is one indicator that is blinking red on this optimism for India: foreign direct investment (FDI).

The latest balance of payments data shows that net FDI flows reduced for three consecutive quarters in FY19.

Net FDI flows were down to $6.4 billion for the March quarter from $9.6 billion in the June quarter of FY19. They were unchanged from the March quarter level of FY18.

For the full year, net FDI flows totalled $30.7 billion, nearly the same from the previous year. As a percentage of gross domestic product, FDI saw no improvement. FDI investment in FY19 was 1.5% of GDP, unchanged from the previous year.

This is in contrast to the improvement in ease of business rankings of the World Bank. After all, FDI is long term and investment decisions here depend more on policies than cyclical factors such as economic growth.

To be sure, India’s FDI policy has been simplified over the years and eased as well. Gross FDI flows have indeed improved over a period of five years. In FY15, gross flows totalled $35.28 billion. This has risen to $43 billion in FY19.

One reason for FDI flow slowdown in FY19 could be that investment decisions were postponed owing to general elections.

With political stability back, the focus now is on the Union Budget this week.

The jury is still out on FDI investment. For now, the dwindling numbers do not paint a good picture.

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