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Home / Politics / News /  Are India’s steps to attract foreign capital  paying  off?

Commerce and industry minister Piyush Goyal this week expressed confidence in India’s foreign direct investment (FDI) inflow as the country is banking on an investment- and infrastructure-led economic recovery. Mint examines if the FDI trend is sustainable:

What has been the FDI inflow trend?

Since 2000, India has received over $547 billion in FDI till the end of June 2021. After a 46% annual drop in April-June 2020-21 to $11.5 billion during the first wave of the coronavirus pandemic, FDI recovered to $22.5 billion in the first quarter of 2021-22—5% more than the first quarter of pre-pandemic 2019-20. Finance, banking and insurance, computer software and hardware, telecommunications, trading, and automobiles are the key recipients. Maharashtra, Gujarat, Karnataka and Delhi account for over 80% of the inflow. Half of the cumulative FDI since 2000 has come from Mauritius and Singapore.

What is India’s FDI target?

Policymakers and the industry eye $100 billion a year. That’s how much India needs to reach its target of a $5 trillion economy from the current $2.7 trillion, according to Mukesh Aghi, president of US India Strategic and Partnership Forum. A report by the Confederation of Indian Industry (CII) and EY stated that India can attract $120-160 billion of FDI annually by 2025. And Prime Minister Narendra Modi, in December last year, said that even during the pandemic, when much of the world was troubled for investment, India managed to attract record FDI and portfolio investments.

FDI inflow
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FDI inflow

Which are the major contributing nations?

Half of India’s FDI since 2000 has come from Mauritius and Singapore, with which India has double taxation avoidance agreements. Some of the investments from Mauritius have in the past worried policy-makers about tax evaded funds in India ‘round tripping’ as FDI, abusing the treaty. These treaties have now been amended to prevent dodgy investors from abusing them.

What are the key enablers?

Experts say investments into e-commerce have been a key driver of India’s FDI growth. Official data shows the services sector, which includes financial, banking, insu-rance, outsourcing, and technology industries, remains top recipient of FDI, accounting for 16% of the cumulative FDI equity inflows since 2000, followed by computer soft-ware and hardware, telecom, trading and auto industries. Incentives for local production, tax break for infrastructure investments, and a drive to attract foreign capital are helping.

Is the country on track for more investments?

Experts say one key requirement for sustained FDI inflow is to ensure regulatory certainty. With multinational companies adopting a ‘China plus one’ strategy for their production and supply chain, India has the potential for further boosting FDI if it plays its cards right. Bankruptcy reforms give investors confidence of a quicker exit in the event an investment turns sour. The ease of exit is a key factor that investors consider while taking investment decisions. Notably, the bulk of the FDI inflow goes to a few large state economies.

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