India’s Race Towards FDI Continues

The global crisis has not deterred India in the raging run towards FDI inflows.

An economy’s path to success is always a multi-pronged strategy. Be it the construction of world-class airports, or environment-friendly buildings, there is always much that goes in the middle of such extreme initiatives, and FDI inflows are the indication of an economy with such a potential. The Make in India initiative opened a new chapter in India’s investment policy. With the Investment Promotion Agency, Investment Ombudsperson Office and the annual Indian Investment Report, the economy successfully constructed good conditions to raise FDI flows. It’s already among the top five countries in the world in amount and growth rate of FDI, hoping very soon, to surpass China. In 2015 alone, FDI flows increased by 30% from the previous year and reached $44 billion, and in 2016 the figure stands close to $55.4 billion.

After a brief decline due to the financial crisis, India has reverted to the path of attracting FDI. India has been identified as most attractive for investment, next to China. The latter, which has somehow painlessly passed through the global crisis, India, as the rest of the world, has suffered greater consequences. Also, there are some systemic measures that India has been more gradual than usual on. While China was quick to pick up the liberalization path back in the 1970’s, India took some time to warm up to the idea.

Now, the new investment policy, which includes Make in India, is aimed to encourage investment in strategically important industries. For MNEs is the most important the protection of the property rights and contract enforcement, so a good institutional framework is necessity. India has already done a lot on the liberalization in telecommunications, infrastructure and insurance sectors. Now, the opening of real estate to FDI, sectoral reforms and the rise of the equity cap is going to help India to get back on track. The only sector that is protected is retail, because a “corner store” industry is its cultural symbol, which also employs many people.

FDI has been an asset to sectors of services, non-conventional energy, and electronic and print media. Mauritius and Singapore account for big chunks of FDI inflows to India, with Mauritius accounting for an FDI inflow of 28% and Singapore reaping the benefits of both FDI inflows and outflows (largest) to India. Follow the US, the UK and others. In 2016, FDI inflows from the US were $4.12 billion. Lately, notable inflows have come from emerging economies like the UAE, stimulating each other’s economic growth and potential. With India showing newer scopes of growth in green technology, it is on the path to become one of the first innovators in the same.

There may be still a long way to go. The economy still suffers from volatile markets, unpredictable economic policies and policy changes, strict investment approval procedures, restrictions in equity investment, delays in land acquisition and poor infrastructure in some regions of the country. Though there has been ample realization the FDI is an indicator determinant of economic prospects, there must be economic and especially socioeconomic motivation for domestic industries. It is necessary that domestic companies take advantage from FDIs’ spill-over through the absorption of the new knowledge. This would directly affect faster economic growth. Furthermore, if India wants to attract larger amount of capital and invite and build stronger MNEs, the economy must create the incentives that will reduce the cost of initial investment, accelerate depreciation, provide cheaper land, or subsidize the payment of taxes in the long term. Since India is a recipient and provider of FDI, it must find an optimal strategy that will encounter needs for attracting FDI as well as to adapt to the foreign markets where it would invest. Transparency, predictability and fairness will follow.

 

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