FM may roll out the red carpet for FDIs

With no fiscal space available for big-bang capital outlay, the Union Budget 2021 is likely to focus on attracting more foreign direct investments (FDIs) into India to create more jobs and spur growth impulses in the economy.

“We are hopeful that with the Union Budget 2021, the government is likely to introduce two new policies — new industrial policy and national e-commerce policy and introduce labour reforms,” said Vishal Yadav, CEO, FDI India, a consultancy firm that connects Indian businesses with foreign investors to accelerate their business growth.

“There is also optimism around liberalising the FDI norms in several sectors like single-brand retail trading, contract manufacturing, coal mining, and digital media,” Yadav added.

Over the years, the Centre has been constantly increasing its budgetary allocation towards capital expenditures. From gross budgetary support of ₹1.96-lakh crore towards capital expenditure in FY 2014-15, the Centre's capex outlay rose to ₹3.48-lakh crore in FY20 (Revised Estimates). For 2020-21, the government has projected its capital expenditure to increase by 18.1 per cent to ₹4.12-lakh crore, over the Revised Estimates of 2019-20.

From 2010-11 to 2020-21, capital expenditure had an annual average growth of 10.2 per cent, while revenue expenditure had an annual average growth of 9.7 per cent. The Centre has been financing these through a mix of budget allocation as well as off-budget financing.

Rise in capital outlay

However, substantial increase in capital outlay may be difficult for the Centre given its over stretched finances wrecked by the pandemic-related relief measures and increased healthcare spending as well as fall in both tax and non-tax revenues.

With States’ finances also equally strained, the Budget may look to incentivise foreign investors through FDI-friendly policies and initiatives which will create more jobs and lead to a multiplier effect.

In its recent report on State finances, the Reserve Bank of India said that States are trying to achieve the budgeted levels of fiscal deficit through large cutbacks on both revenue and capital expenditure to compensate for cyclical shortfalls in tax collections

“State governments may have to face the difficult choice of putting investment projects on hold, but, given the multiplier associated with capital spending, this will inevitably entail growth losses in a vicious circle feeding itself,” the RBI said.

FDI investment into India has been growing consistently over the years. In FY20, FDI equity inflow into India rose 13 per cent to a record $49.97 billion from $44.36 billion a year earlier. In FY21, it has already touched $30 billion between April and September 2020.

In the current fiscal, Singapore remained the top source country for FDI with an inflow of $8.3 billion followed by the US ($7.12 billion) and Cayman Islands ($2.10 billion).

“We have seen heightened interest from countries like the US, Italy, UK, Japan and Germany,” FDI India’s Yadav said, adding, “With the Prime Minister himself making a strong pitch to foreign companies to take advantage of the stable tax regime and attractive FDI policies in India, We are optimistic that the trend is likely to continue in 2021.”

Attractive sectors

Among sectors, computer software & hardware received the highest inflow as on date in FY21, followed by service sector and trading.

“With the government relaxing FDI norms for various sectors, services, IT, telecom, pharma, automobiles and chemicals are likely to see continued FDI flows,” Yadav added.